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1. Business and Basis of Presentation
Overview
Galena Biopharma, Inc. (“we,” “us,” “our,” “Galena” or the “Company”) is a biopharmaceutical company developing hematology and oncology therapeutics that address unmet medical needs. The Company’s pipeline consists of multiple mid- to late-stage clinical assets, including our hematology asset, GALE-401, and our novel cancer immunotherapy programs including NeuVax™ (nelipepimut-S), GALE-301 and GALE-302. GALE-401 is a controlled release version of the approved drug anagrelide for the treatment of elevated platelets in patients with myeloproliferative neoplasms, and we have completed the majority of work for initiation of a Phase 3 trial into a pivotal trial in patients with essential thrombocythemia (ET). NeuVax is currently in multiple investigator-sponsored Phase 2 clinical trials in breast cancer. GALE-301 and GALE-302 have completed early stage trials in ovarian, endometrial and breast cancers.
On January 31, 2017, the Company announced that its Board of Directors had initiated a process to explore and review a range of strategic alternatives. As a result of this process, on August 7, 2017, the Company, SELLAS Life Sciences Group Ltd, a Bermuda exempted company (“SELLAS”), Sellas Intermediate Holdings I, Inc., a Delaware corporation and a wholly-owned subsidiary of Galena (“Holdings I”), Sellas Intermediate Holdings II, Inc., a Delaware corporation and a wholly-owned subsidiary of Holdings I (“Holdings II”) and Galena Bermuda Merger Sub, LTD., a Bermuda corporation and a wholly owned subsidiary of the Company (“Merger Sub”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) pursuant to which, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into SELLAS, and the separate existence of Merger Sub shall cease and SELLAS will continue its corporate existence as the surviving Company of the merger (“Proposed Merger”). As a result of the Proposed Merger, SELLAS will become a wholly owned indirect subsidiary of Galena. See further in this Note and in Note 11 below for more information regarding the Proposed Merger.
If the Proposed Merger is completed, under the terms of the Merger Agreement, at the effective time of the Proposed Merger (the “Effective Time”), (a) each outstanding share of SELLAS (excluding shares held by Galena, Merger Sub or SELLAS and dissenting shares) will be converted into the right to receive shares of Galena Common Stock based on an exchange ratio specified in the Merger Agreement and (b) each outstanding SELLAS stock option and restricted stock unit award will be assumed by Galena. No fractional shares will be issued in connection with the Proposed Merger and Galena will pay cash in lieu of any such fractional shares. Immediately following the Effective Time, (a) Galena stockholders immediately prior to the Effective Time are expected to own approximately 32.5% of the aggregate number of shares of Galena Common Stock, and (b) SELLAS shareholders immediately prior to the Effective Time are expected to own approximately 67.5% of the aggregate number of shares of Galena Common Stock, each calculated on a fully-diluted basis for the combined company, except for the exclusion of 2,556,851 out-of-the money Galena warrants. Though the allocation percentage between SELLAS and Galena will remain the same, both SELLAS and Galena are subject to dilution from (i) any shares of Galena Common Stock issued in connection with a potential third party financing that SELLAS has consented to, and (ii) Galena Common Stock underlying certain Galena warrants (other than the warrants outstanding as of immediately prior to the Effective Time that were issued by Galena under the Warrant Agreement dated February 13, 2017). Upon closing of the Proposed Merger, the name of the combined company will become SELLAS Life Sciences Group, Inc. and shares of the combined company are expected to continue trading on the NASDAQ Capital Market under a new the ticker symbol, SLS.
If the Proposed Merger is completed, our three, Phase 2, investigator-sponsored clinical trials with NeuVax in breast cancer will remain ongoing. Our other development programs, GALE-401 and GALE-301/GALE-302 will be evaluated for potential internal development or strategic partnership by SELLAS.
Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements included herein have been prepared by Galena pursuant to the generally accepted accounting principles (GAAP). Unless the context otherwise indicates, references in these notes to the “Company,” “we,” “us” or “our” refer (i) to Galena, our wholly owned subsidiary, Apthera, Inc., or “Apthera,” and our wholly owned subsidiary, Mills Pharmaceuticals, Inc. or “Mills.”
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes hereto included in its Annual Report on Form 10-K for the year ended December 31, 2016, which was filed on March 15, 2017. The accompanying condensed financial statements at June 30, 2017 and for the three and six months ended June 30, 2017 and 2016, respectively, are unaudited, but include all adjustments, consisting of normal recurring entries, that management believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results for a full year. Balance sheet amounts as of December 31, 2016 have been derived from the audited financial statements as of that date.
On October 31, 2016, we announced a reverse stock split of our shares of common stock at a ratio of 1-for-20 as approved by the Board of Directors on October 26, 2016. The reverse stock split was authorized by the Company’s stockholders at the Special Meeting of Stockholders held on October 21, 2016. The reverse stock split became effective on November 11, 2016 and the Company’s common stock commenced trading on a split-adjusted basis on Wednesday, November 14, 2016. Unless otherwise stated, all shares and price per share numbers set forth in the condensed consolidated financial statements for periods prior to November 11, 2016 are presented after giving effect to the reverse stock split.
Liquidity & Management’s plan — At June 30, 2017, the Company’s capital resources consisted of cash and cash equivalents of $18.1 million. On January 31, 2017, the Company announced that its Board of Directors had initiated a process to explore and review a range of strategic alternatives. As a result of this process, and as described above and in Note 11 below, on August 8, 2017 we announced the Proposed Merger. In light of the strategic alternatives process, the Company limited expenditures for its operations through headcount reductions and a general deferral of programs and operational items except that we continued to support the NeuVax investigator-sponsored immunotherapy trials and we have continued to advance activities related to GALE-401 manufacturing in preparation for a possible initiation of Phase 3 development in the coming quarters. The Company intends to continue to operate at these reduced levels in order to preserve liquidity while completing the Proposed Merger.
Additional funding sources that in certain circumstances may be available to the Company, include 1) approximately $13.2 million of restricted cash associated with the outstanding principal balances as of June 30, 2017 of a debenture with original principal amount of $25.5 million that we sold in May 2016 to the extent we repay the debenture through issuance of common stock in accordance with the terms of the debenture, as detailed further in Note 4; 2) a Purchase Agreement with Lincoln Park Capital, LLC (LPC); 3) At The Market Issuance Sales Agreements (collectively, the ATM) with FBR & Co. (formerly MLV & Co. LLC) and Maxim Group LLC; and 4) amendments to the outstanding warrants; and 5) private or public offerings. See Note 6 below for current restriction on our ability to use the Purchase Agreement with LPC and the ATM with FBR & Co. (formerly MLV & Co. LLC) and Maxim Group LLC. In addition, there are certain restrictions on our ability to amend the outstanding warrants and engage in a private or public offering in the Merger Agreement.
The Company cannot provide assurances that its plans for sources and uses of cash will not change or that changed circumstances will not result in the depletion of its capital resources more rapidly than it currently anticipates. Until we complete the Proposed Merger, we may need to raise additional capital to fund our operations, whether through a sale of equity or debt securities, a strategic business transaction, the establishment of other funding facilities, licensing arrangements, asset sales or other means, in order to continue the development of the Company’s product candidates and to support its other ongoing activities. However, the Company cannot be certain that it will be able to raise additional capital on favorable terms, or at all, which raises substantial doubt about the Company’s ability to continue as a going concern. The Company is currently evaluating its capital requirements in light of both pursuing the Proposed Merger and funding the development of its clinical programs. In addition, the Company is working with SELLAS to develop a comprehensive capital program to fund all product development programs currently prioritized by SELLAS and the Company subsequent to the Proposed Merger. For example, the Merger Agreement states that subsequent to the Merger the Company will use commercially reasonable best efforts to fund the NeuVax ongoing programs in the amount of $3 million through the 2019 budget.
The current unrestricted cash and cash equivalents as of the date of this filing will fund the Company’s operations for at least eight months from the date that the unaudited condensed consolidated financial statements as of June 30, 2017 were issued. This projection is based on our current limited operations and estimates of resolution and legal expenses associated with the ongoing government investigation and legal matters pending against the Company, and is subject to changes in our operating plans, legal matters, uncertainties inherent in our business, transaction costs incurred at closing of the Proposed Merger, that could individually or in the aggregate cause us to need to seek to replenish our existing cash and cash equivalents sooner than we project and in greater amounts that we had projected. There is no guarantee that any debt, additional equity or other funding will be available to us on acceptable terms, or at all. If we fail to obtain additional funding when needed or the Proposed Merger is not completed, we would be forced to scale back, or terminate, our operations and may not be able to consummate the Proposed Merger. The Company prepared the consolidated financial statements as of and for the three and six months ended June 30, 2017 using the generally accepted accounting principles applicable to a going concern. These consolidate financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities amounts that may be necessary should the Company be unable to continue as going concern.
Reclassifications — The prior year amounts for outstanding common stock at par and related additional paid-in capital have been reclassified to correctly present those amounts. These reclassifications had no effect on total equity, or net loss per share.
Recently Issued Accounting Pronouncements
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes or ASU 2015-17. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. The guidance will become effective for us beginning in the first quarter of 2017 and may be applied either prospectively or retrospectively. Early adoption is permitted. At the time of adoption, we will reclassify current deferred tax amounts on our Consolidated Balance Sheets as noncurrent. The Company adopted this ASU on January 1, 2017. There was no impact to the Company’s consolidated financial statements upon adoption.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation or ASU-2016-09. ASU 2016-09 includes several areas of simplification to stock compensation including simplifications to the accounting for income taxes, classification of excess tax benefits on the Statement of Cash Flows and forfeitures. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016. An entity that elects early adoption must adopt all of the amendments in the same period. The Company adopted this ASU on January 1, 2017. There was no impact to the Company’s consolidated financial statements upon adoption.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations or ASU 2017-01. ASU 2017-01 provides guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities (a “set”) does not qualify to be a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the guidance requires a set to be considered a business to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and removes the evaluation as to whether a market participant could replace the missing elements. The new standard will be effective for us on January 1, 2018 and will be adopted on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the goodwill impairment test. Under the new guidance, goodwill impairment will be measured by the amount by which the carrying value of a reporting unit exceeds its fair value, without exceeding the carrying amount of goodwill allocated to that reporting unit. This guidance will be effective for us beginning in the first quarter of 2020 and is required to be adopted on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
In May 2017, the FASB issued Accounting Standard Update No. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard will be effective for us on January 1, 2018; however, early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
1. Business and Basis of Presentation
Overview
Galena Biopharma, Inc. (“we,” “us,” “our,” “Galena” or the “Company”) is a biopharmaceutical company developing hematology and oncology therapeutics that address unmet medical needs. The Company’s pipeline consists of multiple mid- to late-stage clinical assets, including our hematology asset, GALE-401, and our novel cancer immunotherapy programs including NeuVax™ (nelipepimut-S), GALE-301 and GALE-302. GALE-401 is a controlled release version of the approved drug anagrelide for the treatment of elevated platelets in patients with myeloproliferative neoplasms. GALE- 401 has completed a Phase 2 clinical trial and the asset is ready to advance into a pivotal trial in patients with essential thrombocythemia (ET). NeuVax is currently in multiple investigator-sponsored Phase 2 clinical trials in breast cancer. GALE-301 and GALE-302 have completed early stage trials in ovarian, endometrial and breast cancers.
Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements included herein have been prepared by Galena pursuant to the generally accepted accounting principles (GAAP). Unless the context otherwise indicates, references in these notes to the “Company,” “we,” “us” or “our” refer (i) to Galena, our wholly owned subsidiary, Apthera, Inc., or “Apthera,” and our wholly owned subsidiary, Mills Pharmaceuticals, Inc. or “Mills.”
Management’s Plans — We had cash and cash equivalents of approximately $18.1 million as of December 31, 2016, compared with $29.7 million as of December 31, 2015. We expect to continue to incur operating losses as we continue to advance our product candidates through the drug development and the regulatory process. In the absence of revenue, our potential sources of operational funding are proceeds from the sale of equity, funded research and development payments, debt financing arrangements, and payments received under partnership and collaborative agreements.
On February 13, 2017, the Company closed an underwritten public offering of 17,000,000 units at a price to the public of $1.00 per unit for gross proceeds of $17.0 million (“February 2017 Offering”). Each unit consists of one share of common stock, and a warrant to purchase one share of common stock at an exercise price of $1.10 per share. The net proceeds of the February 2017 Offering were $15.5 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.
In addition to the proceeds from the February 2017 Offering, in January and February 2017 the holder of the Debenture redeemed $3.95 million of outstanding principal that was satisfied by the Company with 3,518,663 shares of our common stock. As a result of the redemptions, the Company was able to transfer $3.95 million out of restricted cash and cash equivalents and into unrestricted cash and cash equivalents to be used to fund the Company’s ongoing operations. The outstanding principal balance on the Debenture as of March 15, 2017 is $13,617,702 and is maintained by the Company as restricted cash.
In addition to the funds raised through underwritten public offerings and the debenture, we maintain a purchase agreement with Lincoln Park Capital LLC (LPC) and At Market Issuance Sales Agreements (ATM) with future availability of $2.0 million and $19.1 million, respectively subject to certain terms and conditions. We may also continue to use the ATM, or other instruments, in order to fund our operations going forward.
On January 31, 2017, the Company announced that it is in the process of evaluating strategic alternatives focused on maximizing stockholder value. Potential strategic alternatives that may be explored or evaluated as part of this review include continuing to advance the clinical programs as a stand-alone entity, a sale of the company, a business combination, merger or reverse merger, and a license or other disposition of corporate assets of the company. There is no set timetable for this process and there can be no assurance that this process will result in a transaction. While the Company evaluates its strategic alternatives, Galena’s investigator-sponsored immunotherapy trials will remain ongoing. With the confirmation from the FDA that the GALE-401 development program is appropriate for a New Drug Application (NDA) filing using the 505(b)(2) regulatory pathway in patients with ET who are intolerant or resistant to hydroxyurea, we have developed a clear path forward for GALE-401 in the treatment of ET. Subject to completing the manufacturing of the new formulation and the internal work to prepare the Phase 3 trial for initiation, the Company is evaluating the appropriate time to commence enrollment of the GALE-401 trial and anticipates making a definitive determination in the second half of 2017. The Company has focused on reducing expenditures in order to preserve liquidity while pursuing a strategic alternative.
We believe that our existing cash and cash equivalents, funding available under an amended LPC purchase agreement, ATM and other instruments, should be sufficient to fund our operations for at least one year from the date of issuance of the Company’s consolidated financial statements. This projection is based on our current limited operations and estimates of legal expenses associated with the ongoing government investigation and legal matters pending against the company, and is subject to changes in our operating plans, resolutions of such government investigation and legal matters, uncertainties inherent in our business, strategic alternatives outcomes, and the need to seek to replenish our existing cash and cash equivalents sooner than we project and in greater amounts that we had projected. There is no guarantee that any debt, additional equity or other funding will be available to us on acceptable terms, or at all. If we fail to obtain additional funding when needed, we would be forced to scale back, or terminate, our operations or to seek to merge with or to be acquired by another company.
Reverse Stock-Split — On November 11, 2016 the Company effected a 1:20 reverse stock split of the Company’s outstanding shares of common stock, outstanding stock options to purchase shares of our common stock and warrants to purchase shares of common stock. In addition, the number of shares of common stock and number of shares of common stock subject to stock options or similar rights authorized under the Company’s equity incentive plan and employee stock purchase plan were proportionately adjusted for the reverse stock-split. Further, the per share exercise price under such plans were proportionately adjusted for the reverse stock-split. These consolidated financial statements give retroactive effect to such reverse stock-split and all share and per share amounts have been adjusted accordingly.
Discontinued Operations — As described in Note 15, during the quarter ended September 30, 2015 the Company met the relevant criteria for reporting the commercial operations as held for sale and in discontinued operations, pursuant to FASB Topic 205-20, Presentation of Financial Statements—Discontinued Operations, and FASB Topic 360, Property, Plant, and Equipment. The Company generally considers assets to be held for sale when (i) the transaction has been approved by the board of directors or management vested with authority to approve the transaction, (ii) the assets are available for immediate sale in their present condition, (iii) the company has initiated an active program to locate a buyer and other actions required to complete the plan to sell the assets, (iv) consummation of the transaction is probable, (v) the assets are being actively marketed for sale at a price that is reasonable in relation to the current fair value, and (vi) the transaction is expected to qualify for recognition as a completed sale, within one year. Following the classification of property and equipment for sale, the Company discontinues depreciating the asset and writes down the asset to the lower of the carrying value or fair market value, if needed. During the quarter ended December 31, 2015, the Company completed the sale of the commercial products and the related assets.
Uses of Estimates in Preparation of Financial Statements — The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
Principles of Consolidation — The consolidated financial statements include the accounts of Galena and its wholly owned subsidiaries. All material intercompany accounts have been eliminated in consolidation.
Reclassifications — Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on net loss per share.
Cash and Cash Equivalents — The Company considers all highly liquid debt instruments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market accounts and demand deposits.
Restricted Cash — Restricted cash consists of the minimum cash covenant as required by the debenture certificates of deposit on hand with the Company’s financial institutions as collateral for its corporate credit cards.
Fair Value of Financial Instruments — The carrying amounts reported in the balance sheet for cash equivalents, marketable securities, accounts receivable, accounts payable, and capital leases approximate their fair values due to their short-term nature and market rates of interest.
Equipment and Furnishings — Equipment and furnishings are stated at cost and depreciated using the straight-line method based on the estimated useful lives (generally three to five years for equipment and furniture) of the related assets.
Goodwill and Intangible Assets — Goodwill and indefinite-lived intangible assets are not amortized but are tested annually for impairment at the reporting unit level, or more frequently if events and circumstances indicate impairment may have occurred. Factors the company considers important that could trigger an interim review for impairment include, but are not limited to, the following:
• | Significant changes in the manner of its use of acquired assets or the strategy for its overall business; |
• | Significant negative industry or economic trends; |
• | Significant decline in stock price for a sustained period; and |
• | Significant decline in market capitalization relative to net book value. |
Goodwill and other intangible assets with indefinite lives are evaluated for impairment first by a qualitative assessment to determine the likelihood of impairment. If it is determined that impairment is more likely than not, the Company will then proceed to the two step impairment test. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the “First Step”). If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment (the “Second Step”). Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. In its review of the carrying value of the goodwill for its single reporting unit and its indefinite-lived intangible assets, the Company determines fair values of its goodwill using the market approach, and its indefinite-lived intangible assets using the income approach.
Intangible assets not considered indefinite-lived are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. The Company’s policy is to identify and record impairment losses, if necessary, on intangible product rights when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
The company performed its review for impairment using the qualitative assessment for both goodwill and indefinite-lived intangible assets, and has determined that there has been no impairment to these assets as of December 31, 2016.
Contingent Purchase Price Consideration — Contingent consideration is recorded at the estimated fair value as of the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period with any adjustments in fair value included in our consolidated statement of comprehensive loss.
Acquisitions and In-Licensing — For all in-licensed products and technologies, we perform an analysis to determine whether we hold a variable interest or a controlling financial interest in a variable interest entity. On the basis of our interpretations and conclusions, we determine whether the acquisition falls under the purview of variable interest entity accounting and if so, consider the necessity to consolidate the acquisition. As of December 31, 2016, we determined there were no variable interest entities required to be consolidated.
We also perform an analysis to determine if the assets and liabilities acquired in an acquisition qualify as a “business.” The excess of the purchase price over the fair value of the net assets acquired can only be recognized as goodwill in a business combination.
Patents and Patent Application Costs — Although the Company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived from the patents is uncertain. Patent costs are, therefore, expensed as incurred.
Legal Fees and Insurance Recoveries — There can be a significant time lag between the time that legal fees are incurred and the insurance reimbursement available to offset the related costs. The legal costs are recorded in the period they are incurred, and the insurance recoveries for those costs are recorded in the period when the insurance reimbursement is deemed probable.
