mack-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period from            to           

Commission file number: 001-35409

 

Merrimack Pharmaceuticals, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware

04-3210530

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

One Kendall Square, Suite B7201

Cambridge, MA

02139

(Address of principal executive offices)

(Zip Code)

 

(617) 441-1000

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of November 7, 2017, there were 13,332,967 shares of Common Stock, $0.01 par value per share, outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

 

 

 

Page

Item 1.

Financial Statements.

2

 

 

 

 

Condensed Consolidated Balance Sheets – September 30, 2017 and December 31, 2016 (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) –Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016 (unaudited)

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

32

 

 

 

Item 4.

Controls and Procedures.

32

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings.

33

 

 

 

Item 1A.

Risk Factors.

34

 

 

 

Item 5.

Other Information.

61

 

 

 

Item 6.

Exhibits.

61

 

 

Signatures

63

 

 

 

i


 

FORWARD-LOOKING STATEMENTS

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

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

 

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

 

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

 

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

 

our ability to establish and maintain collaborations for our product candidates;

 

our receipt of payments related to the milestone events under the asset purchase and sale agreement with Ipsen S.A. or under the license and collaboration agreement between Baxalta Incorporated, Baxalta US Inc., Baxalta GmbH and Ipsen S.A., when expected or at all;

 

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

 

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

 

our intellectual property position;

 

our commercialization, marketing and manufacturing capabilities and strategy;

 

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

 

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

 

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

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

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

NOTE REGARDING TRADEMARKS

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

 

1


 

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements.

Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets

(unaudited)

 

(in thousands, except per share amounts)

 

September 30,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

107,245

 

 

$

21,524

 

Restricted cash

 

 

102

 

 

 

102

 

Accounts receivable, net

 

 

190

 

 

 

275

 

Prepaid expenses and other current assets

 

 

8,040

 

 

 

2,239

 

Assets held for sale

 

 

 

 

 

33,295

 

Total current assets

 

 

115,577

 

 

 

57,435

 

Restricted cash

 

 

60,682

 

 

 

674

 

Property and equipment, net

 

 

10,188

 

 

 

14,212

 

Equity method investment

 

 

11,400

 

 

 

 

Other assets

 

 

 

 

 

27

 

Assets held for sale, net of current portion

 

 

 

 

 

9,135

 

Total assets

 

$

197,847

 

 

$

81,483

 

Liabilities, non-controlling interest and stockholders’ equity/(deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

23,983

 

 

$

29,369

 

Deferred rent

 

 

2,117

 

 

 

2,014

 

Accrued intraperiod tax allocation

 

 

6,613

 

 

 

 

Income taxes payable

 

 

1,844

 

 

 

 

Liabilities held for sale

 

 

 

 

 

56,839

 

Total current liabilities

 

 

34,557

 

 

 

88,222

 

Deferred rent, net of current portion

 

 

1,772

 

 

 

3,386

 

Long-term debt

 

 

49,884

 

 

 

216,861

 

Liabilities held for sale, net of current portion

 

 

 

 

 

25,673

 

Total liabilities

 

 

86,213

 

 

 

334,142

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Non-controlling interest

 

 

 

 

 

 

(1,539

)

Stockholders’ equity/(deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000 shares authorized at September 30, 2017 and

   December 31, 2016; no shares issued or outstanding at September 30, 2017 or

   December 31, 2016

 

 

 

 

 

 

Common stock, $0.01 par value: 20,000 shares authorized at September 30, 2017 and

   December 31, 2016; 13,274 and 13,020 shares issued and outstanding at

   September 30, 2017 and December 31, 2016, respectively

 

 

1,328

 

 

 

1,302

 

Additional paid-in capital

 

 

580,126

 

 

 

702,377

 

Accumulated (deficit)

 

 

(469,820

)

 

 

(954,799

)

Total stockholders’ equity/(deficit)

 

 

111,634

 

 

 

(251,120

)

Total liabilities, non-controlling interest and stockholders’ equity/(deficit)

 

$

197,847

 

 

$

81,483

 

 

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

 

2


 

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

(unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands, except per share amounts)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

$

13,598

 

 

$

28,247

 

 

$

54,954

 

 

$

83,944

 

General and administrative expenses

 

 

3,366

 

 

 

6,448

 

 

 

23,798

 

 

 

21,038

 

Restructuring expenses

 

 

 

 

 

809

 

 

 

 

 

 

809

 

Total costs and expenses

 

 

16,964

 

 

 

35,504

 

 

 

78,752

 

 

 

105,791

 

Loss from continuing operations

 

 

(16,964

)

 

 

(35,504

)

 

 

(78,752

)

 

 

(105,791

)

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

250

 

 

 

64

 

 

 

646

 

 

 

258

 

Interest expense

 

 

(1,659

)

 

 

(1,560

)

 

 

(30,400

)

 

 

(20,708

)

Gain on deconsolidation of Silver Creek Pharmaceuticals, Inc.