Share-based Compensation — The Company follows the provisions of the FASB ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, non-employee directors, and consultants, including stock options and warrants. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.
For stock options and warrants granted as consideration for services rendered by non-employees, the Company recognizes compensation expense in accordance with the requirements of FASB ASC Topic 505-50 (“ASC 505-50”), “Equity Based Payments to Non- Employees.” Non-employee option and warrant grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to vesting, the value of these options and warrants, as calculated using the Black-Scholes option-pricing model, will be re-measured using the fair value of the company’s common stock and the non-cash compensation recognized during the period will be adjusted accordingly. Since the fair market value of options and warrants granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options are fully vested.
Research and Development Expenses — Research and development costs are expensed as incurred. Included in research and development costs are wages, benefits and other operating costs, facilities, supplies, external services and overhead related to our research and development departments, and clinical trial expenses.
Clinical trial expenses include direct costs associated with contract research organizations (“CROs”), as well as patient-related costs at sites at which our trials are being conducted.
Direct costs associated with our CROs are generally payable on a time and materials basis, or when certain enrollment and monitoring milestones are achieved. Expense related to a milestone is recognized in the period in which the milestone is achieved or in which we determine that it is more likely than not that it will be achieved.
The invoicing from clinical trial sites can lag several months. We accrue these site costs based on our estimate of upfront set-up costs upon the screening of the first patient at each site, and the patient related costs based on our knowledge of patient enrollment status at each site.
Income Taxes — The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. ASC 740-10 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The Company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the company’s income tax provision or benefit. The recognition and measurement of benefits related to the company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and the company’s assumptions or changes in the company’s assumptions in future periods are recorded in the period they become known.
For the years ended December 31, 2016 and 2015, we recognized income tax of $243,000 and $365,000, respectively. There was no income tax expense or benefit for the year ended December 31, 2014. We continue to maintain a full valuation allowance against our net deferred tax assets.
Concentrations of Credit Risk — Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains cash balances in several accounts with two banks, which at times are in excess of federally insured limits. As of December 31, 2016, the company’s cash equivalents were invested in money market mutual funds. The Company’s investment policy does not allow investment in any debt securities rated less than “investment grade” by national ratings services. The Company has not experienced any losses on its deposits of cash and cash equivalents. As of December 31, 2016, we had approximately $17,583,000 in interest-bearing accounts above federally insured limits.
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2. Recently Issued Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Earlier adoption is permitted. The Company has adopted this ASU.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Further, ASU 2015-03 requires the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. ASU 2015-03 must be applied retrospectively. The Company adopted this ASU on January 1, 2016. There was no impact to the Company’s consolidated financial statements upon adoption.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes or ASU 2015-17. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. The guidance will become effective for us beginning in the first quarter of 2017 and may be applied either prospectively or retrospectively. Early adoption is permitted. At the time of adoption, we will reclassify current deferred tax amounts on our Consolidated Balance Sheets as noncurrent. The Company adopted this ASU on January 1, 2017. There was no impact to the Company’s consolidated financial statements upon adoption.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company beginning in its first quarter of 2019 and early adoption is not permitted. The Company does not believe the adoption of the new financial instruments standard will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation-Stock Compensation. ASU 2016-09 includes several areas of simplification to stock compensation including simplifications to the accounting for income taxes, classification of excess tax benefits on the Statement of Cash Flows and forfeitures. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016. An entity that elects early adoption must adopt all of the amendments in the same period. The Company adopted this ASU on January 1, 2017. There was no impact to the Company’s consolidated financial statements upon adoption.
In August 2016, the Financial Accounting Standards Board issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force.” The objective of ASU No. 2016-15 is to provide specific guidance on eight cash flow classification issues and how to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We are still evaluating the effect of this update.
In November 2016, the FASB issued ASU No. 2016-18, Restricted cash, amending the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The ASU is effective retrospectively for reporting periods beginning after December 15, 2017, with early adoption permitted. We are evaluating the effect of this update.
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2. Fair Value Measurements
The following tables present information about our assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets (in thousands):
Description |
June 30, 2017 |
Quoted Prices In Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
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Assets: |
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Cash equivalents |
$ | 17,131 | $ | 17,131 | $ | — | $ | — | ||||||||
Restricted cash equivalents |
13,212 | 13,212 | — | — | ||||||||||||
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Total assets measured and recorded at fair value |
$ | 30,343 | $ | 30,343 | $ | — | $ | — | ||||||||
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Liabilities: |
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Warrants potentially settleable in cash |
$ | 8,510 | $ | — | $ | 8,510 | $ | — | ||||||||
Contingent purchase price consideration |
1,227 | — | — | 1,227 | ||||||||||||
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Total liabilities measured and recorded at fair value |
$ | 9,737 | $ | — | $ | 8,510 | $ | 1,227 | ||||||||
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Description |
December 31, 2016 |
Quoted Prices In Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
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Assets: |
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Cash equivalents |
$ | 16,192 | $ | 16,192 | $ | — | $ | — | ||||||||
Restricted cash equivalents |
17,622 | 17,622 | — | — | ||||||||||||
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Total assets measured and recorded at fair value |
$ | 33,814 | $ | 33,814 | $ | — | $ | — | ||||||||
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Liabilities: |
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Warrants potentially settleable in cash |
$ | 1,860 | $ | — | $ | 1,860 | $ | — | ||||||||
Contingent purchase price consideration |
1,095 | — | — | 1,095 | ||||||||||||
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Total liabilities measured and recorded at fair value |
$ | 2,955 | $ | — | $ | 1,860 | $ | 1,095 | ||||||||
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The Company did not transfer any financial instruments into or out of Level 3 classification during the six months ended June 30, 2017 and 2016. A reconciliation of the beginning and ending Level 3 liabilities for the six months ended June 30, 2017 is as follows (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
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Balance, January 1, 2017 |
$ | 1,095 | ||
Change in the estimated fair value of the contingent purchase price consideration |
132 | |||
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Balance at June 30, 2017 |
$ | 1,227 | ||
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The fair value of the contingent purchase price consideration is measured at the end of each reporting period using Level 3 inputs in a probability-weighted, discounted cash-outflow model. The significant unobservable assumptions include the probability of achieving each milestone, the date we expect to reach the milestone, and a determination of present value factors used to discount future expected cash outflows. The decrease in the estimated fair value of the contingent purchase price consideration during the period reflects a lowering of the probability and lengthening of the timeline for the potential approval of NeuVax, as these assumptions are now based principally on our Phase 2 combination trial of trastuzumab and NeuVax with HER2 low-to-intermediate expressing patients whereas previously, the valuation was based on our Phase 3 PRESENT trial, which was stopped in June 2016 and subsequently closed in the third quarter due to futility as recommended by the Independent Data Monitoring Committee (“IDMC”).
See Note 7 for discussion of the Level 2 liabilities relating to warrants accounted for as liabilities.
3. Fair Value Measurements
The Company follows ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) for the Company’s financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and are re-measured and reported at fair value at least annually using a fair value hierarchy that is broken down into three levels. Level inputs are defined as follows:
Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.
Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
The Company categorized its cash equivalents and marketable securities as Level 1 inputs. The valuations for Level 1 were determined based on a “market approach” using quoted prices in active markets for identical assets. Valuation of these assets does not require a significant degree of judgment. The Company categorized its warrants potentially settleable in cash as Level 2 inputs. The warrants are measured at market value on a recurring basis and are being marked to market each quarter-end until they are completely settled. The warrants are valued using an appropriate pricing model, using assumptions consistent with our application of ASC 718. The contingent purchase price consideration is categorized as Level 3 inputs and is measured at its estimated fair value on a recurring basis and is adjusted at each quarter-end until it is completely settled. The contingent price consideration is valued based on the expected timing of milestones, the expected probability of success for each milestone and discount rates based on a corporate debt interest rate index publicly issued.
The following tables present information about our assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets (in thousands):
December 31, 2016 |
Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: |
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Cash equivalents |
$ | 16,192 | $ | 16,192 | $ | — | $ | — | ||||||||
Restricted cash equivalents |
17,622 | 17,622 | — | — | ||||||||||||
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Total assets measured and recorded at fair value |
$ | 33,814 | $ | 33,814 | $ | — | $ | — | ||||||||
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Liabilities: |
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Warrants potentially settleable in cash |
$ | 1,860 | $ | — | $ | 1,860 | $ | — | ||||||||
Contingent purchase price consideration |
1,095 | — | — | 1,095 | ||||||||||||
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Total liabilities measured and recorded at fair value |
$ | 2,955 | $ | — | $ | 1,860 | $ | 1,095 | ||||||||
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December 31, 2015 |
Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: |
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Cash equivalents |
$ | 29,171 | $ | 29,171 | $ | — | $ | — | ||||||||
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Total assets measured and recorded at fair value |
$ | 29,171 | $ | 29,171 | $ | — | $ | — | ||||||||
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Liabilities: |
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Warrants potentially settleable in cash |
$ | 14,518 | $ | — | $ | 14,518 | $ | — | ||||||||
Contingent purchase price consideration |
6,142 | — | — | 6,142 | ||||||||||||
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Total liabilities measured and recorded at fair value |
$ | 20,660 | $ | — | $ | 14,518 | $ | 6,142 | ||||||||
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The company has not transferred any financial instruments into or out of Level 3 classification during the years ended December 31, 2016 or 2015. A reconciliation of the beginning and ending Level 3 liabilities for the years ended December 31, 2016 and 2015 is as follows (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
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Balance, January 1, 2015 |
$ | 6,651 | ||
Change in the estimated fair value of the contingent purchase price consideration |
(509 | ) | ||
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Balance, December 31, 2015 |
6,142 | |||
Change in the estimated fair value of the contingent purchase price consideration |
(5,047 | ) | ||
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Balance at December 31, 2016 |
$ | 1,095 | ||
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The fair value of the contingent purchase price consideration is measured at the end of each reporting period using Level 3 inputs in a probability-weighted, discounted cash-outflow model. The significant unobservable assumptions include the probability of achieving each milestone, the date we expect to reach the milestone, and a determination of present value factors used to discount future expected cash outflows. The decrease in the estimated fair value of the contingent purchase price consideration during 2016 reflects a lowering of the probability and lengthening of the timeline for the potential approval of NeuVax, as these assumptions are now based principally on our Phase 2 combination trial with trastuzumab whereas previously, the valuation was based on our Phase 3 PRESENT trial, which was deemed futile by the Independent Data Monitoring Committee (“IDMC”) in June 2016 and subsequently closed.
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3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
June 30, 2017 | December 31, 2016 |
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Clinical trial costs |
$ | 899 | $ | 3,088 | ||||
Professional fees |
660 | 229 | ||||||
Compensation and related benefits |
976 | 975 | ||||||
Interest expense |
99 | — | ||||||
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Accrued expenses and other current liabilities |
$ | 2,634 | $ | 4,292 | ||||
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4. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
December 31, | ||||||||
2016 | 2015 | |||||||
Clinical development expense |
$ | 3,088 | $ | 3,294 | ||||
Professional fees |
229 | 435 | ||||||
Compensation and related benefits |
975 | 1,535 | ||||||
Interest expense |
— | 28 | ||||||
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Accrued expenses and other current liabilities |
$ | 4,292 | $ | 5,292 | ||||
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4. Long-Term Debt
On May 10, 2016, Galena Biopharma, Inc.(the “Company”) entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), with JGB (Cayman) Newton Ltd. (the “Purchaser”) pursuant to which the Company sold to Purchaser, at a 6.375% original issue discount, a $25,530,000 Senior Secured Debenture (the “Initial Debenture”) and warrants to purchase up to 100,000 shares of the Company’s common stock, $0.0001 par value per share (“Common Stock”). Net proceeds to the Company from sale of the Initial Debenture and warrants, after payment of commissions and legal fees, were approximately $23,400,000. The Initial Debenture contained no conversion features to shares of Common Stock.
The Initial Debenture carried an interest only period of six months following which the holder of the Initial Debenture had the right, at its option, to require the Company to redeem up to $1,100,000 of the outstanding principal amount of the Initial Debenture per calendar month. The Company is required to promptly, but in any event no more than three trading days after the holder delivers a redemption notice to the Company, pay the applicable redemption amount in cash or, at the Company’s election and subject to certain conditions, in shares of Common Stock. If the Company elects to pay the redemption amount in shares of Common Stock, then the shares will be delivered at the lesser of A) 7.5% discount to the average of the 3 lowest volume weighted average prices over the prior 20 trading days or B) a 7.5% discount to the prior trading day’s volume weighted average price (the “Stock Payment Price”). Pursuant to the Initial Debenture, the Company may only opt for payment in shares of Common Stock if certain equity conditions are met or waived, including, among others, that the volume weighted price of the Common Stock be at least $15.00 (the “Original Minimum Price Condition”).
The Initial Debenture was amended and restated in its entirety on August 22, 2016 (as so amended, the “Debenture”) pursuant to an Amendment Agreement, dated August 22, 2016, among the Company, the Purchaser and JGB Collateral LLC (the “Amendment Agreement”). As previously reported, interest on the Debenture is payable at the end of each month based on the outstanding principal. The Debenture matures on November 10, 2018, and accrues interest at 9% per year. In addition, on the maturity date of the Debenture (or such earlier date that the principal amount of the Debenture is paid in full by acceleration or otherwise) a fixed amount, which shall be deemed interest under the Debenture, equal to $765,900, will be due and payable to the holder of the Debenture on such date in, at the option of the Company, cash and, subject to the same conditions for the payment of interest in shares of Common Stock, shares of Common Stock or a combination of cash and Common Stock.
The Company’s obligations under the Debenture are secured under a Security Agreement by a senior lien on all of the Company’s assets, including all of the Company’s interests in its consolidated subsidiaries. Under the subsidiary guarantee agreement, each subsidiary guarantees the performance of the Company of the Purchase Agreement, Debenture and related agreements.
After giving effect to the Amendment Agreement, the Debenture contains the following modified and/or additional terms, among others:
• | With respect to interest accruing on the outstanding principal amount under the Debenture for the period prior to November 10, 2016, the Company was permitted to satisfy such interest payments in kind by adding such amount to the outstanding principal. |
• | The Purchaser can from time to time during the term of the Debenture require the Company to prepay in cash all or a portion of the outstanding principal plus accrued and unpaid interest (the “Outstanding Amount”) on written notice to the Company, provided, that such prepayment amount shall not exceed the lesser of $18,500,000 and the Outstanding Amount. If the holder elects such prepayment of the Debenture, then the number of shares subject to the warrants issued to the holder will be reduced in proportion to the percentage of principal and accrued interest required to be prepaid by the Company. In addition, the Company shall have the right to prepay in cash all (but not less than all) of the Outstanding Amount (1) at any time after November 10, 2017, or (2) upon a “change of control” (as such term is used un the Debenture), in each case with a 10% premium on the Outstanding Amount. |
• | The Purchaser shall continue to have the right, which commenced on November 10, 2016, to require the Company to redeem the Outstanding Amount, except that the maximum monthly amount of such redemptions was increased from $1,100,000 to $1,500,000; provided, that if the trading price of Common Stock is at least $8.00 per share (as may be further adjusted appropriately for stock splits, combinations or similar events) during such calendar month, then such monthly maximum redemption amount may be increased to $2,200,000 at the Purchaser’s election and if the Company has already elected to satisfy such redemptions in shares of Common Stock. In addition, notwithstanding the foregoing limitations on the monthly redemption amount, the Purchaser may elect up to three times in any 12-month period to increase the monthly maximum to $2,500,000. |
• | Among the various conditions that must be satisfied (or waived) in order for the Company to be able to elect to satisfy the monthly redemption amounts in shares of Common Stock, the Original Minimum Price Condition of $15.00 was decreased to a volume-weighted average price of $4.00 per share (the “Amended Minimum Price Condition”). |
• | Following November 10, 2016, the Purchaser may elect to convert any portion of the Outstanding Amount into shares of Common Stock at a fixed price of $12.00 per share (as adjusted appropriately for stock splits, combinations or similar events). |
• | Under the Initial Debenture, the Company was required to maintain a minimum of $24,000,000 of unencumbered cash in a restricted account as security for its obligations under the Initial Debenture. Such minimum amount has been reduced to the lesser of $18,500,000 or the Outstanding Amount. |
In addition, in accordance with the terms of the Amendment Agreement, the exercise price of the Series A Warrant was reduced from $30.20 per share to $8.60 per share (as may be further adjusted appropriately for stock splits, combinations or similar events).
On December 14, 2016, the Company and the Purchaser entered into a waiver (the “First Waiver”) pursuant to which, as contemplated by the Debenture, the Purchaser waived with respect to the calendar months of December 2016, January 2017, February 2017 and March 2017 (collectively, the “First Specified Months”) the Amended Minimum Price Condition, provided that, among other things, with respect to the First Specified Months, the volume weighted average price of the Common Stock was not less than $1.00 and the Company’s cash on hand exceeded the outstanding principal amount of the Debenture by $10 million. Furthermore, the First Waiver set out a monthly amount to be redeemed for each of the First Specified Months equal to $1,500,000 and amended the Debenture to require the Company to withdraw all cash and/or cash equivalents in excess of $18,500,000 from certain accounts and deposit such funds into an account in a form acceptable to the Purchaser, to be executed by the Company, U.S. Bank, N.A. and SVB Asset Management such that the Company requires the prior written consent of the Purchaser for certain withdrawals. The First Waiver amends the Debenture to grant the Purchaser the right to redeem any portion of the outstanding principal amount of the Debenture in Common Stock if the price per share of Common Stock on a principal trading market at any point in time of any trading day exceeds the closing price per share of the Common Stock on the immediately preceding trading day by more than 25%.
On April 1, 2017, the Company and Purchaser entered into a waiver (the “Second Waiver”) pursuant to which, as contemplated by the Debenture, the Purchaser waived with respect to the calendar months of April 2017, May 2017, June 2017, July 2017, August 2017 and September 2017 (collectively, the “Second Specified Months”) the Amended Minimum Price Condition, provided that, among other things, with respect to the Second Specified Months, the volume weighted average price of the Common Stock is not less than $0.30 and the Company’s cash on hand exceeds the outstanding principal amount of the Debenture by $10 million.
On May 1, 2017, the Purchaser, the Company and the guarantors of the Company’s obligations under the Debenture entered into an amendment agreement (the “2017 Amendment Agreement”) pursuant to which the Purchaser may, from time to time, at the Purchaser’s option waive the Amended Minimum Price Condition; provided, however, the Purchaser cannot waive the Amended Minimum Price Condition to the extent that the resulting Stock Payment Price would be less than $0.35 per share as a result of any such waiver (the “Minimum Stock Payment Price Condition”). The 2017 Amendment Agreement further provides that, in the event of any Equity Conditions Failure (as such term is defined in the Debenture) that is not, or cannot be as a result of the 2017 Amendment Agreement, waived by the Purchaser, the Company shall honor the holder redemption amounts in cash or, at the Company’s election, with the prior written consent of the Purchaser, deliver aggregate consideration in shares of Common Stock and cash in satisfaction of the applicable holder redemption amount as follows: (i) the number of shares of Common Stock equal to the quotient obtained by dividing such holder redemption amount and $0.35 (each such share having a deemed value per share at the Stock Payment Price that would have been in effect but for the Minimum Stock Payment Price Condition of $0.35 per share) and (ii) cash equal to the difference between the holder redemption amount and the aggregate deemed value of the shares of Common Stock delivered in clause (i).
As of May 1, 2017, (i) there were 37,435,524 shares of Common Stock outstanding and (ii) 9,131,868 shares of Common Stock had been issued by the Company pursuant to the terms of the Debenture. Assuming all the shares issuable pursuant to the terms of the Debenture subsequent to May 1, 2017 are issued at a Stock Payment Price of $0.35, the lowest Stock Payment Price permitted under the Minimum Stock Price Payment Condition, the Company estimates that the maximum number of shares of Common Stock that the Company could issue pursuant to the terms of the Debenture subsequent to May 1, 2017 is 45,000,000.
On July 10, 2017, the Purchaser, the Company and the guarantors of the Company’s obligations under the Debenture entered into an amendment agreement (the “July 2017 Amendment Agreement”) pursuant to which the definition of “Stock Payment Price” in the Debenture was amended and restated to be the lower of (a) 80% (previously 92.5%) of the VWAP for the Trading Day immediately prior to, as the case may be, the applicable Interest Payment Date, the applicable Advance Date or, with respect to any redemption pursuant to Section 6(a) of the Debenture, the date of the applicable Holder Redemption Notice (the “Prior Day VWAP”) and (b) 80% (previously 92.5%) of the average of the three lowest VWAPs during the 20 consecutive Trading Day period immediately preceding, as the case may be, the applicable Interest Payment Date, the applicable Advance Date or, with respect to any redemption pursuant to Section 6(a) of the Debenture, the date of the applicable Holder Redemption Notice (the “Twenty Day VWAP”); provided, however, to the extent that, on any given Trading Day, the price per share of Common Stock on such Trading Day on the Principal Market equals or exceeds 115% of the Prior Day VWAP or Twenty Day VWAP, then for the such Trading Day, and such Trading Day only, each reference to eighty percent (80%) shall be deemed, for such Trading Day only, to be ninety two and one-half percent (92.5%).
The effect of the July 2017 Amendment Agreement is to increase the discount to the Prior Day VWAP and the Twenty Day VWAP granted to the Holder with respect to redemption of, or the payment of interest on, the Debenture in shares of Common Stock from 7.5% to 20%, unless the on any given Trading Day, the price per share of Common Stock on such Trading Day on the Principal Market equals or exceeds 115% of the Prior Day VWAP or Twenty Day VWAP. However, the maximum number of shares of Common Stock issuable pursuant to the Debenture has not changed.
On August 7, 2017, the Company and Purchaser entered into a consent to the Debenture in which the Purchaser consented to the Company’s entry into the Merger Agreement and the Merger as well as an amendment to the Debenture in which: (a) the Company shall not prepay all or any portion of the Debenture prior to the first anniversary of the consummation of the Merger, (b) the Purchaser may increase the dollar amount of the monthly allowance up to the outstanding principal balance of the Debenture by written notice to the Company and may deliver an unlimited number of redemption notices during any calendar month, and (c) to the extent commercially reasonable under the circumstances the Purchaser shall limit the redemption amounts for any given trading day to fifteen percent (15%) of the greater of (1) the daily dollar trading volume for our common stock for such trading day and (2) the average daily dollar trading volume for our common stock for the five (5) consecutive trading days preceding such trading day.
As of June 30, 2017 the outstanding principal balance of the Debenture was $13,171,702. The current portion of long-term debt as of June 30, 2017 of $13,025,180 is net of unamortized discounts and debt issuance costs of $146,552. During the six months ended June 30 2017, the holder of the Debenture redeemed $4,450,000 of principal, which the Company satisfied with 4,497,466 shares of our common stock. As of December 31, 2016 the outstanding principal balance of the Debenture was $17,621,702. The current portion of long-term debt as of December 31, 2016 of $16,397,030 is net of unamortized discounts and debt issuance costs of $1,224,672.
5. Long-term Debt
On May 8, 2013, we entered into a loan and security agreement with Oxford Finance LLC, as collateral agent, and related lenders under which we borrowed the first tranche of $10 million (“Loan”). The Loan payment terms include 12 months of interest-only payments at the fixed coupon rate of 8.45%, followed by 30 months of amortization of principal and interest until maturity in November 2016. In connection with the Loan, we paid the lender a 1% cash facility fee and a 5.5% cash final payment and granted to the lender seven-year warrants to purchase up to 9,109 shares of our common stock at an exercise price of $49.4. On May 10, 2016, the Company prepaid the outstanding principal amount and cash final payment.
On May 10, 2016, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”), with certain purchasers pursuant to which the Company sold, at a 6.375% original issue discount, a total of $25,530,000 Senior Secured Debenture (“Debenture”) and warrants to purchase up to 50,000 shares of the Company’s common stock. Net proceeds to the Company from sale of the Debenture, after payment of commissions and legal fees, were approximately $23.4 million The Debenture matures November 10, 2018, accrues interest at 9% per year, and does not contain any conversion features into shares of our common stock. On August 22, 2016, the Company, the purchasers and certain other parties entered into an amendment agreement, which provides for the amendment and restatement of the Debenture, an amendment to the terms of the Series A Common Stock Purchase Warrant issued by the Company to the purchasers pursuant to the terms of the Purchase Agreement, and certain other terms and conditions, as summarized below.
On December 14, 2016, the Company and the holder entered into a waiver (the “Waiver”) that amended the Securities Purchase Agreement dated May 10, 2016 between the Company and the holder, as amended on August 22, 2016 (the “SPA”). The Waiver provides that solely with respect to the calendar months of December 2016, January 2017, February 2017 and March 2017 (collectively, the “Specified Months”), the holder waives, subject to certain delineated exceptions, the requirement of paragraph (i) of the definition of “Equity Conditions” set forth in Section 1 of the Debenture, thereby continuing to allow the Company to deliver shares of its Common Stock in respect to a portion of its amortization obligation under the Debenture. Furthermore, the waiver sets out a Monthly Allowance for each Specified Month equal to $1,500,000 and required the Company to withdraw all cash and/or cash equivalents in excess of eighteen million five hundred thousand dollars ($18,500,000) from certain accounts and deposit such funds into an account in a form acceptable to the holder, such that the Company requires the prior written consent of the holder for certain withdrawals. The Waiver also grants the holder special redemption rights depending upon the price of our common stock, including the right to redeem the debenture.
The Debenture carries an interest only period of six months, following which interest is due monthly and payable in cash or stock at the election of the Company. Interest deferred during the interest only period is added to and considered principal. Following the interest only period, the Company has the right under the Debenture, commencing November 10, 2016, to pay the monthly redemption amount of the outstanding balance in cash, shares of the Company’s common stock or a combination thereof, if certain conditions are met. The maximum monthly redemption amount was increased from $1,100,000 to $1,500,000 under the amended Debenture; provided, that if the trading price of the Company’s common stock is at least $8.00 per share (as adjusted for stock splits, combinations or similar events) during such calendar month, then such maximum monthly redemption amount may be increased to $2,200,000 at the holder’s election and if the Company has already elected to satisfy such monthly redemptions in shares of common stock. In addition, notwithstanding the foregoing limitations on the monthly redemption amount, the holder may elect up to three times in any 12-month period to increase the maximum monthly redemption to $2,500,000.
If the Company elects to pay the redemption amount in shares of its common stock, then the shares will be delivered at the lesser of A) 7.5% discount to the average of the 3 lowest volume weighted average prices over the prior 20 trading days or B) a 7.5% discount to the prior trading day’s volume weighted average price. The Company may only opt for payment in shares of common stock if certain equity conditions are met. The Company, at its option, may also force the holder to redeem up to double the monthly redemption principal amount of the Debenture but not less than the monthly payment.
The holder received 50,000 warrants upon the closing on the sale of the Debenture at an exercise price of $30.20, maturing 5 years from issuance, and in accordance with the terms of the amendment agreement, the exercise price of the warrant was reduced to $8.60 per share. Additionally, the holder received 50,000 warrants upon the Company’s public company announcement of the interim analysis on June 29, 2016 at an exercise price of $8.60.
The amendment agreement provides that, following November 10, 2016, the holder may elect to convert any portion of the outstanding balance into shares of common stock at a fixed price of $12.00 per share (as adjusted for stock splits, combinations or similar events).
The Company’s obligations under the Debenture can be accelerated in the event the Company undergoes a change in control and other customary events of default. In the event of default and acceleration of the Company’s obligations, the Company would be required to pay all amounts of principal and interest then outstanding under the Debenture in cash. The Company’s obligations under the Debenture are secured under a security agreement by a senior lien on all of the Company’s assets, including all of the Company’s interests in its consolidated subsidiaries. Under the subsidiary guarantee agreement, each subsidiary guarantees the performance of the Company of the Purchase Agreement, Debenture and related agreements. The Company must also maintain as a compensating cash balance, the lesser of a minimum of $18.5 million in cash or the outstanding principal and accrued and unpaid interest, which such amount is included in restricted cash as of December 31, 2016. The holder of the Debenture has the right, at any time and from time to time, to require the Company to prepay the lesser of $18.5 million plus accrued and unpaid interest or the outstanding principal and accrued and unpaid interest.
As of December 31, 2016 the outstanding principal balance of the Debenture was $17,621,702. The current portion of long-term debt of $16,397,030 is net of unamortized discounts and debt issuance costs of $1,224,672. In January and February 2017, the holder of the Debenture redeemed $3,950,000 of principal, which the Company satisfied with 3,541,077 shares of our common stock. The outstanding principal balance as of March 15, 2017 is $13,671,702.
Armentum Partners, LLC (“Placement Agent”) acted as the placement agent in the offering of the Debenture and the Company paid the Placement Agent a fee equal to 2% of the funds received from the sale of the Debenture. The Company paid half of the placement fee upon funding and paid the other half during the third quarter of 2016.
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5. Legal Proceedings, Commitments and Contingencies
Legal Proceedings
On February 13, 2017, a putative shareholder securities class action complaint was filed in the U.S. District Court for the District of New Jersey entitled, Miller v. Galena Biopharma, Inc., et al. On February 15, 2017, a putative shareholder securities class action complaint was filed in the U.S. District Court for the District of New Jersey entitled, Kattuah v Galena Biopharma, Inc., et al. The actions assert that the defendants failed to disclose that Galena’s promotional practices for Abstral were allegedly improper and that the Company may be subject to civil and criminal liability, and that these alleged failures rendered the Company’s statements about its business misleading. Two groups of shareholders and one individual shareholder filed three motions to be appointed lead plaintiff on April 14, 2017 and April 17, 2017. Subsequently, one of the shareholders groups withdrew its motion for lead plaintiff status and the individual shareholder notified the court that he does not object to the appointment of the remaining shareholder group, Gale investor group, as lead plaintiff. On July 17, 2017, the Court approved the GALE investor group as named lead plaintiff and its counsel as lead and liaison counsel. The Court also consolidated both actions. Within the time allowed under the federal rules and statute, we anticipate that an amended complaint will be filed and the Company and the other defendants, former and current officers, will respond to the amended complaints through an appropriate pleading or motion.
On March 16, 2017, a complaint entitled Keller v. Ashton et al., CA No. 2:17-cv-01777 was filed in the U.S. District Court for the District of New Jersey against the Company’s current directors and the Company, as a nominal defendant. The complaint purports to assert derivative claims for breach of fiduciary duty on Galena’s behalf against its directors based on substantially similar facts as alleged in the putative shareholder securities class action complaints mentioned above. The Company’s response to the complaint was due on June 1, 2017; however, the Court on May 21, 2017, entered a stay of the proceedings pending resolution of motions to dismiss in the securities litigations described above.
On April 10, 2017, the Securities and Exchange Commission issued a cease and desist order against the Company and the former CEO, Mark Ahn, requiring each of them to cease and desist from any future violations of Sections 5(a), 5(b), 5(c), 17(a), and 17(b) of the Securities Act of 1933, as amended (the “Securities Act”), and Section 10(b), 13(a), and 13(b)(2)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and various rules thereunder (the “SEC Order”). Sections 5(a) and 5(c) of the Securities Act generally prohibit the offer and sale of unregistered securities absent an applicable exemption from registration. Section 5(b) of the Securities Act prohibits the use of a nonconforming prospectus. Sections 17(a) and 17(b) of the Securities Act and Section 10(b) of the Exchange Act generally prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of securities. Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder require the Company to file annual and quarterly reports that disclose certain information, including information regarding the sale of all securities not registered under the Securities Act, and to include such further information as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. Section 13(b)(2)(A) of the Exchange Act requires the Company to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. The Company and the former CEO did not admit or deny the findings in the order. Based upon the order, the Company made a $200,000 penalty payment as well as a payment of approximately $750,000, which was the indemnification payment of our former CEO for the disgorgement and prejudgment interest payment that he was required to pay by the order. The Company made such indemnification payment after a special committee of our Board of Directors determined that we were required under Delaware law to indemnify our former CEO for the disgorgement and prejudgment interest payment. The former CEO also made a penalty payment of $600,000. As a result of the SEC Order, Galena may not use certain exemptions from registration under the federal securities laws, including Regulation A and Regulation D. In addition, Galena is an “ineligible issuer” as the term is defined under Rule 405 promulgated under the Securities Act.
On April 27, 2017, a putative shareholder class action was filed in the Chancery Court of Delaware entitled Patel vs. Galena Biopharma, Inc. et. al, CA No. 2017-0325 alleging breaches of Section 225 of the Delaware General Corporation Law (“DGCL”) and breaches of fiduciary duties by the board of directors regarding the voting results of authorized share and the reverse stock split proposals in the proxy statements for the July 2016 and October 2016 stockholder meetings. On June 2, 2017, an amended verified complaint was filed along with a motion to expedite the proceedings. On June 5, 2017, we filed a verified petition under Section 205 of the DGCL and a motion to expedite the proceedings. On June 8, 2017, the court denied a request by the plaintiff to schedule a preliminary injunction motion and ordered a prompt trial on both the plaintiff and our claims. On June 20, 2017, the court consolidated the claims into In re Galena Biopharma, Inc., C. A. No. 2017-0423-JTL. On July 10, 2017, the court ordered that the trial of the claims be held on August 28, 30 and 31, 2017. On July 24, 2017, the Company entered into a binding settlement term sheet, which the parties will use to enter into a Stipulation of Settlement that is intended to settle the litigation currently pending in the Court of Chancery of the State of Delaware (the “Court”), captioned In re Galena Biopharma, Inc., C. A. No. 2017-0423-JTL. The settlement resolves the putative stockholder class action claims against the Company and/or certain of its current and former officers and directors (the “Defendants”), as well as the Company’s petition to validate certain corporate actions. The settlement will not become effective until approved by the Court. Under the terms of the settlement, the class will receive a settlement payment of $1.3 million, in addition to attorney fees in an amount to be approved. The settlement payment of $1.3 million consists of $50,000 in cash to be paid by the Defendants or their insurers and $1,250,000 in unrestricted shares of the Company’s common stock (“Settlement Stock”), which valuation will be based on the volume-weighted average closing price for the 20 trading days immediately preceding the day before the transfer of the Settlement Stock to the settlement fund pursuant to the terms and conditions of the settlement. The Company anticipates that the Settlement Stock will be issued, pursuant to the terms of the Stipulation of Settlement, in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 3(a)(10) of the Securities Act. Any amounts awarded by the Court for attorneys’ fees will be paid in part by the settlement fund and in part by the Company’s insurance carriers. Upon the effectiveness of the proposed settlement, the Defendants will be released from the claims that were asserted or could have been asserted in the class action by class members participating in the settlement.
On July 6, 2017, a complaint captioned Jacob v. Schwartz et al., Case No. C17-01222, was filed in the Superior Court of California, County of Contra Costa against the Company’s current and former directors and the Company, as a nominal defendant. The complaint purports to assert derivative claims for breach of fiduciary duty on Galena’s behalf against its directors based on substantially similar facts as alleged in the derivative complaint mentioned above. The Company’s response to the complaint was due on July 7, 2017; however, the parties have agreed to stay of the proceedings pending resolution of motions to dismiss in the securities litigations described above.
With respect to the criminal and civil investigation conducted by the U.S. Attorney’s Office for the District of New Jersey (“USAO NJ”) and the Department of Justice (“DOJ”), the Company previously announced it had reached an oral agreement in principle with USAO NJ and DOJ regarding the material terms of a settlement related to the USAO NJ and DOJ’s investigation. The final terms and details of this settlement are subject to change pending the completion and execution of a definitive civil settlement agreement among the Company and the USAO NJ and DOJ as well as the settlement of any claims that might be made by state agencies and federal agencies such as U.S. Department of Defense, the Office of Personnel Management, the Office of Inspector General for the U.S. Department of Health and Human Services. The agreement in principle involves a non-criminal resolution and a civil payment, the terms of which will be negotiated with the USAO NJ and DOJ, of approximately $7.5 million, plus interest accrued since the date of reaching an agreement in principle, in return for a release of government claims in connection with the investigation. The $7.5 million civil payment was accrued as of June 30, 2017 and is presented in discontinued operations in the statement of operations.
In addition, there is a qui tam action pending in the U.S. District Court of the District of New Jersey related to the investigation by USAO NJ and DOJ. On August 8, 2017, we reached an oral agreement with the attorneys for the relator in the qui tam action to settle their statutorily mandated attorney fees award by payment of $100,000 in cash and $200,000 in common stock subject to court approval which amounts are accrued as of June 30, 2017 and are presented in discontinued operations in the statement of operations. We also obtained the consent of SELLAS under the terms of the Merger Agreement. The Company anticipates that the $200,000 in settlement stock will be issued, pursuant to the terms of the settlement agreement to be negotiated by the parties, in a transaction that is exempt from the registration requirements of the Securities Act.
Contingencies
In a letter date May 16, 2017, the Company was advised by Midatech Pharma PLC (Midatech), the purchaser of Zuplenz, one of our former commercial products, that Zuplenz inventory held by Cardinal Health Inc. (Cardinal), a wholesaler, is approaching its expiration date. Midatech claims that under the Asset Purchase Agreement with the Company that such product needs to be returned. Cardinal, the wholesaler also claims that under an alleged agreement with the Company such product needs to be swapped with better dated Zuplenz product. Cardinal has not asserted the cost of the return. Midatech has advised that under the terms of the Asset Purchase Agreement, Midatech maintains that the cost of the return is $1.5 million and Galena needs to pay Midatech for the return. The Company disputes the claim made by Midatech and Cardinal and is currently in discussions to resolve the claim.
6. Legal Proceedings, Commitments and Contingencies
Legal Proceedings
On June 24, 2016, the U.S. District Court for the District of Oregon entered a final order and judgment in In re Galena Biopharma, Inc. Derivative Litigation, granting final approval to the settlement awarding attorney’s fees of $4.5 million plus costs, which was paid by our insurance carriers. The settlement included a payment of $15 million in cash by our insurance carriers, which we used to fund a portion of the class action settlement, and cancellation of 60,000 outstanding director stock options. The settlement also required that we adopt and implement certain corporate governance measures. The settlement did not include any admission of wrongdoing or liability on the part of us or the individual defendants and included a full release of us and the current and former officers and directors in connection with the allegations made in the consolidated federal derivative actions and state court derivative actions.
On June 24, 2016, the U.S. District Court for the District of Oregon entered a final order and partial judgment in In re Galena Biopharma, Inc. Securities Litigation, granting final approval of the settlement awarding attorney’s fees of $4.5 million plus costs, which was paid out of the settlement funds. The settlement agreement provided for a payment of $20 million to the class and the dismissal of all claims against us and the other defendants in connection with the consolidated federal securities class actions. Of the $20 million settlement payment to the class, $16.7 million was paid by our insurance carriers and $3.3 million was paid by us through a combination of $2.3 million in cash and $1 million in shares of our common stock (24,002 shares) issued by us on July 6, 2016. In addition to the $3.3 million settlement payment, the company paid $2.0 million in December 2015 in attorney fees outstanding as a condition of the settlement.
In July 2016, we resolved claims brought by shareholders that relate to the securities litigation mentioned above in one case for $150,000 plus $150,000 in shares (14,563 shares) of our common stock, and in another case for $1.5 million in shares of our common stock (168,337 shares). The shares issued in connection with such settlements are included in the secondary offering filed on July 25, 2016. The settlements did not include any admission of wrongdoing or liability on the part of us or any of the current or former directors and officers and included a full release of us and the current and former directors and officers in connection with the allegations made. We are not aware of any other claims made by shareholders who have opted out of the securities litigation.