 

 

10,848

 

 

 

 

 

 

10,848

 

 

 

 

Gain on sale of asset

 

 

 

 

 

 

 

 

1,703

 

 

 

 

Other income (expense), net

 

 

69

 

 

 

385

 

 

 

(592

)

 

 

278

 

Net loss from continuing operations before income tax benefit

 

 

(7,456

)

 

 

(36,615

)

 

 

(96,547

)

 

 

(125,963

)

Income tax benefit

 

 

2,133

 

 

 

9,770

 

 

 

32,372

 

 

 

9,770

 

Net loss from continuing operations

 

 

(5,323

)

 

 

(26,845

)

 

 

(64,175

)

 

 

(116,193

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

 

8,456

 

 

 

(3,430

)

 

 

547,994

 

 

 

(3,698

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

3,133

 

 

 

(30,275

)

 

 

483,819

 

 

 

(119,891

)

Net income (loss) attributable to non-controlling interest

 

 

31

 

 

 

(207

)

 

 

(1,160

)

 

 

(600

)

Net income (loss) attributable to Merrimack Pharmaceuticals, Inc.

 

$

3,102

 

 

$

(30,068

)

 

$

484,979

 

 

$

(119,291

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

(3

)

 

 

 

 

 

(2

)

Other comprehensive loss

 

 

 

 

 

(3

)

 

 

 

 

 

(2

)

Comprehensive income (loss)

 

$

3,102

 

 

$

(30,071

)

 

$

484,979

 

 

$

(119,293

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Merrimack Pharmaceuticals, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(5,354

)

 

$

(26,638

)

 

$

(63,015

)

 

$

(115,593

)

Income (loss) from discontinued operations, net of tax

 

 

8,456

 

 

 

(3,430

)

 

 

547,994

 

 

 

(3,698

)

Net income (loss) attributable to Merrimack Pharmaceuticals, Inc.

 

$

3,102

 

 

$

(30,068

)

 

$

484,979

 

 

$

(119,291

)

Basic and dilutive net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(0.40

)

 

$

(2.06

)

 

$

(4.77

)

 

$

(9.33

)

Net income (loss) from discontinued operations, net of tax

 

 

0.64

 

 

 

(0.27

)

 

 

41.52

 

 

 

(0.30

)

Net income (loss) per share

 

$

0.24

 

 

$

(2.33

)

 

$

36.75

 

 

$

(9.63

)

Weighted-average common shares used per share calculations—basic and diluted

 

 

13,282

 

 

 

12,921

 

 

 

13,197

 

 

 

12,383

 

Cash dividend paid per common share

 

$

 

 

$

 

 

$

10.55

 

 

$

 

 

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

 

 

3


 

Merrimack Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

483,819

 

 

$

(119,891

)

Less:

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

 

547,994

 

 

 

(3,698

)

Loss from continuing operations

 

 

(64,175

)

 

 

(116,193

)

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

 

 

 

 

 

 

 

 

Non-cash interest expense

 

 

3,352

 

 

 

4,672

 

Loss on extinguishment of debt

 

 

4,887

 

 

 

14,566

 

Benefit from intraperiod tax allocation

 

 

(32,372

)

 

 

(9,970

)

Depreciation and amortization expense

 

 

2,813

 

 

 

4,181

 

Non-cash activity related to discontinued operations

 

 

10,241

 

 

 

9,970

 

Gain on deconsolidation of Silver Creek Pharmaceuticals, Inc.

 

 

(10,848

)

 

 

 

Loss (gain) on sale of property and equipment

 

 

(439

)

 

 

187

 

Stock-based compensation expense

 

 

11,110

 

 

 

8,251

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

85

 

 

 

11

 

Prepaid expenses and other current assets

 

 

(6,205

)

 

 

1,087

 

Income taxes payable

 

 

1,844

 

 

 

 

Accounts payable, accrued expenses and other

 

 

(3,140

)

 

 

(4,061

)

Deferred rent

 

 

(334

)

 

 

493

 

Net cash used in continuing operations for operating activities

 

 

(83,181

)

 

 

(86,806

)

Net cash used in discontinuing operations for operating activities

 

 

(37,964

)

 

 

(52,538

)

Net cash used in operating activities

 

 

(121,145

)

 

 

(139,344

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(729

)

 

 

(2,868

)

Proceeds from maturities and sales of available for sale securities

 

 

 

 

 

72,160

 

Deconsolidation of Silver Creek Pharmaceuticals, Inc. cash

 

 

(4,002

)

 

 

 

Proceeds on sale of property and equipment

 

 

1,094

 

 

 

 

Purchases of available for sale securities

 

 

 

 

 

(84,262

)

Proceeds from sale of business

 

 

575,000

 

 

 

 

Changes in restricted cash

 

 

(60,008

)

 

 

 

Net cash provided by (used in) investing activities

 

 

511,355

 

 

 

(14,970

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of options to purchase common stock

 

 

6,517

 

 

 

4,007

 

Proceeds from issuance of Series C preferred stock by Silver Creek Pharmaceuticals, Inc., net of issuance costs

 

 

3,994

 

 

 

1,185

 

Repayment of debt

 

 

(175,000

)

 

 

 

Payment of dividend

 

 

(140,000

)

 

 

 

Other financing activities, net

 

 

 

 

 

(21

)

Net cash provided by (used in) financing activities

 

 

(304,489

)

 

 

5,171

 

Net increase (decrease) in cash and cash equivalents

 

 

85,721

 

 

 

(149,143

)