On October 13, 2016, we filed a complaint in the Circuit Court for the County of Multnomah for the State of Oregon against Aon Risk Insurance Services West, Inc. where we are seeking attorney’s fees, costs and expenses incurred by us related to our coverage dispute with a certain insurer and for amounts we were required to contribute to the settlements of In re Galena Biopharma, Inc. Derivative Litigation and In re Galena Biopharma, Inc. Securities Litigation as a direct result of certain insurer’s failure to pay its full policy limits of liability and other relief. We are currently engaged in written discovery.
On February 13, 2017, a putative shareholder securities class action complaint was filed in the U.S. District Court for the District of New Jersey entitled, Miller v. Galena Biopharma, Inc., et al. On February 15, 2017, a putative shareholder securities class action complaint was filed in the U.S. District Court for the District of New Jersey entitled, Kattuah v Galena Biopharma, Inc., et al. Within the time allowed under the federal rules and statutes, the Company and the other defendants, former and current officers, will respond to the complaints through an appropriate pleading or motion.
A federal investigation of two of the high-prescribing physicians for Abstral (former commercial product) has resulted in the criminal prosecution of the two physicians for alleged violations of the federal False Claims Act and other federal statutes. The criminal trial began in January 2017 and is ongoing. We received a trial subpoena for documents in connection with that investigation and we have been in contact with the U.S. Attorney’s Office for the Southern District of Alabama (SDAL), which is handling the criminal trial, and are cooperating in the production of documents. On April 28, 2016, a second superseding indictment was filed in the criminal case, which added additional information about the defendant physicians and provided information regarding the facts and circumstances involving a rebate agreement between the Company and the defendant physicians’ pharmacy as well as their ownership of our stock. The criminal trial, which began on January 4, 2017, concluded with a jury verdict on February 23, 2017 finding these physicians guilty on 19 of 20 counts; sentencing is scheduled for May 2017. At the end of the SDAL case, SDAL dismissed count 18 of the indictment charging that the physicians conspired, through the C&R Pharmacy, to receive illegal kickbacks in exchange for prescribing Abstral. Though certain former employees received trial subpoenas to appear at the trial and provide oral testimony, only one former employee testified at the trial. We agreed to reimburse those former employees’ attorney’s fees. To our knowledge, we were not a target or subject of that investigation.
There are also federal and state investigations of a company that has a product that competes with Abstral in the same therapeutic class, and we have learned that the FDA and other governmental agencies are investigating our Abstral promotion practices. On December 16, 2015, we received a subpoena issued by the U.S. Attorney’s Office for the District of New Jersey requesting the production of a broad range of documents pertaining to our marketing and promotional practices for Abstral, the commercial product we sold in the fourth quarter of 2015. We have been in contact with the U.S. Attorney’s Office for the District of New Jersey and the Department of Justice, and we have come to understand that the investigation being undertaken is a criminal investigation in addition to a civil investigation that could ultimately involve the Company as well as one or more former employees. Pursuant to the Company’s charter, we are currently reimbursing certain former employees’ attorney’s fees with respect to the investigation. We are cooperating with the civil and criminal investigation, and through our outside counsel we have begun preliminary discussions with the government aimed at the ultimate resolution of the investigation regarding the Company.
On December 22, 2016, the Company and its former CEO reached an agreement in principle to a proposed settlement that would resolve an investigation by the staff of the Securities and Exchange Commission (SEC) involving conduct in the period 2012-2014 regarding the commissioning of internet publications by outside promotional firms. Under the terms of the proposed settlement framework, the Company and the former CEO would consent to the entry of an administrative order requiring that we and the former CEO cease and desist from any future violations of Sections 5(a), 5(b), 5(c), 17(a), and 17(b) of the Securities Act of 1933, as amended, and Section 10(b), 13(a), and 13(b)(2)(A) of the Securities Exchange Act of 1934, as amended, and various rules thereunder, without admitting or denying the findings in the order. Based upon the proposed settlement framework, the Company will make a $200,000 penalty payment. In addition to other remedies, the proposed settlement framework would require the former CEO to make a disgorgement and prejudgment interest payment as well as a penalty payment to the Commission. To address the issues raised by the SEC staff’s investigation, in addition to previous governance enhancements we have implemented, we have voluntarily undertaken to implement a number of remedial actions relating to securities offerings and our interactions with investor relations and public relations firms. The proposed settlement is subject to approval by the Commission and would acknowledge our cooperation in the investigation and confirm our voluntary undertaking to continue that cooperation. If the Commission does not approve the settlement, we may need to enter into further discussions with the SEC staff to resolve the investigated matters on different terms and conditions. As a result, there can be no assurance as to the final terms of any resolution including its financial impact or any future adjustment to the financial statements. In response to an indemnification claim by the former CEO, a special committee of our Board of Directors has determined that we are required under Delaware law to indemnify our former CEO for the disgorgement and prejudgment interest payment of approximately $750,000 that he would be required to pay if and when the settlement is approved by the Commission. Any penalty payment that the former CEO will be required to make in connection with this matter ($600,000 under the proposed settlement framework) will be the responsibility of the former CEO.
The litigation settlements are summarized as follows (in thousands):
Amount | ||||
Class action settlement in 2015 |
$ | 20,000 | ||
Derivative settlement in 2015 |
5,000 | |||
Shareholders securities litigation settlements in 2016 |
1,800 | |||
SEC settlement in 2016 |
950 | |||
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Total settlements |
$ | 27,750 | ||
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Payable by the Company in cash as of December 31, 2016 |
$ | 950 | ||
Paid by the insurance carriers in 2016 |
21,700 | |||
Paid by the Company in cash in 2016 |
2,450 | |||
Paid by the Company in common stock in 2016 |
2,650 | |||
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Total settlements |
$ | 27,750 | ||
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Commitments
The Company acquires assets still in development and enters into research and development arrangements with third parties that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, the Company is required to make royalty payments based upon a percentage of the sales. Because of the contingent nature of these payments, they are not included in the table of contractual obligations shown below.
These arrangements may be material individually, and in the unlikely event that milestones for multiple products covered by these arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations. In addition, these arrangements often give the Company the discretion to unilaterally terminate development of the product, which would allow the Company to avoid making the contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives. The Company’s contractual obligations that may require future cash payments as of December 31, 2016 are as follows (in thousands):
Operating Leases(1) |
Non- Cancelable Employment Agreements(2) |
Subtotal | Cancelable License Agreements(3) |
Total | ||||||||||||||||
2017 |
$ | 241 | $ | 1,601 | $ | 1,842 | $ | 1,391 | $ | 3,233 | ||||||||||
2018 |
246 | — | 246 | 350 | 596 | |||||||||||||||
2019 |
251 | — | 251 | 350 | 601 | |||||||||||||||
2020 |
236 | — | 236 | 7,350 | 7,586 | |||||||||||||||
2021 and thereafter |
— | — | — | 8,815 | 8,815 | |||||||||||||||
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Total |
$ | 974 | $ | 1,601 | $ | 2,575 | $ | 18,256 | $ | 20,831 | ||||||||||
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(1) | Operating leases are primarily facility and equipment related obligations with third party vendors. Operating lease expenses during the years ended December 31, 2016, 2015, and 2014 were approximately $291,000, $116,000 and $72,000, respectively. |
(2) | Employment agreement obligations include management contracts, as well as scientific advisory board member compensation agreements. Certain agreements, which have been revised from time to time, provide for minimum salary levels, adjusted annually at the discretion of the Compensation Committee, as well as for minimum bonuses that are payable. |
(3) | License agreements generally relate to the company’s obligations with The Board of Regents, University of Texas M.D. Anderson Cancer Center and the Henry M. Jackson Foundation for our oncology therapies and the obligations with Biovascular Inc. and Mills Pharma for our GALE-401 asset. The company continually assesses the progress of its licensed technology and the progress of its research and development efforts as it relates to its licensed technology and may terminate with notice to the licensor at any time. In the event these licenses are terminated, no amounts will be due. |
The Company applies the disclosure provisions FASB ASC Topic 460 (“ASC 460”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to its agreements that contain guarantee or indemnification clauses. The Company provides (i) indemnifications of varying scope and size to certain investors and other parties for certain losses suffered or incurred by the indemnified party in connection with various types of third-party claims and (ii) indemnifications of varying scope and size to officers and directors against third party claims arising from the services they provide to us. These indemnifications give rise only to the disclosure provisions of ASC 460. In 2016, the Company has incurred $750,000 as a result of these obligations as a result of its obligation to its former CEO as noted above. Accordingly, the Company has accrued this liability in its financial statements related to these indemnifications.
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6. Stockholders’ Equity
Preferred Stock — The Company has authorized up to 5,000,000 shares of preferred stock, $0.0001 par value per share, for issuance. The preferred stock will have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Company’s Board of Directors upon its issuance. To date, the Company has not issued any preferred shares.
Common Stock — The Company has authorized up to 350,000,000 shares of common stock, $0.0001 par value per share, for issuance.
November 2014 Purchase Agreement with Lincoln Park Capital, LLC — On November 18, 2014, the Company entered into a purchase agreement (LPC Agreement) with Lincoln Park Capital, LLC (LPC), pursuant to which the Company has the right to sell to LPC up to $50 million in shares of the Company’s common stock, subject to certain limitations and conditions over the 36 month term of the LPC Agreement. Pursuant to the purchase agreement, LPC initially purchased 125,000 shares of the Company’s common stock at $40.00 per share and the Company issued 31,561 shares of common stock to LPC as a commitment fee, which was recorded as a cost of capital. As a result of this initial issuance, the Company received initial net proceeds of $4.9 million, after deducting commissions and other offering expenses. The Company did not sell any shares of our common stock under the LPC Agreement during the six months ended June 30, 2017. On February 6, 2017, the LPC Agreement was amended to decrease the total value of common stock that the Company may sell to LPC from $55,000,000 to $15,600,000. Except as noted below, the Company has $2.1 million of remaining availability under the LPC Agreement. Use of the purchase agreement with LPC is not currently available to the Company because the Company is not currently eligible to use a Form S-3 registration statement until April 2018 at the earliest.
At-The-Market Issuance Sales Agreements — On May 24, 2013, the Company entered into At-The-Market Issuance Sales Agreements (ATM) with FBR & Co. (formerly MLV & Co. LLC) and Maxim Group LLC (the Agents). From time to time during the term of the ATM, we may issue and sell through the Agents, shares of our common stock, and the Agents collect a fee equal to 3% of the gross proceeds from the sale of shares, up to a total limit of $20 million in gross proceeds. Except as noted below, the ATM is available to the Company until it is terminated by the Agents, or the Company. The Company did not sell any shares of our common stock under the ATM during the six months ended June 30, 2017. On December 4, 2015 we replenished the ATM limit up to $20 million in gross proceeds available for future sales of our common stock. Except as noted below, the Company has $19.1 million of remaining availability under the ATM. Use of the ATM is not currently available to the Company because the Company is not currently eligible to use a Form S-3 registration statement, and it does not expect to be eligible to use a Form S-3 registration statement until April 2018 at the earliest.
February 2017 Underwritten Public Offering — On February 13, 2017, the Company closed an underwritten public offering of 17,000,000 shares of common stock and warrants to purchase 17,000,000 shares of common stock priced at $1.00 per share and accompanying warrant (February 2017 Offering). The warrants are immediately exercisable with a strike price of $1.10 and will expire on the fifth anniversary of the date of issuance. The shares of common stock and the warrants were issued separately and were separately transferable immediately upon issuance. The net proceeds of the February 2017 Offering were $15.5 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company. The fair value of the warrants to purchase shares of our common stock issued in connection with the February 2017 Offering was $10.4 million recorded as an issuance cost.
Shares of common stock for future issuance are reserved for as follows (in thousands):
As of June 30, 2017 | ||||
Warrants outstanding |
19,557 | |||
Stock options outstanding |
505 | |||
Options reserved for future issuance under the Company’s 2016 Incentive Plan |
466 | |||
Shares reserved for future issuance under the Employee Stock Purchase Plan |
17 | |||
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Total reserved for future issuance |
20,545 | |||
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7. Stockholders’ Equity
Preferred Stock — The Company has authorized up to 5,000,000 shares of preferred stock, $0.0001 par value per share, for issuance. The preferred stock will have such rights, privileges and restrictions, including voting rights, dividend conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Company’s board of directors upon its issuance. To date, the Company has not issued any preferred shares.
Common Stock — The Company has authorized up to 350,000,000 shares of common stock, $0.0001 par value per share, for issuance.
Issuances of common stock are as follows:
November 2014 Purchase Agreement with Lincoln Park Capital, LLC — On November 18, 2014, the Company entered into a purchase agreement with Lincoln Park Capital, LLC (LPC), pursuant to which the Company has the right to sell to LPC up to $50 million in shares of the Company’s common stock, subject to certain limitations and conditions over the 36 month term of the purchase agreement. Pursuant to the purchase agreement, LPC initially purchased 125,000 shares of the Company’s common stock at $40.00 per share and the Company issued 31,561 shares of common stock to LPC as a commitment fee, which was recorded as a cost of capital. As a result of this initial issuance, the Company received initial net proceeds of $4.9 million, after deducting commissions and other offering expenses. In addition to the LPC’s initial purchase of our common stock under the purchase agreement, during 2014, we received net proceeds of $8.5 million from LPC’s subsequent purchases of a total of 230,000 shares of our common stock, excluding the commitment fee shares. During the years ended December 31, 2016 and 2015 we received $0.8 million and $4.4 million by issuing 150,000 and 135,000 shares of our common stock, respectively. On February 6, 2017, Purchase Agreement was amended to the total value of common stock that the Company may sell to LPC from $55,000,000 to $15,600,000.
At-The-Market Issuance Sales Agreements — On May 24, 2013 the Company entered into At-The-Market Issuance Sales Agreements (ATM) with FBR & Co. (formerly MLV & Co. LLC) and Maxim Group LLC (the Agents). From time to time during the term of the ATM, we may issue and sell through the Agents, shares of our common stock, and the Agents collect a fee equal to 3% of the gross proceeds from the sale of shares, up to a total limit of $20 million in gross proceeds. The ATM is available to the Company until it is terminated by the Agents, or the Company. During the years ended December 31, 2016 and 2015 we received $0.9 million and $2.3 million by issuing 334,000 and 72,000 shares of our common stock. During the year ended December 31, 2014, we received $2.3 million in net proceeds from the sale of 70,000 shares of our common stock through the ATM. On December 4, 2015 we replenished the ATM limit up to $20 million in gross proceeds available for future sales of our common stock.
March 2015 Underwritten Public Offering — On March 18, 2015 the Company closed an underwritten public offering of 1,217,948 units at a price to the public of $31.20 per unit for gross proceeds of $38 million (the “March 2015 Offering”). Each unit consists of one share of common stock, and a warrant to purchase 0.50 of a share of common stock at an exercise price of $41.60 per share. The March 2015 Offering included an over-allotment option for the underwriters to purchase an additional 182,692 shares of common stock and/or warrants to purchase up to 91,346 shares of common stock. On March 18, 2015, the underwriters exercised their over-allotment option to purchase warrants to purchase an aggregate of 91,346 shares of common stock. On April 10, 2015, the underwriters exercised their over-allotment option to purchase 182,692 shares of common stock for additional net proceeds of $5.4 million. The total net proceeds of the March 2015 Offering, including the exercise of the over-allotment option to purchase the warrants, were $40.8 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.
January 2016 Underwritten Public Offering — On January 12, 2016 the Company closed an underwritten public offering of 988,636 units at a price to the public of $22.00 per unit for gross proceeds of $21.8 million (“January 2016 Offering”). Each unit consists of one share of common stock, and a warrant to purchase 0.60 of a share of common stock at an exercise price of $28.40 per share. The January 2016 Offering included an over-allotment option for the underwriters to purchase an additional 148,295 shares of common stock and/or warrants to purchase up to 88,977 shares of common stock. On January 12, 2016, the underwriters exercised their over-allotment option to purchase warrants to purchase an aggregate of 88,977 shares of common stock. The underwriters did not exercise their over-allotment option to purchase 148,295 shares of our common stock. The total net proceeds of the January 2016 Offering, including the exercise of the over-allotment option to purchase the warrants, were $20.2 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.
July 2016 Registered Direct Offering — On July 13, 2016, we closed the sale to certain institutional investors of 1,400,000 shares of common stock at a purchase price per share of $9.00 in a registered direct offering, and warrants to purchase up to 700,000 shares of common stock with an exercise price of $13.00 per share in a concurrent private placement. The warrants are initially exercisable six months and one day following issuance and have a term of five years from the date of issuance. The net proceeds to Galena after deducting placement agent fees and estimated offering expenses were approximately $11.7 million.
February 2017 Underwritten Public Offering — On February 13, 2017, the Company closed an underwritten public offering of 17,000,000 shares of common stock and warrants to purchase 17,000,000 shares of common stock priced at $1.00 per share and accompanying warrant (“February 2017 Offering”). The warrants are immediately exercisable with a strike price of $1.10 and will expire on the fifth anniversary of the date of issuance. The shares of common stock and the warrants will be issued separately and will be separately transferable immediately upon issuance. The net proceeds of the February 2017 Offering were $15.5 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.
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7. Warrants
The following is a summary of warrant activity for the six months ended June 30, 2017 (in thousands):
Warrant Issuance |
Outstanding, December 31, 2016 |
Granted | Exercised | Expired | Outstanding, June 30 2017 |
Expiration | ||||||||||||||||||
February 2017 |
— | 17,000 | — | — | 17,000 | February 2022 | ||||||||||||||||||
July 2016 |
700 | — | — | — | 700 | January 2022 | ||||||||||||||||||
January 2016 |
682 | — | — | — | 682 | January 2021 | ||||||||||||||||||
March 2015 |
700 | — | — | — | 700 | March 2020 | ||||||||||||||||||
September 2013 |
199 | — | — | — | 199 | September 2018 | ||||||||||||||||||
December 2012 |
152 | — | — | — | 152 | December 2017 | ||||||||||||||||||
April 2011 |
13 | — | — | (13 | ) | — | April 2017 | |||||||||||||||||
Other |
124 | — | — | — | 124 | November 2021 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
2,570 | 17,000 | — | (13 | ) | 19,557 | |||||||||||||||||||
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|
|
|
|
|
|
Warrants consist of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.
Warrants classified as liabilities
Liability-classified warrants consist of warrants to purchase common stock issued in connection with equity financings in February 2017, July 2016, January 2016, March 2015, September 2013, December 2012, and April 2011. These warrants are potentially settleable in cash and were determined not to be indexed to our common stock.
Most of our warrants have a provision allowing the holders of warrants to require us to make a cash payment in the event we engage in a Fundamental Transaction. The term Fundamental Transaction is defined in each warrant agreement governing the applicable class of warrants. The cash payment is based upon a Black-Scholes analysis of the remaining value of the warrant at the time the Fundamental Transaction is effectuated. In August 2017, a holder of warrants under the warrant agreement dated February 13, 2017 has asserted that the Proposed Merger of SELLAS constitutes a Fundamental Transaction. The Company is in process of determining the merits of the assertion.
The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the condensed consolidated statement of operations as other income (expense). The fair value of the warrants is estimated using an appropriate pricing model with the following inputs:
As of June 30, 2017 |
||||||||||||||||||||
Warrant Issuance |
Outstanding (in thousands) |
Strike price (per share) |
Expected term (years) |
Volatility % | Risk-free rate % |
|||||||||||||||
February 2017 |
17,000 | $ | 1.10 | 4.62 | 136.07 | % | 1.83 | % | ||||||||||||
July 2016 |
700 | $ | 13.00 | 4.04 | 144.12 | % | 1.73 | % | ||||||||||||
January 2016 |
682 | $ | 28.40 | 3.53 | 150.15 | % | 1.64 | % | ||||||||||||
March 2015 |
700 | $ | 41.60 | 2.72 | 168.20 | % | 1.50 | % | ||||||||||||
September 2013 |
199 | $ | 50.00 | 1.22 | 100.31 | % | 1.27 | % | ||||||||||||
December 2012 |
152 | $ | 10.32 | 0.48 | 49.17 | % | 1.13 | % | ||||||||||||
As of December 31, 2016 |
||||||||||||||||||||
Warrant Issuance |
Outstanding (in thousands) |
Strike price (per share) |
Expected term (years) |
Volatility % | Risk-free rate % |
|||||||||||||||
July 2016 |
700 | $ | 13.00 | 4.54 | 117.82 | % | 1.82 | % | ||||||||||||
January 2016 |
682 | $ | 28.40 | 4.03 | 120.38 | % | 1.71 | % | ||||||||||||
March 2015 |
700 | $ | 41.60 | 3.22 | 131.46 | % | 1.52 | % | ||||||||||||
September 2013 |
199 | $ | 50.00 | 1.72 | 164.01 | % | 1.10 | % | ||||||||||||
December 2012 |
152 | $ | 31.60 | 0.98 | 204.55 | % | 0.84 | % | ||||||||||||
April 2011 |
13 | $ | 13.00 | 0.31 | 103.79 | % | 0.53 | % |
The expected volatility assumptions are based on the Company’s implied volatility in combination with the implied volatilities of similar publicly traded entities. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on the zero coupon rates in effect at the time of valuation. The dividend yield used in the pricing model is zero, because the Company has no present intention to pay cash dividends.
The changes in fair value of the warrant liability for the six months ended June 30, 2017 were as follows (in thousands):
Warrant Issuance |
Warrant liability, December 31, 2016 |
Fair value of warrants granted |
Fair value of warrants exercised |
Change in fair value of warrants |
Warrant liability, June 30, 2017 |
|||||||||||||||
February 2017 |
$ | — | $ | 10,357 | $ | — | $ | (2,345 | ) | $ | 8,012 | |||||||||
July 2016 |
753 | — | — | (540 | ) | 213 | ||||||||||||||
January 2016 |
529 | — | — | (375 | ) | 154 | ||||||||||||||
March 2015 |
432 | — | — | (301 | ) | 131 | ||||||||||||||
September 2013 |
81 | — | — | (81 | ) | — | ||||||||||||||
December 2012 |
65 | — | — | (65 | ) | — | ||||||||||||||
April 2011 |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 1,860 | $ | 10,357 | $ | — | $ | (3,707 | ) | $ | 8,510 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Warrants classified as equity
Equity-classified warrants consist of warrants issued in connection with consulting services provided to us. Additionally, on May 8, 2013 as a part of a previous loan financing, we granted Oxford Financial LLC warrants to purchase 9,109 shares of common stock at an exercise price of $49.40 per share, which equaled the 20-day average market price of our common stock prior to the date of the grant. The warrants were valued using the Black Scholes model. The fair value assumptions for the grant included a volatility of 75.34%, expected term of seven years, risk free rate of 1.20%, and a dividend rate of 0.00%. The fair value of the warrants granted was $38.60 per share. These warrants are recorded in equity at fair value upon issuance, and not as liabilities, and are not subject to adjustment to fair value in subsequent reporting periods.
In 2016, the Company issued warrants to purchase 100,000 shares of common stock to the holder of the Debenture. The holder received 50,000 warrants upon the closing on the sale of the Debenture at an exercise price of $30.20, maturing 5 years from issuance, and in accordance with the terms of the amendment agreement, the exercise price of the warrant was reduced to $8.60 per share. The fair value assumptions for the grant included a volatility of 77.13%, expected term of 5.5 years, risk free rate of 1.26%, and a dividend rate of 0.00%. Additionally, the holder received 50,000 warrants upon the Company’s public company announcement of the interim analysis on June 29, 2016 at an exercise price of $8.60. The fair value assumptions for the grant included a volatility of 106.63%, expected term of 5.5 years, risk free rate of 1.35%, and a dividend rate of 0.00%.
In addition to the warrants issued to the holder of the Debenture there are 15,000 outstanding warrants issued to service providers with a weighted average exercise price of $79.40 as of June 30, 2017 and December 31, 2016. These warrants are recorded in equity at fair value upon issuance, and not as liabilities, and are not subject to adjustment to fair value in subsequent reporting periods.
8. Warrants
The following is a summary of warrant activity for the years ended December 31, 2016 and 2015 (in thousands):
Warrant Issuance |
Outstanding, December 31, 2015 |
Granted | Exercised | Expired | Outstanding, December 31, 2016 |
Expiration | ||||||||||||||||||
July 2016 |
— | 700 | — | — | 700 | January 2022 | ||||||||||||||||||
January 2016 |
— | 682 | — | — | 682 | January 2021 | ||||||||||||||||||
March 2015 |
700 | — | — | — | 700 | March 2020 | ||||||||||||||||||
September 2013 |
199 | — | — | — | 199 | September 2018 | ||||||||||||||||||
December 2012 |
152 | — | — | — | 152 | December 2017 | ||||||||||||||||||
April 2011 |
31 | — | (18 | ) | — | 13 | April 2017 | |||||||||||||||||
March 2011 |
9 | — | (1 | ) | (8 | ) | — | March 2016 | ||||||||||||||||
March 2010 |
1 | — | — | (1 | ) | — | March 2016 | |||||||||||||||||
Other |
24 | 100 | — | — | 124 | November 2021 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
1,116 | 1,482 | (19 | ) | (9 | ) | 2,570 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Warrant Issuance |
Outstanding, January 1, 2015 |
Granted | Exercised | Expired | Outstanding, December 31, 2015 |
Expiration | ||||||||||||||||||
March 2015 |
— | 700 | — | — | 700 | March 2020 | ||||||||||||||||||
September 2013 |
199 | — | — | — | 199 | September 2018 | ||||||||||||||||||
December 2012 |
152 | — | — | — | 152 | December 2017 | ||||||||||||||||||
April 2011 |
31 | — | — | — | 31 | April 2017 | ||||||||||||||||||
March 2011 |
9 | — | — | — | 9 | March 2016 | ||||||||||||||||||
March 2010 |
1 | — | — | — | 1 | March 2016 | ||||||||||||||||||
Other |
36 | — | — | (12 | ) | 24 | November 2021 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
428 | 700 | — | (12 | ) | 1,116 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Warrants consist of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.
Warrants classified as liabilities
Liability-classified warrants consist of warrants to purchase common stock issued in connection with equity financings in July 2016, January 2016, March 2015, September 2013, December 2012, April 2011, March 2011, March 2010 and August 2009. These warrants are potentially settleable in cash and were determined not to be indexed to our common stock.
The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the consolidated statement of operations as other income (expense). The fair value of the warrants is estimated using an appropriate pricing model with the following inputs:
As of December 31, 2016 |
||||||||||||||||||||
Warrant Issuance |
Outstanding | Strike price | Expected term |
Volatility % | Risk-free rate % |
|||||||||||||||
July 2016 |
700 | $ | 13.00 | 4.54 | 117.82 | % | 1.82 | % | ||||||||||||
January 2016 |
682 | $ | 28.40 | 4.03 | 120.38 | % | 1.71 | % | ||||||||||||
March 2015 |
700 | $ | 41.60 | 3.22 | 131.46 | % | 1.52 | % | ||||||||||||
September 2013 |
199 | $ | 50.00 | 1.72 | 164.01 | % | 1.10 | % | ||||||||||||
December 2012 |
152 | $ | 31.60 | 0.98 | 204.55 | % | 0.84 | % | ||||||||||||
April 2011 |
13 | $ | 13.00 | 0.31 | 103.79 | % | 0.53 | % | ||||||||||||
As of December 31, 2015 |
||||||||||||||||||||
Warrant Issuance |
Outstanding | Strike price | Expected term |
Volatility % | Risk-free rate % |
|||||||||||||||
March 2015 |
700 | $ | 41.60 | 4.22 | 75.85 | % | 1.58 | % | ||||||||||||
September 2013 |
199 | $ | 50.00 | 2.72 | 74.70 | % | 1.24 | % | ||||||||||||
December 2012 |
152 | $ | 31.60 | 1.98 | 76.37 | % | 1.05 | % | ||||||||||||
April 2011 |
31 | $ | 13.00 | 1.31 | 65.60 | % | 0.77 | % | ||||||||||||
March 2011 |
9 | $ | 13.00 | 0.18 | 47.98 | % | — | % | ||||||||||||
March 2010 |
1 | $ | 40.04 | 0.24 | 71.41 | % | — | % |
The Company’s expected volatility is based on a combination of implied volatilities of similar publicly traded entities. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on the zero coupon rates in effect at the time of valuation. The dividend yield used in the pricing model is zero, because the company has no present intention to pay cash dividends.
The changes in fair value of the warrant liability for the years ended December 31, 2016 and 2015 were as follows (in thousands):
Warrant Issuance |
Warrant liability, December 31, 2015 |
Fair value of warrants granted |
Fair value of warrants exercised |
Change in fair value of warrants |
Warrant liability, December 31, 2016 |
|||||||||||||||
July 2016 |
$ | — | $ | 4,296 | $ | — | $ | (3,543 | ) | $ | 753 | |||||||||
January 2016 |
— | 5,590 | — | (5,061 | ) | 529 | ||||||||||||||
March 2015 |
10,337 | — | — | (9,905 | ) | 432 | ||||||||||||||
September 2013 |
1,933 | — | — | (1,852 | ) | 81 | ||||||||||||||
December 2012 |
1,565 | — | — | (1,500 | ) | 65 | ||||||||||||||
April 2011 |
537 | — | (278 | ) | (259 | ) | — | |||||||||||||
March 2011 |
144 | — | (46 | ) | (98 | ) | — | |||||||||||||
March 2010 |
2 | — | — | (2 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 14,518 | $ | 9,886 | $ | (324 | ) | $ | (22,220 | ) | $ | 1,860 | |||||||||
|
|
|
|
|
|
|
|
|
|
Warrant Issuance |
Warrant liability, January 1, 2015 |
Fair value of warrants granted |
Fair value of warrants exercised |
Change in fair value of warrants |
Warrant liability, December 31, 2015 |
|||||||||||||||
March 2015 |
— | 10,296 | — | 41 | 10,337 | |||||||||||||||
September 2013 |
2,560 | — | — | (627 | ) | 1,933 | ||||||||||||||
December 2012 |
2,027 | — | — | (462 | ) | 1,565 | ||||||||||||||
April 2011 |
625 | — | — | (88 | ) | 537 | ||||||||||||||
March 2011 |
144 | — | — | — | 144 | |||||||||||||||
March 2010 |
2 | — | — | — | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
5,358 | 10,296 | — | (1,136 | ) | 14,518 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
Warrants classified as equity
Equity-classified warrants consist of warrants issued in connection with consulting services provided to us. Additionally, on May 8, 2013 as a part of our Loan financing, we granted Oxford Financial LLC warrants to purchase 9,109 shares of common stock at an exercise price of $49.40 per share, which equaled the 20-day average market price of our common stock prior to the date of the grant. The warrants were valued using the Black Scholes model. The fair value assumptions for the grant included a volatility of 75.34%, expected term of seven years, risk free rate of 1.20%, and a dividend rate of 0.00%. The fair value of the warrants granted was $38.60 per share. These warrants are recorded in equity at fair value upon issuance, and not as liabilities, and are not subject to adjustment to fair value in subsequent reporting periods.
In 2016, we issued 100,000 to the holder of the Debenture. The holder received 50,000 warrants upon the closing on the sale of the Debenture at an exercise price of $30.20, maturing 5 years from issuance, and in accordance with the terms of the amendment agreement, the exercise price of the warrant was reduced to $8.60 per share. The fair value assumptions for the grant included a volatility of 77.13%, expected term of 5.5 years, risk free rate of 1.26%, and a dividend rate of 0.00%. Additionally, the holder received 50,000 warrants upon the Company’s public company announcement of the interim analysis on June 29, 2016 at an exercise price of $8.60. The fair value assumptions for the grant included a volatility of 106.63%, expected term of 5.5 years, risk free rate of 1.35%, and a dividend rate of 0.00%. In addition to the warrants issued to the holder of the debenture we have 15,000 outstanding warrants issued to service providers with a weighted average exercise price of $79.40 as of December 31, 2016 and 2015. These warrants are recorded in equity at fair value upon issuance, and not as liabilities, and are not subject to adjustment to fair value in subsequent reporting periods.
|
8. Stock-Based Compensation
Options to Purchase Shares of Common Stock
The following table summarizes the components of stock-based compensation expense in the condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016, respectively (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Research and development |
$ | 35 | $ | 108 | $ | 73 | $ | 235 | ||||||||
General and administrative |
162 | 514 | 352 | 1,043 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation from continuing operations |
$ | 197 | $ | 622 | $ | 425 | $ | 1,278 | ||||||||
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes option-pricing model and the following weighted-average assumptions to determine the fair value of all its stock options granted:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2015* | 2017 | 2016 | |||||||||||||
Risk free interest rate |
1.58 | % | 1.41 | % | 1.87 | % | 1.41 | % | ||||||||
Volatility |
132.13 | % | 76.30 | % | 116.41 | % | 75.63 | % | ||||||||
Expected lives (years) |
5.50 | 6.25 | 5.92 | 6.25 | ||||||||||||
Expected dividend yield |
— | % | — | % | — | % | — | % |
The weighted-average grant date fair value of options granted during the three and six months ended June 30, 2017 were $0.54 per share and $1.15 per share, respectively.
The Company’s expected common stock price volatility assumption is based upon the Company’s own implied volatility in combination with the implied volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method provided for under ASC 718-10, which averages the contractual term of the Company’s options of ten years with the average vesting term of four years for an average of six years. The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption is zero, because the Company has never paid cash dividends and presently has no intention to do so. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. The Company has estimated an annualized forfeiture rate of 15% for options granted to its employees, 8% for options granted to senior management and zero for non-employee directors. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated.
As of June 30, 2017, there was $713,000 of unrecognized compensation cost related to outstanding stock options that is expected to be recognized as a component of the Company’s operating expenses over a weighted-average period of 2.30 years.
As of June 30, 2017, an aggregate of 1,325,000 shares of common stock were reserved for issuance under the Company’s 2016 Incentive Plan, including 505,000 shares subject to outstanding common stock options granted under the plan. There are 466,000 shares available for future grants based on adjustments in the 2016
Incentive Plan. The administrator of the plan determines the terms when a stock option may become exercisable. Vesting periods of stock options granted to date have not exceeded four years. The stock options will expire, unless previously exercised, no later than ten years from the grant date.
The following table summarizes stock option activity of the Company for the six months ended June 30, 2017:
Total Number of Shares (In Thousands) |
Weighted Average Exercise Price |
Aggregate Intrinsic Value (In Thousands) |
||||||||||
Outstanding at January 1, 2017 |
561 | $ | 41.50 | |||||||||
Granted |
105 | 1.30 | ||||||||||
Exercised |
— | — | $ | — | ||||||||
Canceled |
(161 | ) | 34.21 | $ | — | |||||||
|
|
|||||||||||
Outstanding at June 30, 2017 |
505 | $ | 35.49 | $ | — | |||||||
|
|
|||||||||||
Options exercisable at June 30, 2017 |
300 | $ | 54.15 | $ | — | |||||||
|
|
The aggregate intrinsic values of outstanding and exercisable stock options at June 30, 2017 were calculated based on the closing price of the Company’s common stock as reported on The NASDAQ Capital Market on June 30, 2017 of $0.58 per share. The aggregate intrinsic value equals the positive difference between the closing fair market value of the Company’s common stock and the exercise price of the underlying stock options.
9. Stock-Based Compensation
Options to Purchase Shares of Common Stock — The Company follows the provisions ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, non-employee directors and consultants, including employee stock options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.
For stock options and warrants granted in consideration for services rendered by non-employees, the company recognizes compensation expense in accordance with the requirements of ASC Topic 505-50. Non-employee option and warrant grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to vesting, the value of these options and warrants, as calculated using the Black-Scholes option-pricing model, is being re-measured using the fair value of the company’s common stock and the non-cash compensation recognized during the period will be adjusted accordingly. Since the fair market value of options and warrants granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options and warrants are fully vested.
The following table summarizes the components of stock-based compensation expense in the Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016, 2015, and 2014 (in thousands):
2016 | 2015 | 2014 | ||||||||||
Research and development |
$ | 298 | $ | 350 | $ | 484 | ||||||
General and administrative |
1,966 | 1,591 | 4,903 | |||||||||
|
|
|
|
|
|
|||||||
Total stock-based compensation |
$ | 2,264 | $ | 1,941 | $ | 5,387 | ||||||
|
|
|
|
|
|
The Company uses the Black-Scholes option-pricing model and the following weighted-average assumptions to determine the fair value of all its stock options granted:
2016 | 2015 | 2014 | ||||||||||
Risk free interest rate |
1.47 | % | 1.67 | % | 2.01 | % | ||||||
Volatility |
102.62 | % | 73.97 | % | 79.37 | % | ||||||
Expected lives (years) |
5.93 | 6.16 | 6.16 | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % |
The weighted-average fair value of options granted during the years ended December 31, 2016 and 2015 was $6.09 and $21.40 per share, respectively.
The Company’s expected common stock price volatility assumption is based upon the volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method provided for under ASC 718-10, which averages the contractual term of the Company’s options of ten years with the average vesting term of four years for an average of six years. The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption is zero, because the Company has never paid cash dividends and presently has no intention of paying cash dividends in the future. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. The Company has estimated an annualized forfeiture rate of 15% for options granted to its employees, 8% for options granted to senior management and zero for non-employee directors. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated.
As of December 31, 2016, there was $2,295,000 of unrecognized compensation cost related to outstanding options that is expected to be recognized as a component of the Company’s operating expenses over a weighted-average period of 2.30 years.
As of December 31, 2016, an aggregate of 1,325,000 shares of common stock were reserved for issuance under the Company’s 2016 Incentive Plan, including 561,000 shares subject to outstanding common stock options granted under the plan and 501,000 shares available for future grants. On July 14, 2016, shareholders approved the 2016 Incentive Plan. The 2016 Incentive Plan replaced the 2007 Incentive Plan that expired on February 23, 2017. The administrator of the plan determines the times when an option may become exercisable. Vesting periods of options granted to date have not exceeded four years. The options generally will expire, unless previously exercised, no later than ten years from the grant date.
The following table summarizes option activity of the company:
Total Number of Shares (In Thousands) |
Weighted Average Exercise Price |
|||||||
Outstanding at December 31, 2015 |
663 | $ | 51.60 | |||||
Granted |
146 | 9.40 | ||||||
Exercised |
(8 | ) | 31.44 | |||||
Cancelled |
(240 | ) | 50.28 | |||||
|
|
|||||||
Outstanding at December 31, 2016 |
561 | $ | 41.50 | |||||
|
|
|||||||
Options exercisable at December 31, 2016 |
329 | $ | 56.06 | |||||
|
|
The weighted average remaining contractual life of options outstanding as of December 31, 2016, 2015, and 2014 was 7.02, 7.63, and 7.35 years, respectively. The weighted average remaining contractual life of options exercisable as of December 31, 2016, 2015, and 2014 was 5.52, 6.20, and 6.51 years, respectively.
The aggregate intrinsic value of outstanding options as of December 31, 2016, 2015, and 2014 was $0, $539,000, and $610,000, respectively. The aggregate intrinsic value of exercisable options as of December 31, 2016, 2015, and 2014 was $0, $518,000, and $509,000, respectively. The aggregate intrinsic value is calculated based on the positive difference between the closing fair market value of the Company’s common stock and the exercise price of the underlying options.
The aggregate intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $56,000, $37,000, and $13,429,000 respectively.