Cash and cash equivalents, beginning of period

 

 

21,524

 

 

 

185,606

 

Cash and cash equivalents, end of period

 

$

107,245

 

 

$

36,463

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

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

 

$

159

 

 

$

105

 

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

 

 

 

 

 

39

 

Receivables related to property and equipment sale in other current assets

 

 

145

 

 

 

40

 

Transaction costs related to conversion of convertible notes due 2020 in accounts payable, accrued expenses and other

 

 

 

 

 

148

 

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

 

 

 

 

 

64,209

 

4


 

Supplemental disclosure of cash flows

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

 

6,122

 

 

 

 

Cash paid for interest

 

 

30,250

 

 

 

13,851

 

 

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

 

5


 

Merrimack Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

1. Nature of the Business

Merrimack Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company based in Cambridge, Massachusetts that is outthinking cancer to ensure that patients and their families live fulfilling lives. The Company’s mission is to transform cancer care through the smart design and development of targeted solutions based on a deep understanding of cancer pathways and biological markers. All of the Company’s development programs, including four clinical studies in distinct indications and six candidates in preclinical development, fit into the Company’s strategy of (1) understanding the biological problems the Company is trying to solve, (2) designing specific solutions and (3) developing those solutions for biomarker-selected patients. This three-pronged strategy seeks to ensure optimal patient outcomes.

On April 3, 2017, the Company completed the previously announced transaction (the “Asset Sale”) with Ipsen S.A. (“Ipsen”). Pursuant to the Asset Purchase and Sale Agreement, dated as of January 7, 2017 (the “Asset Sale Agreement”), between the Company and Ipsen, the Company sold to Ipsen its right, title and interest in the non-cash assets, equipment, inventory, contracts and intellectual property primarily related to or used in the Company’s business operations and activities involving or relating to developing, manufacturing and commercializing ONIVYDE, the Company’s first commercial product, and MM-436 (the “Commercial Business”). The Company received $575.0 million in cash, subject to a working capital adjustment, and is eligible to receive up to $450.0 million in additional regulatory approval-based milestone payments. The Company reached a settlement on certain working capital adjustments with Ipsen in the amount of $0.8 million, which was received in September 2017. The remaining working capital adjustment is currently estimated as a $4.9 million receivable presented in prepaid expenses and other currents assets within the condensed consolidated balance sheets, which was received in the fourth quarter of 2017. The Company also retained the right to receive net milestone payments of up to $33.0 million that may become payable pursuant to the license and collaboration agreement with Baxalta Incorporated, Baxalta US Inc. and Baxalta GmbH (collectively, “Baxalta”) for the ex-U.S. development and commercialization of ONIVYDE.

The Company’s non-commercial assets, including its clinical and preclinical development programs, were not included in the Asset Sale and remain assets of the Company. The Company’s most advanced assets are as follows:

 

MM-121 (seribantumab), a fully human monoclonal antibody that binds to the ErbB3 (HER3) receptor and targets heregulin positive cancers. There are two active development programs for MM-121, each in a Phase 2 clinical trial. The Company is currently conducting the Phase 2 randomized SHERLOC clinical trial, evaluating MM-121 in heregulin positive non-small cell lung cancer patients in combination with docetaxel. The Company has also initiated trial sites for the Phase 2 randomized SHERBOC clinical trial in patients with heregulin positive, hormone receptor positive, ErbB2 (HER2) negative, metastatic breast cancer in combination with fulvestrant, and expects to dose the first patient in the SHERBOC clinical trial in the fourth quarter of 2017;

 

MM-141 (istiratumab), a fully human bispecific tetravalent monoclonal antibody designed to block tumor survival signals by targeting receptor complexes containing the insulin-like growth factor 1 (“IGF-1”) receptor and ErbB3 (HER3) cell surface receptors. The Company is currently conducting and has completed enrollment of the Phase 2 randomized CARRIE clinical trial evaluating MM-141 in previously untreated metastatic pancreatic cancer patients with high levels of free IGF-1 in combination with nab-paclitaxel and gemcitabine; and

 

MM-310, an antibody-directed nanotherapeutic (“ADN”) that contains a novel prodrug of the highly potent chemotherapy docetaxel and targets the ephrin receptor A2 (“EphA2”) receptor, which is highly expressed in most solid tumor types. MM-310 was designed to improve the therapeutic window of docetaxel in major oncology indications, such as prostate, ovarian, bladder, gastric, pancreatic and lung cancers. The Company initiated a Phase 1 clinical trial to evaluate safety and preliminary activity of MM-310 in the first quarter of 2017.

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

6


 

The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Until such time, if ever, as the Company can generate sufficient product revenues, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, collaborations, licensing arrangements and other marketing and distribution arrangements. The Company could also engage in discussions with third parties regarding partnerships, joint ventures, combinations or divestitures of one or more of its businesses as it seeks to further the development of its research programs, improve its cash position and maximize stockholder value.

 

 

2. Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements as of September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for condensed consolidated financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017.

The information presented in the condensed consolidated financial statements and related notes as of September 30, 2017, and for the three and nine months ended September 30, 2017 and 2016, is unaudited. The December 31, 2016 condensed consolidated balance sheets included herein were derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements.

Interim results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017, or any future period.