Employee Stock Purchase Plan — The Company also has an employee stock purchase plan (“ESPP”) which allows employees to contribute up to 15% of their cash earnings, subject to certain maximums, to be used to purchase shares of our common stock on each semi-annual purchase date. The purchase price is equal to 85% of the market value per share on either the first or last day of the semi-annual period, whichever is lower. Our ESPP is non-compensatory pursuant to the provisions of generally accepted accounting principles for share-based compensation expense. The ESPP contains an “evergreen provision” with annual increases in the number of shares available for issuance on the first day of each year through January 1, 2015 equal to the lesser of: (a) 12,500 shares increased on each anniversary of the adoption of the Plan by 1% of the total shares of stock then outstanding and (b) 50,000 shares. As of December 31, 2016, an aggregate of 20,930 shares of common stock were authorized and available for future issuance under the ESPP. The Company has issued 29,070 shares under the ESPP through December 31, 2016.
Restricted Stock Units — In addition to options to purchase shares of common stock, the Company may grant restricted stock units (“RSU”) as part of its compensation package. If granted, each RSU would be granted at the fair market value of the Company’s common stock on the date of grant. Vesting is determined on a grant-by-grant basis. There were no RSUs outstanding as of December 21, 2016 and 2015.
|
11. Income Taxes
The components of federal and state income tax expense are as follows (in thousands):
As of December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Current |
||||||||||||
Federal |
$ | — | $ | — | $ | — | ||||||
State |
— | — | — | |||||||||
|
|
|
|
|
|
|||||||
Total current |
— | — | — | |||||||||
Deferred expense |
||||||||||||
Federal |
210 | 332 | — | |||||||||
State |
33 | 33 | — | |||||||||
|
|
|
|
|
|
|||||||
Total deferred |
243 | 365 | — | |||||||||
|
|
|
|
|
|
|||||||
Total income tax expense |
$ | 243 | $ | 365 | $ | — | ||||||
|
|
|
|
|
|
The components of net deferred tax assets are as follows (in thousands):
As of December 31, | ||||||||
2016 | 2015 | |||||||
Net operating loss carryforwards |
$ | 97,168 | $ | 75,221 | ||||
Tax credit carryforwards |
4,083 | 3,866 | ||||||
Stock based compensation |
5,757 | 5,050 | ||||||
Other |
58 | 1,430 | ||||||
Licensing deduction deferral |
10,263 | 9,910 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
117,329 | 95,477 | ||||||
Valuation allowance |
(117,329 | ) | (95,477 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset |
$ | — | $ | — | ||||
|
|
|
|
The components of net deferred tax liabilities are as follows (in thousands):
As of December 31, | ||||||||
2016 | 2015 | |||||||
In-process research and development not subject to future amortization for tax purposes |
$ | 5,661 | $ | 5,418 | ||||
|
|
|
|
|||||
Gross deferred tax liability |
$ | 5,661 | $ | 5,418 | ||||
|
|
|
|
The provision for income taxes differs from the provision computed by applying the federal statutory rate to net loss before income taxes as follows (in thousands):
As of December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Expected federal income tax benefit |
$ | (7,977 | ) | $ | (21,603 | ) | $ | (12,447 | ) | |||
State income taxes after credits |
(1,575 | ) | (2,375 | ) | (1,283 | ) | ||||||
Unrealized gain on marketable securities |
— | — | — | |||||||||
Changes in warrant value |
(8,728 | ) | (456 | ) | (6,503 | ) | ||||||
Stock compensation |
(1,782 | ) | 508 | 3,996 | ||||||||
Effect of change in valuation allowance |
21,852 | 24,029 | 17,275 | |||||||||
Income tax credits |
(217 | ) | (276 | ) | (42 | ) | ||||||
Other |
(1,330 | ) | 538 | (996 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | 243 | $ | 365 | $ | — | |||||||
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|
|
|
|
|
The Company has incurred net operating losses from inception. At December 31, 2016, the Company had domestic federal and state net operating loss carryforwards of approximately $251.5 million and $200.0 million, respectively, available to reduce future taxable income, which expire at various dates beginning in 2016 through 2036. The Company also had federal and state research and development tax credit carryforwards of approximately $2.6 million and $2.5 million, respectively, available to reduce future tax liabilities and which expire at various dates beginning in 2023 through 2035. The income tax expense for the year ended December 31, 2016 relates to indefinite lived deferred tax liabilities.
At December 31, 2016, approximately $1.4 million of the Company’s net operating loss carryforwards were generated as a result of deductions related to the exercises of stock options. If utilized, this portion of the Company’s carryforwards, as tax effected, will be accounted for as a direct increase to contributed capital rather than as a reduction of that year’s provision for income taxes. Net operating loss carryforwards created by excess tax benefits from the exercise of stock options are not recorded as deferred tax assets.
Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss carryforwards and research and development credit carryforwards which could be utilized annually to offset future taxable income and taxes payable.
Based on an assessment of all available evidence including, but not limited to the Company’s limited operating history in its core business and lack of profitability, uncertainties of the commercial viability of its technology, the impact of government regulation and healthcare reform initiatives, and other risks normally associated with biotechnology companies, the Company has concluded that it is more likely than not that these net operating loss carryforwards and credits will not be realized and, as a result, a 100% deferred income tax valuation allowance has been recorded against these assets. The valuation allowance increased by $21.8 million and $24.2 million for the years ended December 31, 2015 and 2014, respectively.
The Company files income tax returns in the U.S. federal, Massachusetts, Colorado, California, Connecticut, Georgia, Oregon, and Texas jurisdictions. The Company is subject to tax examinations for the 2012 tax year and beyond. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company has not incurred any interest or penalties. In the event that the Company is assessed interest or penalties at some point in the future, they will be classified in the financial statements as general and administrative expense.
|
12. License Agreements
As part of its business, the Company enters into licensing agreements with third parties that often require milestone and royalty payments based on the progress of the licensed asset through development and commercial stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency, and the Company may be required to make royalty payments based upon a percentage of net sales of the product. The expenditures required under these arrangements in any period may be material and are likely to fluctuate from period to period.
These arrangements sometimes permit the Company to unilaterally terminate development of the product and thereby avoid future contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives.
In conjunction with the acquisition of NeuVax, the Company acquired rights and assumed obligations under a license agreement among Apthera and The University of Texas M. D. Anderson Cancer Center (“MDACC”) and The Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc. (“HJF”) which grants exclusive worldwide rights to a U.S. patent covering the nelipepimut-S peptide and several U.S. and foreign patents and patent applications covering methods of using the peptide as a vaccine. Under the terms of this license, we are required to pay an annual maintenance fee of $200,000, clinical milestone payments including $200,000 upon commencement of the Phase 3 PRESENT trial of NeuVax and royalty payments based on sales of NeuVax or other therapeutic products developed from the licensed technologies.
Effective December 3, 2012, we entered into a license and supply agreement with ABIC Marketing Limited, a subsidiary of Teva Pharmaceuticals (“ABIC”), under which we granted ABIC exclusive rights to seek marketing approval in Israel for our NeuVax product candidate for intradermal injection for the treatment of breast cancer following its approval by the FDA or the European Medicines Agency, and to market, sell and distribute NeuVax in Israel assuming such approval is obtained. ABIC’s rights also include a right of first refusal in Israel for all future indications for which NeuVax may be approved. Under the license and supply agreement, ABIC will assume responsibility for regulatory registration of NeuVax in Israel, provide financial support for local development, and commercialize the product in the region in exchange for making royalty payments to us based on future sales of NeuVax. ABIC also agrees in the license and supply agreement to purchase from us all supplies of NeuVax at a price determined according to a specified formula.
On November 19, 2015, Galena Biopharma, Inc. (the “Company”) and Sentynl Therapeutics Inc., a Delaware corporation (“Sentynl”), entered into and closed upon an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell to Sentynl and Sentynl agreed to purchase from the Company, certain assets of the Company related to and including its Abstral® (fentanyl) sublingual tablets product (“Abstral”). The assets sold and assigned to Sentynl pursuant to the Purchase Agreement included all of the Company’s rights and interests in the Asset Purchase Agreement by and between the Company and Orexo AB (“Orexo”) dated March 15, 2013, and the License Agreement by and between the Company and Orexo dated March 18, 2013 (collectively, the “Orexo Agreements”). The Company’s future obligations under the Orexo Agreements were assumed by Sentynl pursuant to such assignment. The Purchase Agreement further provides that the Company will continue to be responsible for any pre-closing liabilities and obligations related to Abstral, as well for certain channel liabilities related to Abstral for a period of time post-closing. In connection with the transactions contemplated by the Purchase Agreement, the Company assigned to Sentynl all of its rights to and interests in the Orexo Agreements. In connection with such assignment, Orexo released the Company from any future liabilities and obligations under the Orexo Agreements.
The total potential consideration payable to the Company under the Purchase Agreement is $12 million, comprised of an $8 million upfront payment and up to an aggregate of $4 million, consisting of two one-time payments based on Sentynl’s achievement of “net sales” of Abstral in amounts ranging from $25 million to $35 million.
On January 12, 2014, we acquired worldwide rights to anagrelide controlled release (CR) formulation, which we renamed GALE-401, through our acquisition of Mills Pharmaceuticals, LLC (“Mills”), and Mills became a wholly owned subsidiary. GALE-401 contains the active ingredient anagrelide, an FDA-approved product that has been in use since the late 1990s for the treatment of myleoproliferative neoplasms (MPNs). Mills holds an exclusive license to develop and commercialize anagrelide CR formulation, pursuant to a license agreement with BioVascular, Inc. Under the terms of the license agreement, Mills has agreed to pay BioVascular, Inc. a mid-to-low single digit royalty on net revenue from the sale of licensed products as well as future cash milestone payments based on the achievement of specified regulatory milestones. We are responsible for patent prosecution and maintenance.
On December 17, 2015, Galena Biopharma, Inc. (the “Company”) and Midatech Pharma PLC, a public limited company organized under the laws of England and Wales (“Midatech”), entered into an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell to Midatech and Midatech agreed to purchase from the Company, certain assets of the Company related to and including its Zuplenz® (ondansetron) Oral Soluble Film (“Zuplenz”). The assets to be sold and assigned to Midatech pursuant to the Purchase Agreement include all of the Company’s rights and interests in the License and Supply Agreement by and between the Company and MonoSol Rx, LLC (“MonoSol”) dated July 17, 2014 (the “MonoSol License”). The Company’s future obligations under the MonoSol agreement will be assumed by Midatech pursuant to such assignment. The Purchase Agreement further provides that the Company will continue to be responsible for any pre-closing liabilities and obligations related to Zuplenz, as well for certain channel liabilities related to Zuplenz for a period of time post-closing. The transaction was completed on December 24, 2015.
The total potential consideration payable to the Company under the Purchase Agreement is $29.75 million, comprised of a $3.75 million upfront payment upon the closing and up to an aggregate of $26 million, consisting of four one-time payments based on Midatech’s achievement of “net sales” of Zuplenz in amounts ranging from $12 million to $70 million.
Through a separate agreement with MonoSol entered into on December 16, 2015 (the “MonoSol License Amendment”), (i) the Company and MonSol agreed to amend the MonoSol License in order to reduce the number of field representatives that the Company is required to maintain with respect to Zuplenz, and (ii) the Company agreed to pay MonoSol $900,000 of the upfront fee payable to the Company under the Purchase Agreement and 20% of any future milestone payments received by the Company under the Purchase Agreement.
On December 24, 2015, the Company and Midatech closed upon the Purchase Agreement. In connection with the closing of the transactions contemplated by the Purchase Agreement, the Company assigned to Midatech all of its rights to and interests in the Company’s License and Supply Agreement, dated July 17, 2014 (the “MonoSol License”). As a result of such assignment, Midatech assumed all of the Company’s obligations under the MonoSol License.
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13. Related Party Transactions
From 2011 to 2016, the Company retained TroyGould PC as outside corporate counsel. Sanford J. Hillsberg, the Chairman of Galena, is a senior lawyer with TroyGould PC. The Company incurred $209,000, $577,000, and $533,000 for services provided by TroyGould PC during the years ended December 31, 2016, 2015, and 2014, respectively. At December 31, 2015, Galena owed $20,000 to TroyGould PC. There was no payable to TroyGould PC as of December 31, 2016.
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14. Employee Benefit Plan
The Company sponsors a 401(k) retirement savings plan (the “Plan”). Participation in the Plan is available to full-time employees who meet eligibility requirements. Eligible employees may defer a portion of their salary as defined by Internal Revenue Service regulations. The Company may make matching contributions on behalf of all participants in the 401(k) Plan in an amount determined by the Company’s Board of Directors. The Company may also make additional discretionary profit sharing contributions in amounts as determined by the Board of Directors, subject to statutory limitations. Matching and profit-sharing contributions, if any, are subject to a vesting schedule; all other contributions are at all times fully vested. The Company intends the 401(k) Plan, and the accompanying trust, to qualify under Sections 401(k) and 501 of the Internal Revenue Code so that contributions by employees to the 401(k) Plan, and income earned (if any) on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that the Company will be able to deduct its contributions, if any, when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. The Company made matching contributions totaling $108,000 for the year ended December 31, 2016. For the years ended December 31, 2015 and 2014, the Company made matching contributions totaling $115,000 and $70,000, respectively
|
10. Discontinued Operations
During the fourth quarter of 2015, the Company sold its rights to its commercial products Abstral® (fentanyl) Sublingual Tablets and Zuplenz® (ondansetron) Oral Soluble Film.
The following table presents amounts related to the discontinued operations in the balance sheets (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Carrying amounts of current assets of discontinued operations: |
||||||||
Accounts receivable |
$ | 189 | $ | 813 | ||||
|
|
|
|
|||||
Total current assets of discontinued operations |
189 | 813 | ||||||
|
|
|
|
|||||
Carrying amounts of current liabilities of discontinued operations: |
||||||||
Accounts payable |
$ | 122 | $ | 3,115 | ||||
Accrued expenses and other current liabilities |
8,248 | 2,944 | ||||||
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|
|
|
|||||
Total current liabilities of discontinued operations |
$ | 8,370 | $ | 6,059 | ||||
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The following table represents the components attributable to the commercial operations that are presented in the condensed consolidated statements of operations as discontinued operations (in thousands):
Three Months Ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Additional channel obligations |
(105 | ) | (656 | ) | $ | (428 | ) | $ | (1,666 | ) | ||||||
Selling, general, and administrative |
(897 | ) | (2,233 | ) | (2,510 | ) | (4,614 | ) | ||||||||
Settlements associated with USAO NJ and DOJ and the qui tam action (Note 5) |
(300 | ) | — | (7,800 | ) | — | ||||||||||
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|
|
|
|
|
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|
|||||||||
Loss from discontinued operations |
$ | (1,302 | ) | $ | (2,889 | ) | $ | (10,738 | ) | $ | (6,280 | ) | ||||
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Additional channel obligations included in discontinued operations is comprised of larger than anticipated returns of product expiring throughout 2016 and rebates of Abstral sales for which we are responsible through the end of the first quarter of 2016. The increase in returns and rebates was driven by larger than expected volumes through these returns and rebate channels and additional price protection provisions over which the Company has no control.
Selling, general and administrative expense included in discontinued operations consists of all other expenses of our commercial operations that were required in order to market and sell our marketed products prior to our sales of the rights to these commercial products. These expenses include all personnel related costs, marketing, data, consulting, legal, and other outside services necessary to support the commercial operations. During the three and six months ended June 30, 2017 and 2016, the majority of the costs incurred in selling, general, and administrative expense in discontinued operations related to legal fees from external counsel associated with the Company’s cooperation with the USAO NJ and DOJ’s investigation of the sales and marketing practices of Abstral. The settlement recorded in the second quarter of 2017 relates to the oral agreement with the attorneys for the relator in the qui tam action to settle the statutorily mandated attorney fees award. These legal proceedings are disclosed in Note 5 and Part II, Item 1. On August 7, 2017, the Company entered into an oral settlement, which will be used to enter into a written settlement agreement, with the primary D&O liability insurance carrier regarding reimbursement of these attorneys’ fees. Under the settlement, the Company would receive a payment of $685,000 to reimburse the prior payments of the attorneys’ fees as well as such insurance carrier will advance the attorneys’ fees of four former employees who are incurring attorneys fees as a result of the USAO NJ and DOJ investigation from May 1, 2017 forward.
15. Discontinued Operations
As part of the Company’s strategic objective to focus its resources on its development pipeline, our management and Board of Directors decided and committed to pursue a plan to sell or otherwise divest the Company’s commercial business during the third quarter of 2015. The Company’s commercial business was comprised of two products: Abstral® (fentanyl) sublingual tablets and Zuplenz® (ondansetron) Oral Soluble Film. As described in Note 14, both products were sold in the fourth quarter of 2015.
The Company met the relevant criteria for reporting the commercial business as held for sale and in discontinued operations in the accompanying financial statements pursuant to FASB Topic 205-20, Presentation of Financial Statements—Discontinued Operations, and FASB Topic 360, Property, Plant, and Equipment. The Company assessed the commercial business net asset group for impairment pursuant to FASB Topic 360, as discussed in Note 1, determining that the carrying value exceeded the fair value of the assets, therefore the Company recorded a $8.1 million impairment charge as of September 30, 2015.
The Company entered into an agreement with a third party firm to assist the Company with the divestiture of its commercial operations including identifying potential acquirers. Pursuant to the terms of the agreement, in the event the Company successfully completed a divestiture through the sale of its commercial operations to a third-party, the Company paid a success fee to the third party firm in an amount of $0.9 million, reimbursement for reasonable out-of-pocket expenses and agreed to pay 5% of realized future revenue and payment streams.
The Company entered into compensatory arrangements related to the divestiture of our commercial business with certain members of commercial management. Under the terms of these arrangements, if the Company met certain sales and margin numbers in the fourth quarter of 2015 and successfully completed a divestiture through sale of its commercial operations to a third-party, the Company paid a retention fee to the three employees in a combined total amount equal to $352,000 or 3% of cash consideration received as upfront payment in the transactions. These employees will also receive severance payments equal to one month’s salary for between four and seven months. In addition to these compensatory agreements loss from discontinued operations includes one-time termination benefits provided to employees that were part of the commercial business and did not accept employment opportunities at the companies who purchased Abstral and Zuplenz.
The following table describes the net proceeds from the sale and the assets and liabilities sold, net of selling costs (in thousands):
Sale of Abstral and related assets on November 19, 2015 |
Sale of Zuplenz and related assets on December 24, 2015 |
|||||||
Net proceeds from sales |
||||||||
Total consideration |
$ | 8,348 | $ | 3,750 | ||||
Less selling costs* |
(815 | ) | (1,050 | ) | ||||
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|
|
|
|||||
Proceeds from sale, net of selling costs |
$ | 7,533 | $ | 2,700 | ||||
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|
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* | Note selling costs related to the sale of Zuplenz and related assets are included in accrued liabilities and were paid in the first quarter of 2016. |
In addition to the upfront proceeds received from the sale of Abstral and Zuplenz and their related assets, the Company is eligible to receive up to $30 million in future milestone payments based on future net revenue of the products. The additional consideration will be recognized in the period that the net revenue milestones are achieved.
The following table presents a reconciliation of the carrying amounts of assets and liabilities of the commercial operations to assets held for sale in the balance sheets (in thousands):
2016 | 2015 | |||||||
Carrying amounts of assets included as part of discontinued operations: |
||||||||
Accounts receivable |
$ | 813 | $ | 392 | ||||
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|
|
|
|||||
Total current assets of discontinued operations |
$ | 813 | $ | 392 | ||||
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|
|
|
|||||
Carrying amounts of liabilities included as part of discontinued operations: |
||||||||
Accounts payable |
$ | 3,115 | $ | 1,491 | ||||
Accrued expenses and other current liabilities |
2,944 | 4,434 | ||||||
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|
|
|
|||||
Total current liabilities of discontinued operations |
$ | 6,059 | $ | 5,925 | ||||
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|
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The following table represents the components attributable to the commercial business in 2016, 2015, and 2014 that are presented in the consolidated statements of comprehensive loss as discontinued operations (in thousands):
2016 | 2015 | 2014 | ||||||||||
Net revenue |
$ | — | $ | 9,734 | $ | 9,319 | ||||||
Cost of revenue |
— | (1,780 | ) | (1,403 | ) | |||||||
Additional channel obligations |
(2,886 | ) | — | — | ||||||||
Amortization of certain acquired intangible assets |
— | (921 | ) | (440 | ) | |||||||
Research and development |
— | (355 | ) | (680 | ) | |||||||
Selling, general, and administrative |
(9,562 | ) | (17,655 | ) | (15,118 | ) | ||||||
Impairment charge form classification as held for sale |
— | (8,071 | ) | — | ||||||||
Loss on sale of commercial business assets |
— | (4,549 | ) | — | ||||||||
Severance and exit costs |
— | (1,349 | ) | — | ||||||||
|
|
|
|
|
|
|||||||
Loss from discontinued operations |
$ | (12,448 | ) | $ | (24,946 | ) | $ | (8,322 | ) | |||
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|
|
|
|
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Additional channel obligations included in discontinued operations in 2016 is comprised of larger than anticipated rebates of Abstral sales for which we were responsible through the end of the first quarter of 2016. The increase in rebates was driven by larger than expected volumes through these rebate channels and additional price protection provisions over which the Company has no control and was partially offset by lower than expected patient assistance program reimbursement.
Selling, general and administrative expense included in discontinued operations consists of all other expenses of our commercial operations that were required in order to market and sell our marketed products prior to our sales of the rights to these commercial products. These expenses include all personnel related costs, marketing, data, consulting, legal, and other outside services necessary to support the commercial operations. During the year ended December 31, 2016 we incurred $9.2 million related to legal fees from external counsel associated with document production for the subpoenas related to the sales and marketing practices of Abstral. See Note 6 for further disclosures related to these legal proceedings.
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16. Selected Quarterly Financial Data (Unaudited)
The following amounts are in thousands, except per share amounts:
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
2016 |
||||||||||||||||
Net income (loss) |
$ | (16,493 | ) | $ | 5,389 | $ | (6,929 | ) | $ | (5,516 | ) | |||||
Net income (loss) per share, basic and diluted |
$ | (1.84 | ) | $ | 0.59 | $ | (0.66 | ) | $ | (0.51 | ) | |||||
2015 |
||||||||||||||||
Net revenue |
$ | 2,750 | $ | 3,382 | $ | 2,166 | $ | 1,436 | ||||||||
Gross profit on net revenue |
$ | 2,357 | $ | 2,914 | $ | 1,454 | $ | 1,229 | ||||||||
Net loss |
$ | (10,537 | ) | $ | (15,660 | ) | $ | (18,026 | ) | $ | (19,678 | ) | ||||
Net loss per share, basic and diluted |
$ | (1.55 | ) | $ | (1.94 | ) | $ | (2.23 | ) | $ | (2.51 | ) |
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11. Subsequent Events
The Company evaluated all events or transactions that occurred after June 30, 2017 up through the date these financial statements were issued. Other than as disclosed elsewhere in the notes to the condensed consolidated financial statements and below, the Company did not have any material recognizable or unrecognizable subsequent events.
On August 7, 2017, the Company, SELLAS, Holdings I, Holdings II and Merger Sub entered into the Merger Agreement pursuant to which, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into SELLAS, and the separate existence of Merger Sub shall cease and SELLAS will continue its corporate existence as the surviving company. As a result of the Proposed Merger SELLAS will become a wholly-owned indirect subsidiary of Galena.
If the Proposed Merger is completed, under the terms of the Merger Agreement, at the Effective Time, (a) each outstanding share of SELLAS (excluding shares held by Galena, Merger Sub or SELLAS and dissenting shares) will be converted into the right to receive shares of Galena Common Stock based on an exchange ratio specified in the Merger Agreement and (b) each outstanding SELLAS stock option and restricted stock unit award will be assumed by Galena. No fractional shares will be issued in connection with the Merger and Galena will pay cash in lieu of any such fractional shares. Immediately following the Effective Time, (a) Galena stockholders immediately prior to the Effective Time are expected to own approximately 32.5% of the aggregate number of shares of Galena Common Stock, (b) SELLAS shareholders immediately prior to the Effective Time are expected to own approximately 67.5% of the aggregate number of shares of Galena Common Stock, each calculated on a fully-diluted basis for the combined company, except for the exclusion of 2,556,851 out-of-the money Galena warrants. Though the allocation percentage between SELLAS and Galena will remain the same, both SELLAS and Galena are subject to dilution from (i) any shares of Galena Common Stock issued in connection with a potential third party financing that SELLAS has consented to, and (ii) Galena Common Stock underlying certain Galena warrants (other than the warrants outstanding as of immediately prior to the Effective Time that were issued by Galena under the Warrant Agreement dated February 13, 2017). Upon closing of the Merger, the name of the combined company will become SELLAS Life Sciences Group, Inc. and shares of the combined company are expected to continue trading on the NASDAQ Capital Market under a new the ticker symbol, SLS.
The Merger Agreement contains certain termination rights for both Galena and SELLAS, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $750,000, or in some circumstances reimburse the other party’s expenses up to a maximum of $100,000.
17. Subsequent Events
The Company evaluated all events or transactions that occurred after December 31, 2016 up through the date these financial statements were issued. Other than as disclosed elsewhere in the notes to the condensed consolidated financial statements, the Company did not have any material recognizable or unrecognizable subsequent events.
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Discontinued Operations — As described in Note 15, during the quarter ended September 30, 2015 the Company met the relevant criteria for reporting the commercial operations as held for sale and in discontinued operations, pursuant to FASB Topic 205-20, Presentation of Financial Statements—Discontinued Operations, and FASB Topic 360, Property, Plant, and Equipment. The Company generally considers assets to be held for sale when (i) the transaction has been approved by the board of directors or management vested with authority to approve the transaction, (ii) the assets are available for immediate sale in their present condition, (iii) the company has initiated an active program to locate a buyer and other actions required to complete the plan to sell the assets, (iv) consummation of the transaction is probable, (v) the assets are being actively marketed for sale at a price that is reasonable in relation to the current fair value, and (vi) the transaction is expected to qualify for recognition as a completed sale, within one year. Following the classification of property and equipment for sale, the Company discontinues depreciating the asset and writes down the asset to the lower of the carrying value or fair market value, if needed. During the quarter ended December 31, 2015, the Company completed the sale of the commercial products and the related assets.
Principles of Consolidation — The consolidated financial statements include the accounts of Galena and its wholly owned subsidiaries. All material intercompany accounts have been eliminated in consolidation.
Cash and Cash Equivalents — The Company considers all highly liquid debt instruments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market accounts and demand deposits.
Restricted Cash — Restricted cash consists of the minimum cash covenant as required by the debenture certificates of deposit on hand with the Company’s financial institutions as collateral for its corporate credit cards.
Fair Value of Financial Instruments — The carrying amounts reported in the balance sheet for cash equivalents, marketable securities, accounts receivable, accounts payable, and capital leases approximate their fair values due to their short-term nature and market rates of interest.
Equipment and Furnishings — Equipment and furnishings are stated at cost and depreciated using the straight-line method based on the estimated useful lives (generally three to five years for equipment and furniture) of the related assets.
Goodwill and Intangible Assets — Goodwill and indefinite-lived intangible assets are not amortized but are tested annually for impairment at the reporting unit level, or more frequently if events and circumstances indicate impairment may have occurred. Factors the company considers important that could trigger an interim review for impairment include, but are not limited to, the following:
• | Significant changes in the manner of its use of acquired assets or the strategy for its overall business; |
• | Significant negative industry or economic trends; |
• | Significant decline in stock price for a sustained period; and |
• | Significant decline in market capitalization relative to net book value. |
Goodwill and other intangible assets with indefinite lives are evaluated for impairment first by a qualitative assessment to determine the likelihood of impairment. If it is determined that impairment is more likely than not, the Company will then proceed to the two step impairment test. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the “First Step”). If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment (the “Second Step”). Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. In its review of the carrying value of the goodwill for its single reporting unit and its indefinite-lived intangible assets, the Company determines fair values of its goodwill using the market approach, and its indefinite-lived intangible assets using the income approach.
Intangible assets not considered indefinite-lived are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. The Company’s policy is to identify and record impairment losses, if necessary, on intangible product rights when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
The company performed its review for impairment using the qualitative assessment for both goodwill and indefinite-lived intangible assets, and has determined that there has been no impairment to these assets as of December 31, 2016.
Contingent Purchase Price Consideration — Contingent consideration is recorded at the estimated fair value as of the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period with any adjustments in fair value included in our consolidated statement of comprehensive loss.
Acquisitions and In-Licensing — For all in-licensed products and technologies, we perform an analysis to determine whether we hold a variable interest or a controlling financial interest in a variable interest entity. On the basis of our interpretations and conclusions, we determine whether the acquisition falls under the purview of variable interest entity accounting and if so, consider the necessity to consolidate the acquisition. As of December 31, 2016, we determined there were no variable interest entities required to be consolidated.
We also perform an analysis to determine if the assets and liabilities acquired in an acquisition qualify as a “business.” The excess of the purchase price over the fair value of the net assets acquired can only be recognized as goodwill in a business combination.
Patents and Patent Application Costs — Although the Company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived from the patents is uncertain. Patent costs are, therefore, expensed as incurred.
Legal Fees and Insurance Recoveries — There can be a significant time lag between the time that legal fees are incurred and the insurance reimbursement available to offset the related costs. The legal costs are recorded in the period they are incurred, and the insurance recoveries for those costs are recorded in the period when the insurance reimbursement is deemed probable.
Share-based Compensation — The Company follows the provisions of the FASB ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, non-employee directors, and consultants, including stock options and warrants. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.
For stock options and warrants granted as consideration for services rendered by non-employees, the Company recognizes compensation expense in accordance with the requirements of FASB ASC Topic 505-50 (“ASC 505-50”), “Equity Based Payments to Non- Employees.” Non-employee option and warrant grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to vesting, the value of these options and warrants, as calculated using the Black-Scholes option-pricing model, will be re-measured using the fair value of the company’s common stock and the non-cash compensation recognized during the period will be adjusted accordingly. Since the fair market value of options and warrants granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options are fully vested.
Research and Development Expenses — Research and development costs are expensed as incurred. Included in research and development costs are wages, benefits and other operating costs, facilities, supplies, external services and overhead related to our research and development departments, and clinical trial expenses.
Clinical trial expenses include direct costs associated with contract research organizations (“CROs”), as well as patient-related costs at sites at which our trials are being conducted.
Direct costs associated with our CROs are generally payable on a time and materials basis, or when certain enrollment and monitoring milestones are achieved. Expense related to a milestone is recognized in the period in which the milestone is achieved or in which we determine that it is more likely than not that it will be achieved.
The invoicing from clinical trial sites can lag several months. We accrue these site costs based on our estimate of upfront set-up costs upon the screening of the first patient at each site, and the patient related costs based on our knowledge of patient enrollment status at each site.
Income Taxes — The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. ASC 740-10 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The Company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the company’s income tax provision or benefit. The recognition and measurement of benefits related to the company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and the company’s assumptions or changes in the company’s assumptions in future periods are recorded in the period they become known.
For the years ended December 31, 2016 and 2015, we recognized income tax of $243,000 and $365,000, respectively. There was no income tax expense or benefit for the year ended December 31, 2014. We continue to maintain a full valuation allowance against our net deferred tax assets.
Concentrations of Credit Risk — Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains cash balances in several accounts with two banks, which at times are in excess of federally insured limits. As of December 31, 2016, the company’s cash equivalents were invested in money market mutual funds. The Company’s investment policy does not allow investment in any debt securities rated less than “investment grade” by national ratings services. The Company has not experienced any losses on its deposits of cash and cash equivalents. As of December 31, 2016, we had approximately $17,583,000 in interest-bearing accounts above federally insured limits.
Recently Issued Accounting Pronouncements
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes or ASU 2015-17. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. The guidance will become effective for us beginning in the first quarter of 2017 and may be applied either prospectively or retrospectively. Early adoption is permitted. At the time of adoption, we will reclassify current deferred tax amounts on our Consolidated Balance Sheets as noncurrent. The Company adopted this ASU on January 1, 2017. There was no impact to the Company’s consolidated financial statements upon adoption.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation or ASU-2016-09. ASU 2016-09 includes several areas of simplification to stock compensation including simplifications to the accounting for income taxes, classification of excess tax benefits on the Statement of Cash Flows and forfeitures. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016. An entity that elects early adoption must adopt all of the amendments in the same period. The Company adopted this ASU on January 1, 2017. There was no impact to the Company’s consolidated financial statements upon adoption.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations or ASU 2017-01. ASU 2017-01 provides guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities (a “set”) does not qualify to be a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the guidance requires a set to be considered a business to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and removes the evaluation as to whether a market participant could replace the missing elements. The new standard will be effective for us on January 1, 2018 and will be adopted on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the goodwill impairment test. Under the new guidance, goodwill impairment will be measured by the amount by which the carrying value of a reporting unit exceeds its fair value, without exceeding the carrying amount of goodwill allocated to that reporting unit. This guidance will be effective for us beginning in the first quarter of 2020 and is required to be adopted on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
In May 2017, the FASB issued Accounting Standard Update No. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard will be effective for us on January 1, 2018; however, early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
|
The following tables present information about our assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets (in thousands):
Description |
June 30, 2017 |
Quoted Prices In Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 17,131 | $ | 17,131 | $ | — | $ | — | ||||||||
Restricted cash equivalents |
13,212 | 13,212 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured and recorded at fair value |
$ | 30,343 | $ | 30,343 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Warrants potentially settleable in cash |
$ | 8,510 | $ | — | $ | 8,510 | $ | — | ||||||||
Contingent purchase price consideration |
1,227 | — | — | 1,227 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities measured and recorded at fair value |
$ | 9,737 | $ | — | $ | 8,510 | $ | 1,227 | ||||||||
|
|
|
|
|
|
|
|
Description |
December 31, 2016 |
Quoted Prices In Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 16,192 | $ | 16,192 | $ | — | $ | — | ||||||||
Restricted cash equivalents |
17,622 | 17,622 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured and recorded at fair value |
$ | 33,814 | $ | 33,814 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Warrants potentially settleable in cash |
$ | 1,860 | $ | — | $ | 1,860 | $ | — | ||||||||
Contingent purchase price consideration |
1,095 | — | — | 1,095 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities measured and recorded at fair value |
$ | 2,955 | $ | — | $ | 1,860 | $ | 1,095 | ||||||||
|
|
|
|
|
|
|
|
The following tables present information about our assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets (in thousands):
December 31, 2016 |
Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 16,192 | $ | 16,192 | $ | — | $ | — | ||||||||
Restricted cash equivalents |
17,622 | 17,622 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured and recorded at fair value |
$ | 33,814 | $ | 33,814 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Warrants potentially settleable in cash |
$ | 1,860 | $ | — | $ | 1,860 | $ | — | ||||||||
Contingent purchase price consideration |
1,095 | — | — | 1,095 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities measured and recorded at fair value |
$ | 2,955 | $ | — | $ | 1,860 | $ | 1,095 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2015 |
Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 29,171 | $ | 29,171 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured and recorded at fair value |
$ | 29,171 | $ | 29,171 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Warrants potentially settleable in cash |
$ | 14,518 | $ | — | $ | 14,518 | $ | — | ||||||||
Contingent purchase price consideration |
6,142 | — | — | 6,142 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities measured and recorded at fair value |
$ | 20,660 | $ | — | $ | 14,518 | $ | 6,142 | ||||||||
|
|
|
|
|
|
|
|
The Company did not transfer any financial instruments into or out of Level 3 classification during the six months ended June 30, 2017 and 2016. A reconciliation of the beginning and ending Level 3 liabilities for the six months ended June 30, 2017 is as follows (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||
Balance, January 1, 2017 |
$ | 1,095 | ||
Change in the estimated fair value of the contingent purchase price consideration |
132 | |||
|
|
|||
Balance at June 30, 2017 |
$ | 1,227 | ||
|
|
A reconciliation of the beginning and ending Level 3 liabilities for the years ended December 31, 2016 and 2015 is as follows (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||
Balance, January 1, 2015 |
$ | 6,651 | ||
Change in the estimated fair value of the contingent purchase price consideration |
(509 | ) | ||
|
|
|||
Balance, December 31, 2015 |
6,142 | |||
Change in the estimated fair value of the contingent purchase price consideration |
(5,047 | ) | ||
|
|
|||
Balance at December 31, 2016 |
$ | 1,095 | ||
|
|
|
Accrued expenses and other current liabilities consist of the following (in thousands):
June 30, 2017 | December 31, 2016 |
|||||||
Clinical trial costs |
$ | 899 | $ | 3,088 | ||||
Professional fees |
660 | 229 | ||||||
Compensation and related benefits |
976 | 975 | ||||||
Interest expense |
99 | — | ||||||
|
|
|
|
|||||
Accrued expenses and other current liabilities |
$ | 2,634 | $ | 4,292 | ||||
|
|
|
|
Accrued expenses and other current liabilities consist of the following (in thousands):
December 31, | ||||||||
2016 | 2015 | |||||||
Clinical development expense |
$ | 3,088 | $ | 3,294 | ||||
Professional fees |
229 | 435 | ||||||
Compensation and related benefits |
975 | 1,535 | ||||||
Interest expense |
— | 28 | ||||||
|
|
|
|
|||||
Accrued expenses and other current liabilities |
$ | 4,292 | $ | 5,292 | ||||
|
|
|
|
|
The litigation settlements are summarized as follows (in thousands):
Amount | ||||
Class action settlement in 2015 |
$ | 20,000 | ||
Derivative settlement in 2015 |
5,000 | |||
Shareholders securities litigation settlements in 2016 |
1,800 | |||
SEC settlement in 2016 |
950 | |||
|
|
|||
Total settlements |
$ | 27,750 | ||
|
|
|||
Payable by the Company in cash as of December 31, 2016 |
$ | 950 | ||
Paid by the insurance carriers in 2016 |
21,700 | |||
Paid by the Company in cash in 2016 |
2,450 | |||
Paid by the Company in common stock in 2016 |
2,650 | |||
|
|
|||
Total settlements |
$ | 27,750 | ||
|
|