As of March 31, 2017, the Commercial Business met all the conditions to be classified as a discontinued operation since the disposal of the Commercial Business represented a strategic shift that will have a major effect on the Company’s operations and financial results. The Company will not have further significant involvement in the operations of the discontinued Commercial Business. The operating results of the Commercial Business are reported as a loss from discontinued operations, net of tax in the condensed consolidated statements of operations and comprehensive income (loss) for all periods presented. The gain recognized on the sale of the Commercial Business is presented in income (loss) from discontinued operations, net of tax in the consolidated statement of operations and comprehensive income (loss). In addition, in the condensed consolidated balance sheets as of December 31, 2016, the assets and liabilities held for sale have been presented separately. For additional information, see Note 3, “Sale of Commercial Business.”

The condensed consolidated financial statements have historically included the accounts of the Company and Silver Creek Pharmaceuticals, Inc. (“Silver Creek”) with all intercompany transactions and balances eliminated in consolidation. Silver Creek represented a variable interest entity that the Company consolidated as the primary beneficiary. As discussed in Note 12, “Investment in Silver Creek,” Silver Creek completed a preferred stock financing in the third quarter of 2017, which reduced the Company’s ownership percentage in Silver Creek below 50% and resulted in the Company no longer controlling the Silver Creek board of directors. The Company determined that it is no longer the primary beneficiary of Silver Creek since the Company does not control the board of directors and does not direct the activities that have the most significant impact on Silver Creek’s economic performance. Therefore, the Company deconsolidated Silver Creek from its financial statements in the third quarter of 2017 in accordance with Accounting Standards Codification (“ASC”) 810-10-40-4(c), Consolidation. The Company accounts for its investment in Silver Creek under the equity method of accounting as of September 30, 2017.

The Company’s consolidated balance sheet at December 31, 2016, as reported, included Silver Creek’s assets and liabilities, after intercompany eliminations. The Company’s unaudited consolidated balance sheet at September 30, 2017 does not include the assets and liabilities of Silver Creek since the Company deconsolidated Silver Creek in the third quarter of 2017.

The Company’s unaudited consolidated statements of operations for the nine months ended September 30, 2017 include Silver Creek’s results for the period through July 13, 2017, the day immediately preceding the deconsolidation of Silver Creek. For the three and nine months ended September 30, 2016, the Company’s unaudited consolidated results include Silver Creek’s results for the full periods presented.

7


 

On August 11, 2017, the Company’s stockholders approved an amendment to the Company's certificate of incorporation to effect a one-for-ten reverse stock split of its issued and outstanding common stock (the “Reverse Split”). On September 5, 2017, the Company filed the amendment to its certificate of incorporation to effect the Reverse Split, and on September 6, 2017, the Reverse Split was effective for trading purposes. As a result of the Reverse Split, every ten shares of common stock issued and outstanding was converted into one share of common stock, reducing the number of issued and outstanding shares of common stock from approximately 132.8 million shares to approximately 13.28 million shares. No fractional shares were issued in connection with the Reverse Split. The amendment to the certificate of incorporation also proportionately reduced the number of authorized shares of common stock from 200 million to 20 million. The Reverse Split did not change the par value of the common stock. The Reverse Split did not change the number of authorized shares or par value of the Company’s preferred stock, of which there are no shares issued or outstanding. All outstanding stock options and convertible notes entitling their holders to purchase shares of common stock or acquire shares of common stock upon conversion, as the case may be, were adjusted as a result of the Reverse Split, as required by the terms of these securities. For additional information, see Note 11, “Stock Compensation.”

 

3. Sale of Commercial Business

Ipsen

On April 3, 2017, the Company completed the sale of the Commercial Business to Ipsen. Pursuant to the Asset Sale Agreement, the Company may be entitled to up to $450.0 million in additional payments based on the achievement by or on behalf of Ipsen of certain milestone events if the U.S. Food and Drug Administration (the “FDA”) approves ONIVYDE for certain indications as follows: (i) $225.0 million upon the regulatory approval by the FDA of ONIVYDE for the first-line treatment of metastatic adenocarcinoma of the pancreas (a) in combination with fluorouracil and leucovorin (with or without oxaliplatin), (b) in combination with gemcitabine and abraxane or (c) following submission and filing of regulatory approval by Ipsen for purposes of commercialization by Ipsen; (ii) $150.0 million upon the regulatory approval by the FDA of ONIVYDE for the treatment of small cell lung cancer after failure of first-line chemotherapy; and (iii) $75.0 million upon the regulatory approval by the FDA of ONIVYDE for an additional indication unrelated to those described above.

In connection with the sale of the Commercial Business, on April 3, 2017, the Company entered into a transition services agreement with Ipsen pursuant to which the Company and Ipsen are providing certain services to each other for a period of 24 months following the closing, including Ipsen’s agreement to manufacture MM-310 and to perform certain quality related services in accordance with a manufacturing services agreement, the accounting impact of which is immaterial.

In connection with the completion of the Asset Sale, on April 3, 2017, the Company irrevocably deposited the redemption price of the 11.50% senior secured notes due 2022 (the “2022 Notes”) of $175.0 million outstanding aggregate principal amount, interest of $7.4 million through the redemption date and an additional make-whole premium payment of approximately $20.1 million with U.S. Bank National Association as trustee (the “Trustee”) under the Indenture dated as of December 22, 2015 (the “Indenture”) and irrevocably instructed the Trustee to apply such amount to the redemption in full of the 2022 Notes on the redemption date of April 27, 2017. The Indenture was satisfied and discharged on April 3, 2017.

In connection with the completion of the Asset Sale, on April 3, 2017, the Company entered into a sublease with Ipsen, pursuant to which Ipsen is subleasing from the Company approximately 70,237 square feet of leased space in the Company’s Cambridge, Massachusetts facility through the end of the term of the lease on June 30, 2019. Payments under the sublease are recorded as an offset to rent expense in the condensed consolidated statement of operations and comprehensive income (loss).

Also in connection with the completion of the Asset Sale, on April 3, 2017, the Company entered into an intellectual property license agreement with Ipsen, pursuant to which Ipsen granted to the Company a perpetual, worldwide, non-exclusive, royalty-free, fully paid-up license in and to all patents included in the transferred intellectual property, other than certain patents relating to generic liposomal technology, with respect to which the license will be exclusive, in each case for use outside of the Commercial Business. The Company granted to Ipsen a non-exclusive, royalty-free, fully paid up, perpetual, irrevocable and worldwide license to all patents it owned at the time of the closing of the transaction contemplated by the Asset Sale Agreement for use in connection with the Commercial Business. This transfer of intellectual property did not impact the financial statements as no amounts related to the intellectual property had previously been recorded.

On April 5, 2017, the Company announced that its Board of Directors authorized and declared a special cash dividend of $140.0 million on the Company's common stock. The special dividend was payable on May 26, 2017 to stockholders of record as of the close of business on May 17, 2017. The special dividend resulted in a decrease to additional paid-in capital.

8


 

Discontinued Operations and Assets Held for Sale

The condensed consolidated financial statements for the three and nine months ended September 30, 2017 and 2016 reflect the operations of the Commercial Business as a discontinued operation. For the three months ended September 30, 2017, the Company recorded a gain of $3.5 million on the Asset Sale, resulting from an increase in the estimated working capital adjustment. The Company reached a settlement on certain working capital adjustments with Ipsen in the amount of $0.8 million, which was received in September 2017. The remaining working capital adjustment is currently estimated as a $4.9 million receivable that was received in the fourth quarter of 2017. For the nine months ended September 30, 2017, the Company recorded a gain of approximately $601.7 million on the Asset Sale, which is included in gain from discontinued operations on the condensed consolidated statements of operations and comprehensive income (loss). Discontinued operations for the three and nine months ended September 30, 2017 and 2016 includes the following:

 

(in thousands)

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues, net

 

$

 

 

$

14,493

 

 

$

16,135

 

 

$

37,312

 

License and collaboration revenues

 

 

 

 

 

12,417

 

 

 

7,797

 

 

 

43,062

 

Other revenues

 

 

 

 

 

1,161

 

 

 

1,973

 

 

 

2,659

 

Total revenues

 

 

 

 

 

28,071

 

 

 

25,905

 

 

 

83,033

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

1,010

 

 

 

3,890

 

 

 

3,593

 

Research and development expenses

 

 

 

 

 

3,830

 

 

 

3,730

 

 

 

22,012

 

Selling, general and administrative expenses

 

 

 

 

 

11,600

 

 

 

8,732

 

 

 

35,485

 

Restructuring expenses

 

 

 

 

 

 

 

 

9,535

 

 

 

 

Total costs and expenses

 

 

 

 

 

16,440

 

 

 

25,887

 

 

 

61,090

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

(5,291

)

 

 

(6,743

)

 

 

(15,871

)

Gain on sale of commercial business

 

 

3,497

 

 

 

 

 

 

601,670

 

 

 

 

Income from discontinued operations

 

$

3,497

 

 

$

6,340

 

 

$

594,945

 

 

$

6,072

 

Income tax benefit (expense)

 

 

4,959

 

 

 

(9,770

)

 

 

(46,951

)

 

 

(9,770

)

Total income (loss) from discontinued operations

 

$

8,456

 

 

$

(3,430

)

 

$

547,994

 

 

$

(3,698

)

 

The carrying value of the assets and liabilities of the Commercial Business classified as “Discontinued operations” in the condensed consolidated balance sheets is as follows:

 

(in thousands)

 

December 31,

2016

 

Assets

 

 

 

 

Current assets:

 

 

 

 

Accounts receivable, net

 

$

17,194

 

Inventory

 

 

14,554

 

Prepaid expenses and other current assets

 

 

1,547

 

Total current assets held for sale

 

 

33,295

 

Property and equipment, net

 

 

1,553

 

Intangible assets, net

 

 

3,977

 

Goodwill

 

 

3,605

 

Total long-term assets held for sale

 

 

9,135

 

Liabilities

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable, accrued expenses and other

 

 

20,613

 

Deferred revenues

 

 

36,226

 

Total current liabilities held for sale

 

 

56,839

 

Deferred revenues, net of current portion

 

 

25,673

 

Total liabilities held for sale

 

 

25,673

 

9


 

 

Inventory

Inventory of the Commercial Business as of December 31, 2016 consisted of the following:

(in thousands)

 

December 31,

2016

 

Raw materials

 

$

4,483

 

Work in process

 

 

8,651

 

Finished goods

 

 

1,420

 

Total inventory

 

$

14,554

 

 

Restructuring Activities

On January 8, 2017, the Company announced a reduction in headcount by approximately 30% in connection with the Asset Sale and the completion of its strategic pipeline review. Upon the closing of the Asset Sale and the completion of its strategic pipeline review, the Company had approximately 80 employees.