The Company’s contractual obligations that may require future cash payments as of December 31, 2016 are as follows (in thousands):
Operating Leases(1) |
Non- Cancelable Employment Agreements(2) |
Subtotal | Cancelable License Agreements(3) |
Total | ||||||||||||||||
2017 |
$ | 241 | $ | 1,601 | $ | 1,842 | $ | 1,391 | $ | 3,233 | ||||||||||
2018 |
246 | — | 246 | 350 | 596 | |||||||||||||||
2019 |
251 | — | 251 | 350 | 601 | |||||||||||||||
2020 |
236 | — | 236 | 7,350 | 7,586 | |||||||||||||||
2021 and thereafter |
— | — | — | 8,815 | 8,815 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 974 | $ | 1,601 | $ | 2,575 | $ | 18,256 | $ | 20,831 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Operating leases are primarily facility and equipment related obligations with third party vendors. Operating lease expenses during the years ended December 31, 2016, 2015, and 2014 were approximately $291,000, $116,000 and $72,000, respectively. |
(2) | Employment agreement obligations include management contracts, as well as scientific advisory board member compensation agreements. Certain agreements, which have been revised from time to time, provide for minimum salary levels, adjusted annually at the discretion of the Compensation Committee, as well as for minimum bonuses that are payable. |
(3) | License agreements generally relate to the company’s obligations with The Board of Regents, University of Texas M.D. Anderson Cancer Center and the Henry M. Jackson Foundation for our oncology therapies and the obligations with Biovascular Inc. and Mills Pharma for our GALE-401 asset. The company continually assesses the progress of its licensed technology and the progress of its research and development efforts as it relates to its licensed technology and may terminate with notice to the licensor at any time. In the event these licenses are terminated, no amounts will be due. |
|
The following is a summary of warrant activity for the six months ended June 30, 2017 (in thousands):
Warrant Issuance |
Outstanding, December 31, 2016 |
Granted | Exercised | Expired | Outstanding, June 30 2017 |
Expiration | ||||||||||||||||||
February 2017 |
— | 17,000 | — | — | 17,000 | February 2022 | ||||||||||||||||||
July 2016 |
700 | — | — | — | 700 | January 2022 | ||||||||||||||||||
January 2016 |
682 | — | — | — | 682 | January 2021 | ||||||||||||||||||
March 2015 |
700 | — | — | — | 700 | March 2020 | ||||||||||||||||||
September 2013 |
199 | — | — | — | 199 | September 2018 | ||||||||||||||||||
December 2012 |
152 | — | — | — | 152 | December 2017 | ||||||||||||||||||
April 2011 |
13 | — | — | (13 | ) | — | April 2017 | |||||||||||||||||
Other |
124 | — | — | — | 124 | November 2021 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
2,570 | 17,000 | — | (13 | ) | 19,557 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
The following is a summary of warrant activity for the years ended December 31, 2016 and 2015 (in thousands):
Warrant Issuance |
Outstanding, December 31, 2015 |
Granted | Exercised | Expired | Outstanding, December 31, 2016 |
Expiration | ||||||||||||||||||
July 2016 |
— | 700 | — | — | 700 | January 2022 | ||||||||||||||||||
January 2016 |
— | 682 | — | — | 682 | January 2021 | ||||||||||||||||||
March 2015 |
700 | — | — | — | 700 | March 2020 | ||||||||||||||||||
September 2013 |
199 | — | — | — | 199 | September 2018 | ||||||||||||||||||
December 2012 |
152 | — | — | — | 152 | December 2017 | ||||||||||||||||||
April 2011 |
31 | — | (18 | ) | — | 13 | April 2017 | |||||||||||||||||
March 2011 |
9 | — | (1 | ) | (8 | ) | — | March 2016 | ||||||||||||||||
March 2010 |
1 | — | — | (1 | ) | — | March 2016 | |||||||||||||||||
Other |
24 | 100 | — | — | 124 | November 2021 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
1,116 | 1,482 | (19 | ) | (9 | ) | 2,570 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Warrant Issuance |
Outstanding, January 1, 2015 |
Granted | Exercised | Expired | Outstanding, December 31, 2015 |
Expiration | ||||||||||||||||||
March 2015 |
— | 700 | — | — | 700 | March 2020 | ||||||||||||||||||
September 2013 |
199 | — | — | — | 199 | September 2018 | ||||||||||||||||||
December 2012 |
152 | — | — | — | 152 | December 2017 | ||||||||||||||||||
April 2011 |
31 | — | — | — | 31 | April 2017 | ||||||||||||||||||
March 2011 |
9 | — | — | — | 9 | March 2016 | ||||||||||||||||||
March 2010 |
1 | — | — | — | 1 | March 2016 | ||||||||||||||||||
Other |
36 | — | — | (12 | ) | 24 | November 2021 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
428 | 700 | — | (12 | ) | 1,116 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the condensed consolidated statement of operations as other income (expense). The fair value of the warrants is estimated using an appropriate pricing model with the following inputs:
As of June 30, 2017 |
||||||||||||||||||||
Warrant Issuance |
Outstanding (in thousands) |
Strike price (per share) |
Expected term (years) |
Volatility % | Risk-free rate % |
|||||||||||||||
February 2017 |
17,000 | $ | 1.10 | 4.62 | 136.07 | % | 1.83 | % | ||||||||||||
July 2016 |
700 | $ | 13.00 | 4.04 | 144.12 | % | 1.73 | % | ||||||||||||
January 2016 |
682 | $ | 28.40 | 3.53 | 150.15 | % | 1.64 | % | ||||||||||||
March 2015 |
700 | $ | 41.60 | 2.72 | 168.20 | % | 1.50 | % | ||||||||||||
September 2013 |
199 | $ | 50.00 | 1.22 | 100.31 | % | 1.27 | % | ||||||||||||
December 2012 |
152 | $ | 10.32 | 0.48 | 49.17 | % | 1.13 | % | ||||||||||||
As of December 31, 2016 |
||||||||||||||||||||
Warrant Issuance |
Outstanding (in thousands) |
Strike price (per share) |
Expected term (years) |
Volatility % | Risk-free rate % |
|||||||||||||||
July 2016 |
700 | $ | 13.00 | 4.54 | 117.82 | % | 1.82 | % | ||||||||||||
January 2016 |
682 | $ | 28.40 | 4.03 | 120.38 | % | 1.71 | % | ||||||||||||
March 2015 |
700 | $ | 41.60 | 3.22 | 131.46 | % | 1.52 | % | ||||||||||||
September 2013 |
199 | $ | 50.00 | 1.72 | 164.01 | % | 1.10 | % | ||||||||||||
December 2012 |
152 | $ | 31.60 | 0.98 | 204.55 | % | 0.84 | % | ||||||||||||
April 2011 |
13 | $ | 13.00 | 0.31 | 103.79 | % | 0.53 | % |
The fair value of the warrants is estimated using an appropriate pricing model with the following inputs:
As of December 31, 2016 |
||||||||||||||||||||
Warrant Issuance |
Outstanding | Strike price | Expected term |
Volatility % | Risk-free rate % |
|||||||||||||||
July 2016 |
700 | $ | 13.00 | 4.54 | 117.82 | % | 1.82 | % | ||||||||||||
January 2016 |
682 | $ | 28.40 | 4.03 | 120.38 | % | 1.71 | % | ||||||||||||
March 2015 |
700 | $ | 41.60 | 3.22 | 131.46 | % | 1.52 | % | ||||||||||||
September 2013 |
199 | $ | 50.00 | 1.72 | 164.01 | % | 1.10 | % | ||||||||||||
December 2012 |
152 | $ | 31.60 | 0.98 | 204.55 | % | 0.84 | % | ||||||||||||
April 2011 |
13 | $ | 13.00 | 0.31 | 103.79 | % | 0.53 | % | ||||||||||||
As of December 31, 2015 |
||||||||||||||||||||
Warrant Issuance |
Outstanding | Strike price | Expected term |
Volatility % | Risk-free rate % |
|||||||||||||||
March 2015 |
700 | $ | 41.60 | 4.22 | 75.85 | % | 1.58 | % | ||||||||||||
September 2013 |
199 | $ | 50.00 | 2.72 | 74.70 | % | 1.24 | % | ||||||||||||
December 2012 |
152 | $ | 31.60 | 1.98 | 76.37 | % | 1.05 | % | ||||||||||||
April 2011 |
31 | $ | 13.00 | 1.31 | 65.60 | % | 0.77 | % | ||||||||||||
March 2011 |
9 | $ | 13.00 | 0.18 | 47.98 | % | — | % | ||||||||||||
March 2010 |
1 | $ | 40.04 | 0.24 | 71.41 | % | — | % |
The changes in fair value of the warrant liability for the six months ended June 30, 2017 were as follows (in thousands):
Warrant Issuance |
Warrant liability, December 31, 2016 |
Fair value of warrants granted |
Fair value of warrants exercised |
Change in fair value of warrants |
Warrant liability, June 30, 2017 |
|||||||||||||||
February 2017 |
$ | — | $ | 10,357 | $ | — | $ | (2,345 | ) | $ | 8,012 | |||||||||
July 2016 |
753 | — | — | (540 | ) | 213 | ||||||||||||||
January 2016 |
529 | — | — | (375 | ) | 154 | ||||||||||||||
March 2015 |
432 | — | — | (301 | ) | 131 | ||||||||||||||
September 2013 |
81 | — | — | (81 | ) | — | ||||||||||||||
December 2012 |
65 | — | — | (65 | ) | — | ||||||||||||||
April 2011 |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 1,860 | $ | 10,357 | $ | — | $ | (3,707 | ) | $ | 8,510 | ||||||||||
|
|
|
|
|
|
|
|
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The changes in fair value of the warrant liability for the years ended December 31, 2016 and 2015 were as follows (in thousands):
Warrant Issuance |
Warrant liability, December 31, 2015 |
Fair value of warrants granted |
Fair value of warrants exercised |
Change in fair value of warrants |
Warrant liability, December 31, 2016 |
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July 2016 |
$ | — | $ | 4,296 | $ | — | $ | (3,543 | ) | $ | 753 | |||||||||
January 2016 |
— | 5,590 | — | (5,061 | ) | 529 | ||||||||||||||
March 2015 |
10,337 | — | — | (9,905 | ) | 432 | ||||||||||||||
September 2013 |
1,933 | — | — | (1,852 | ) | 81 | ||||||||||||||
December 2012 |
1,565 | — | — | (1,500 | ) | 65 | ||||||||||||||
April 2011 |
537 | — | (278 | ) | (259 | ) | — | |||||||||||||
March 2011 |
144 | — | (46 | ) | (98 | ) | — | |||||||||||||
March 2010 |
2 | — | — | (2 | ) | — | ||||||||||||||
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$ | 14,518 | $ | 9,886 | $ | (324 | ) | $ | (22,220 | ) | $ | 1,860 | |||||||||
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Warrant Issuance |
Warrant liability, January 1, 2015 |
Fair value of warrants granted |
Fair value of warrants exercised |
Change in fair value of warrants |
Warrant liability, December 31, 2015 |
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March 2015 |
— | 10,296 | — | 41 | 10,337 | |||||||||||||||
September 2013 |
2,560 | — | — | (627 | ) | 1,933 | ||||||||||||||
December 2012 |
2,027 | — | — | (462 | ) | 1,565 | ||||||||||||||
April 2011 |
625 | — | — | (88 | ) | 537 | ||||||||||||||
March 2011 |
144 | — | — | — | 144 | |||||||||||||||
March 2010 |
2 | — | — | — | 2 | |||||||||||||||
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5,358 | 10,296 | — | (1,136 | ) | 14,518 | |||||||||||||||
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The following table summarizes the components of stock-based compensation expense in the condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016, respectively (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Research and development |
$ | 35 | $ | 108 | $ | 73 | $ | 235 | ||||||||
General and administrative |
162 | 514 | 352 | 1,043 | ||||||||||||
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Total stock-based compensation from continuing operations |
$ | 197 | $ | 622 | $ | 425 | $ | 1,278 | ||||||||
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The following table summarizes the components of stock-based compensation expense in the Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016, 2015, and 2014 (in thousands):
2016 | 2015 | 2014 | ||||||||||
Research and development |
$ | 298 | $ | 350 | $ | 484 | ||||||
General and administrative |
1,966 | 1,591 | 4,903 | |||||||||
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Total stock-based compensation |
$ | 2,264 | $ | 1,941 | $ | 5,387 | ||||||
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The Company uses the Black-Scholes option-pricing model and the following weighted-average assumptions to determine the fair value of all its stock options granted:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2015* | 2017 | 2016 | |||||||||||||
Risk free interest rate |
1.58 | % | 1.41 | % | 1.87 | % | 1.41 | % | ||||||||
Volatility |
132.13 | % | 76.30 | % | 116.41 | % | 75.63 | % | ||||||||
Expected lives (years) |
5.50 | 6.25 | 5.92 | 6.25 | ||||||||||||
Expected dividend yield |
— | % | — | % | — | % | — | % |
The Company uses the Black-Scholes option-pricing model and the following weighted-average assumptions to determine the fair value of all its stock options granted:
2016 | 2015 | 2014 | ||||||||||
Risk free interest rate |
1.47 | % | 1.67 | % | 2.01 | % | ||||||
Volatility |
102.62 | % | 73.97 | % | 79.37 | % | ||||||
Expected lives (years) |
5.93 | 6.16 | 6.16 | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % |
The following table summarizes stock option activity of the Company for the six months ended June 30, 2017:
Total Number of Shares (In Thousands) |
Weighted Average Exercise Price |
Aggregate Intrinsic Value (In Thousands) |
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Outstanding at January 1, 2017 |
561 | $ | 41.50 | |||||||||
Granted |
105 | 1.30 | ||||||||||
Exercised |
— | — | $ | — | ||||||||
Canceled |
(161 | ) | 34.21 | $ | — | |||||||
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Outstanding at June 30, 2017 |
505 | $ | 35.49 | $ | — | |||||||
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Options exercisable at June 30, 2017 |
300 | $ | 54.15 | $ | — | |||||||
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The following table summarizes option activity of the company:
Total Number of Shares (In Thousands) |
Weighted Average Exercise Price |
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Outstanding at December 31, 2015 |
663 | $ | 51.60 | |||||
Granted |
146 | 9.40 | ||||||
Exercised |
(8 | ) | 31.44 | |||||
Cancelled |
(240 | ) | 50.28 | |||||
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Outstanding at December 31, 2016 |
561 | $ | 41.50 | |||||
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Options exercisable at December 31, 2016 |
329 | $ | 56.06 | |||||
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The components of federal and state income tax expense are as follows (in thousands):
As of December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Current |
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Federal |
$ | — | $ | — | $ | — | ||||||
State |
— | — | — | |||||||||
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Total current |
— | — | — | |||||||||
Deferred expense |
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Federal |
210 | 332 | — | |||||||||
State |
33 | 33 | — | |||||||||
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Total deferred |
243 | 365 | — | |||||||||
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Total income tax expense |
$ | 243 | $ | 365 | $ | — | ||||||
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The components of net deferred tax assets are as follows (in thousands):
As of December 31, | ||||||||
2016 | 2015 | |||||||
Net operating loss carryforwards |
$ | 97,168 | $ | 75,221 | ||||
Tax credit carryforwards |
4,083 | 3,866 | ||||||
Stock based compensation |
5,757 | 5,050 | ||||||
Other |
58 | 1,430 | ||||||
Licensing deduction deferral |
10,263 | 9,910 | ||||||
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Gross deferred tax assets |
117,329 | 95,477 | ||||||
Valuation allowance |
(117,329 | ) | (95,477 | ) | ||||
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Net deferred tax asset |
$ | — | $ | — | ||||
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The components of net deferred tax liabilities are as follows (in thousands):
As of December 31, | ||||||||
2016 | 2015 | |||||||
In-process research and development not subject to future amortization for tax purposes |
$ | 5,661 | $ | 5,418 | ||||
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Gross deferred tax liability |
$ | 5,661 | $ | 5,418 | ||||
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The provision for income taxes differs from the provision computed by applying the federal statutory rate to net loss before income taxes as follows (in thousands):
As of December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Expected federal income tax benefit |
$ | (7,977 | ) | $ | (21,603 | ) | $ | (12,447 | ) | |||
State income taxes after credits |
(1,575 | ) | (2,375 | ) | (1,283 | ) | ||||||
Unrealized gain on marketable securities |
— | — | — | |||||||||
Changes in warrant value |
(8,728 | ) | (456 | ) | (6,503 | ) | ||||||
Stock compensation |
(1,782 | ) | 508 | 3,996 | ||||||||
Effect of change in valuation allowance |
21,852 | 24,029 | 17,275 | |||||||||
Income tax credits |
(217 | ) | (276 | ) | (42 | ) | ||||||
Other |
(1,330 | ) | 538 | (996 | ) | |||||||
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$ | 243 | $ | 365 | $ | — | |||||||
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The following table presents amounts related to the discontinued operations in the balance sheets (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Carrying amounts of current assets of discontinued operations: |
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Accounts receivable |
$ | 189 | $ | 813 | ||||
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Total current assets of discontinued operations |
189 | 813 | ||||||
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Carrying amounts of current liabilities of discontinued operations: |
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Accounts payable |
$ | 122 | $ | 3,115 | ||||
Accrued expenses and other current liabilities |
8,248 | 2,944 | ||||||
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Total current liabilities of discontinued operations |
$ | 8,370 | $ | 6,059 | ||||
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The following table represents the components attributable to the commercial operations that are presented in the condensed consolidated statements of operations as discontinued operations (in thousands):
Three Months Ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Additional channel obligations |
(105 | ) | (656 | ) | $ | (428 | ) | $ | (1,666 | ) | ||||||
Selling, general, and administrative |
(897 | ) | (2,233 | ) | (2,510 | ) | (4,614 | ) | ||||||||
Settlements associated with USAO NJ and DOJ and the qui tam action (Note 5) |
(300 | ) | — | (7,800 | ) | — | ||||||||||
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Loss from discontinued operations |
$ | (1,302 | ) | $ | (2,889 | ) | $ | (10,738 | ) | $ | (6,280 | ) | ||||
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The following table describes the net proceeds from the sale and the assets and liabilities sold, net of selling costs (in thousands):
Sale of Abstral and related assets on November 19, 2015 |
Sale of Zuplenz and related assets on December 24, 2015 |
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Net proceeds from sales |
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Total consideration |
$ | 8,348 | $ | 3,750 | ||||
Less selling costs* |
(815 | ) | (1,050 | ) | ||||
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Proceeds from sale, net of selling costs |
$ | 7,533 | $ | 2,700 | ||||
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* | Note selling costs related to the sale of Zuplenz and related assets are included in accrued liabilities and were paid in the first quarter of 2016. |
The following table presents a reconciliation of the carrying amounts of assets and liabilities of the commercial operations to assets held for sale in the balance sheets (in thousands):
2016 | 2015 | |||||||
Carrying amounts of assets included as part of discontinued operations: |
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Accounts receivable |
$ | 813 | $ | 392 | ||||
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Total current assets of discontinued operations |
$ | 813 | $ | 392 | ||||
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Carrying amounts of liabilities included as part of discontinued operations: |
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Accounts payable |
$ | 3,115 | $ | 1,491 | ||||
Accrued expenses and other current liabilities |
2,944 | 4,434 | ||||||
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Total current liabilities of discontinued operations |
$ | 6,059 | $ | 5,925 | ||||
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The following table represents the components attributable to the commercial business in 2016, 2015, and 2014 that are presented in the consolidated statements of comprehensive loss as discontinued operations (in thousands):
2016 | 2015 | 2014 | ||||||||||
Net revenue |
$ | — | $ | 9,734 | $ | 9,319 | ||||||
Cost of revenue |
— | (1,780 | ) | (1,403 | ) | |||||||
Additional channel obligations |
(2,886 | ) | — | — | ||||||||
Amortization of certain acquired intangible assets |
— | (921 | ) | (440 | ) | |||||||
Research and development |
— | (355 | ) | (680 | ) | |||||||
Selling, general, and administrative |
(9,562 | ) | (17,655 | ) | (15,118 | ) | ||||||
Impairment charge form classification as held for sale |
— | (8,071 | ) | — | ||||||||
Loss on sale of commercial business assets |
— | (4,549 | ) | — | ||||||||
Severance and exit costs |
— | (1,349 | ) | — | ||||||||
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Loss from discontinued operations |
$ | (12,448 | ) | $ | (24,946 | ) | $ | (8,322 | ) | |||
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The following amounts are in thousands, except per share amounts:
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
2016 |
||||||||||||||||
Net income (loss) |
$ | (16,493 | ) | $ | 5,389 | $ | (6,929 | ) | $ | (5,516 | ) | |||||
Net income (loss) per share, basic and diluted |
$ | (1.84 | ) | $ | 0.59 | $ | (0.66 | ) | $ | (0.51 | ) | |||||
2015 |
||||||||||||||||
Net revenue |
$ | 2,750 | $ | 3,382 | $ | 2,166 | $ | 1,436 | ||||||||
Gross profit on net revenue |
$ | 2,357 | $ | 2,914 | $ | 1,454 | $ | 1,229 | ||||||||
Net loss |
$ | (10,537 | ) | $ | (15,660 | ) | $ | (18,026 | ) | $ | (19,678 | ) | ||||
Net loss per share, basic and diluted |
$ | (1.55 | ) | $ | (1.94 | ) | $ | (2.23 | ) | $ | (2.51 | ) |
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Shares of common stock for future issuance are reserved for as follows (in thousands):
As of June 30, 2017 | ||||
Warrants outstanding |
19,557 | |||
Stock options outstanding |
505 | |||
Options reserved for future issuance under the Company’s 2016 Incentive Plan |
466 | |||
Shares reserved for future issuance under the Employee Stock Purchase Plan |
17 | |||
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Total reserved for future issuance |
20,545 | |||
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