Under this corporate restructuring, for the three and nine months ended September 30, 2017, the Company recognized total restructuring expenses of $0.0 million and $9.5 million, respectively, which was related to contractual termination benefits for employees with pre-existing severance arrangements. These one-time employee termination benefits are comprised of severance, benefits and related costs, all of which are expected to result in cash expenditures. The majority of these payments were made during the second quarter of 2017. The remaining payments represent severance payments that will be paid over one year. The expense of $9.5 million was included in discontinued operations, as the costs are directly associated with the sale of the Commercial Business.

The following table summarizes the charges related to the restructuring activities as of September 30, 2017:

(in thousands)

 

Accrued Restructuring Expenses at December 31, 2016

 

 

Expenses

 

 

Less: Payments

 

 

Accrued Restructuring Expenses at September 30, 2017

 

Severance, benefits and related costs

 

$

 

 

$

9,521

 

 

$

8,434

 

 

$

1,087

 

Totals

 

$

 

 

$

9,521

 

 

$

8,434

 

 

$

1,087

 

These amounts are included in accounts payable, accrued expenses and other in the September 30, 2017 balance sheet.

License and Collaboration Agreements Related to the Asset Sale

Baxalta

On September 23, 2014, the Company and Baxter International Inc., Baxter Healthcare Corporation and Baxter Healthcare SA entered into a license and collaboration agreement (the “Baxalta Agreement”) for the development and commercialization of ONIVYDE outside of the United States and Taiwan (the “Licensed Territory”). In connection with Baxter International Inc.’s separation of the Baxalta business, the Baxalta Agreement was assigned to Baxalta during the second quarter of 2015. As part of the Baxalta Agreement, the Company granted Baxalta an exclusive, royalty-bearing right and license under the Company’s patent rights and know-how to develop and commercialize ONIVYDE in the Licensed Territory.

On April 3, 2017, the Baxalta Agreement and all related agreements, including the Company’s agreement related to the commercial supply of ONIVYDE, were assigned to Ipsen in connection with the Asset Sale. Pursuant to the Asset Sale Agreement, the Company retained the right to receive net milestone payments of up to $33.0 million that may become payable pursuant to the Baxalta Agreement for the ex-U.S. development and commercialization of ONIVYDE, which is comprised of potential payments of $18.0 million from the sale of ONIVYDE in two additional major European countries, $5.0 million related to the sale of ONIVYDE in the first major non-European, non-Asian country and $10.0 million for the first patient dosed in a pivotal clinical trial in an indication other than pancreatic cancer.

PharmaEngine, Inc.

On May 5, 2011, the Company and PharmaEngine, Inc. (“PharmaEngine”) entered into an assignment, sublicense and collaboration agreement (the “PharmaEngine Agreement”) under which the Company reacquired rights in Europe and certain countries in Asia to ONIVYDE. In exchange, the Company agreed to pay PharmaEngine a nonrefundable, noncreditable upfront

10


 

payment of $10.0 million and up to an additional $80.0 million in aggregate development and regulatory milestones and $130.0 million in aggregate sales milestones.

On April 3, 2017, the PharmaEngine Agreement and all related agreements, including the Company’s agreement related to its commercial supply of ONIVYDE, were assigned to Ipsen in connection with the Asset Sale.

 

 

4. Going Concern

In accordance with ASC 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued.

As of December 31, 2016, the Company had $21.5 million in unrestricted cash and cash equivalents, had suffered recurring losses from operations and had negative working capital and cash outflows from operating activities. Based on the evaluation completed in connection with the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, including consideration of management’s plans, the Company previously concluded that there was substantial doubt as to its ability to continue as a going concern within one year after March 1, 2017, the date that the consolidated financial statements were issued.

On April 3, 2017, the Company closed the Asset Sale with Ipsen and received a $575.0 million upfront cash payment, subject to a working capital adjustment. The Company reached a settlement on certain working capital adjustments with Ipsen in the amount of $0.8 million, which was received in September 2017. The remaining working capital adjustment is currently estimated as a $4.9 million receivable that was received in the fourth quarter of 2017. The Company used a portion of the cash payment to redeem the $175.0 million outstanding aggregate principal amount of the 2022 Notes, which also required an additional make-whole premium payment of approximately $20.1 million, and deposited $60.0 million into an escrow account in response to a lawsuit filed by the trustee and certain holders of its 4.50% convertible notes due 2020 (the “Convertible Notes”). The Company distributed $140.0 million of the upfront cash payment in the form of a special cash dividend to stockholders, which was payable on May 26, 2017 to stockholders of record as of the close of business on May 17, 2017. After consideration of the Company’s cash and cash equivalents balance at March 31, 2017 of $17.2 million and the net proceeds from the Asset Sale, the Company has concluded that the previous conditions and events that raised substantial doubt about its ability to continue as a going concern have been alleviated. The Company updated its going concern assessment for the three months ended September 30, 2017 and concluded the Company is able to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued.

 

 

5. Income Taxes

Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted tax rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company completed the Asset Sale and recorded the income tax implications of the sale in the second quarter of 2017. The Asset Sale generated taxable income for the Company which has resulted in income tax expense.  The Company released a portion of its valuation allowance in the three months ended June 30, 2017 as it is now able to utilize its net operating loss carryforwards to offset the taxable income generated from the Asset Sale. The Company’s current income tax expense for the nine months ended September 30, 2017 is $8.0 million, which is comprised primarily of federal Alternative Minimum Tax and state income tax. As of September 30, 2017, the income tax payable was $1.8 million.

Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. In periods in which there is pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as discontinued operations, the Company must allocate to continuing operations a tax benefit for the loss in continuing operations with an offsetting tax expense to discontinued operations.

For the three and nine months ended September 30, 2017, the Company recognized an income tax benefit of $2.1 million and  $32.4 million, respectively, in continuing operations and income tax benefit in discontinued operations of $5.0 million and income tax expense of $47.0 million, respectively, related to the income generated in connection with the Asset Sale. For the three and nine months ended September 30, 2016, the Company recognized an income tax benefit of $9.8 million in continuing operations and income tax expense in discontinued operations of $9.8 million.

In connection with the Asset Sale, the Company recorded an income tax provision in discontinued operations of $224.3 million prior to the release of the valuation allowance. The Company released $177.4 million of its valuation allowance in discontinued operations, resulting in a total income tax expense of $47.0 million in discontinued operations for the nine months ended September 30, 2017.

11


 

 

6. Net Income (Loss) Per Common Share

Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to Merrimack Pharmaceuticals, Inc. by the weighted-average number of common shares outstanding during the period.

Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to Merrimack Pharmaceuticals, Inc. by the weighted-average number of dilutive common shares outstanding during the period. Dilutive shares outstanding is calculated by adding to the weighted shares outstanding any potential (unissued) shares of common stock from outstanding stock options based on the treasury stock method. In a period when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods where a loss is reported, there is no difference in basic and dilutive loss per share.

The Company follows the two-class method when computing net income (loss) per share, when it has issued shares that meet the definition participating securities. The two–class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participating rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based on their respective rights to receive dividends, as if all income for the period has been distributed or losses to be allocated if they are contractually required to fund losses. There were no amounts allocated to participating securities for the three and nine months ended September 30, 2017 and 2016, as the Company was in a loss position and had no shares that met the definition of participating securities outstanding as of September 30, 2017 and 2016.

In addition, as discussed in Note 10, “Borrowings,” in July 2013, the Company issued $125.0 million aggregate principal amount of Convertible Notes in an underwritten public offering. Following the repayment and satisfaction in full of the Company’s obligations to Hercules Technology Growth Capital, Inc. (“Hercules”) under its Loan and Security Agreement with Hercules (the “Loan Agreement”), which occurred in December 2015, upon any conversion of the Convertible Notes, the Convertible Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the conversion premium will be settled in common stock, inclusive of a contractual make-whole provision resulting from a fundamental change, and the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. As of September 30, 2017, $60.8 million aggregate principal amount of the Convertible Notes remained outstanding.

The stock options and conversion premium on the Convertible Notes are excluded from the calculation of diluted loss per share because the net loss for the three and nine months ended September 30, 2016 causes such securities to be anti-dilutive. Outstanding securities excluded from the calculation of diluted loss per share for the three and nine months ended September 30, 2017 and 2016 are shown in the chart below:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Outstanding options to purchase common stock

 

 

1,824

 

 

 

2,100

 

 

 

1,824

 

 

 

2,100

 

Conversion of the Convertible Notes

 

 

1,216

 

 

 

1,216

 

 

 

1,216

 

 

 

1,216

 

 

 

7. Fair Value of Financial Instruments

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

Recurring Fair Value Measurements

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

12


 

The following tables show assets measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:

 

 

 

September 30, 2017

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

99,079

 

 

$

 

 

$

 

Totals

 

$

99,079

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

12,373

 

 

$

 

 

$

 

Totals

 

$

12,373

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Silver Creek warrant liability

 

$

 

 

$

 

 

$

1,499

 

Totals

 

$

 

 

$

 

 

$

1,499

 

 

In December 2016, Silver Creek issued warrants to purchase an aggregate of 1.9 million shares of Silver Creek Series C preferred stock (the “Silver Creek warrants”). During the first quarter of 2017, Silver Creek issued additional Silver Creek warrants to purchase an aggregate of 1.8 million shares of Silver Creek Series C preferred stock. During the second quarter of 2017, Silver Creek issued additional Silver Creek warrants to purchase an aggregate of 0.3 million shares of Silver Creek Series C preferred stock. In June 2017, Silver Creek amended the outstanding warrant purchase agreements to increase the number of shares for which each warrant is redeemable.

During the third quarter of 2017, Silver Creek completed its Series C preferred stock financing, issuing 2.0 million shares of Series C preferred stock at $1.50 per share for proceeds of $2.9 million. In conjunction with this sale, Silver Creek also issued warrants to purchase 1.7 million shares of Series C preferred stock to investors. The sale of additional shares of Series C preferred stock in the third quarter resulted in the deconsolidation of Silver Creek, effective July 14, 2017. As such, the Company valued the warrants on that date. The warrants were valued at $5.2 million and $1.5 million as of July 14, 2017 and December 31, 2016, respectively, using a Black-Scholes option pricing model, probability-weighted for different exercise scenarios. The key assumptions utilized in the Black-Scholes option pricing model as of July 14, 2017 were a risk-free interest rate of 2.1%, expected dividend yield of 0.0%, expected volatility of 60.0% and expected term of 6.4 years – 7.0 years. The key assumptions utilized in the Black-Scholes option pricing model as of December 31, 2016 were a risk-free interest rate of 2.3%, expected dividend yield of 0.0%, expected volatility of 61.7% and expected term of 6.9 years. Changes in the fair value of the Silver Creek warrants are recognized as a component of “other income and expenses” in the condensed consolidated statements of operations and comprehensive income (loss). The change in fair value for the three and nine months ended September 30, 2017 was $0.1 million and $1.1 million, respectively, and is recorded in other income (expense) on the statement of operations and comprehensive loss.

There were no changes in valuation techniques or transfers between the fair value measurement levels during the three or nine months ended September 30, 2017 or during the year ended December 31, 2016.

Other Fair Value Measurements

The estimated fair value of the Convertible Notes was $51.0 million as of September 30, 2017. The Company estimated the fair value of the Convertible Notes by using a quoted market rate in an inactive market, which is classified as a Level 2 input. The carrying value of the Convertible Notes was $49.9 million as of September 30, 2017 due to the bifurcation of the conversion feature of the Convertible Notes as described more fully in Note 10, “Borrowings.”

As discussed in Note 10, “Borrowings,” in December 2015, the Company closed a private placement of $175.0 million aggregate principal amount of 2022 Notes. The Company estimated the fair value of the 2022 Notes by using publicly-available information related to one of the 2022 Notes borrower’s portfolio of debt investments based on unobservable inputs, which is classified as a Level 3 input. In connection with the completion of the Asset Sale, on April 3, 2017, the liability under the 2022 Notes was satisfied. The Company incurred a loss on extinguishment of $25.0 million as a result of the early repayment of the 2022 Notes, which is included in interest expense on the statement of operations. For additional information, see Note 3, “Sale of Commercial Business.”

 

13


 

8. Marketable Securities

As of both September 30, 2017 and December 31, 2016, the Company maintained only cash equivalents comprised of money market funds. As of September 30, 2017, the Company did not hold any securities that were in an unrealized loss position. There were no realized gains or losses on available-for-sale securities for the three or nine months ended September 30, 2017 or 2016.

 

 

9. Accounts Payable, Accrued Expenses and Other

Accounts payable, accrued expenses and other as of September 30, 2017 and December 31, 2016 consisted of the following:

 

(in thousands)

 

September 30,

2017

 

 

December 31,

2016

 

Accounts payable

 

$

8,835

 

 

$

2,692

 

Accrued goods and services

 

 

4,688

 

 

 

8,233

 

Accrued clinical trial costs

 

 

3,845

 

 

 

8,776

 

Accrued drug purchase costs

 

 

950

 

 

 

480

 

Accrued payroll and related benefits

 

 

2,500

 

 

 

3,394

 

Accrued severance expenses

 

 

1,166

 

 

 

774

 

Accrued interest

 

 

578

 

 

 

2,100

 

Accrued dividends payable

 

 

19

 

 

 

19

 

Silver Creek warrant liability

 

 

 

 

 

1,499

 

Deferred tax incentives

 

 

1,402

 

 

 

1,402

 

Total accounts payable, accrued expenses and other

 

$

23,983

 

 

$

29,369

 

 

 

10. Borrowings

2022 Notes

On December 22, 2015, the Company closed a private placement of $175.0 million aggregate principal amount of 2022 Notes. As a result of this placement, the Company received net proceeds of approximately $168.5 million, after deducting private placement and offering expenses payable by the Company. The 2022 Notes bore interest at a rate of 11.50% per year, payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2016. The 2022 Notes contained customary covenants, including covenants that limited or restricted the Company’s ability to incur liens, incur indebtedness and make certain restricted payments, but did not contain covenants related to future financial performance. The 2022 Notes were secured by a first priority lien on substantially all of the Company’s assets.

In connection with the completion of the Asset Sale on April 3, 2017, the liability under the 2022 Notes was satisfied. As a result of the early repayment, a loss on extinguishment of $25.0 million was recognized in interest expense in the condensed consolidated statement of operations and comprehensive income (loss) for the nine months ended September 30, 2017. The $25.0 million loss on extinguishment included a $20.1 million prepayment penalty and $4.9 million of amortization expense recognized for the remaining debt discount at settlement as a result of the early repayment. For the three and nine months ended September 30, 2017, interest expense related to the 2022 Notes was $0.0 million and $6.7 million, respectively. For the three and nine months ended September 30, 2016, interest expense related to the 2022 Notes was $5.2 million and $15.6 million, respectively. These amounts are included in discontinued operations.

Convertible Notes

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

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