Business context and reporting period
The filing is NantKwest, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2016; it does not identify the registrant as ImmunityBio, Inc. NantKwest was a clinical-stage biotechnology company developing natural-killer-cell immunotherapies. It reported no product-sales revenue and only nominal licensing and service revenue.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 or comparison |
|---|---|---|
| Revenue | $6,000 | $120,000 |
| Research and development expense | $4.9 million | $0.6 million |
| Selling, general and administrative expense | $26.7 million | $31.6 million |
| Operating loss | $31.6 million | $32.1 million |
| Net loss | $30.7 million | $32.8 million |
| Net loss per share, basic and diluted | $0.38 | $0.54 |
| Cash used in operating activities | $8.9 million | $7.4 million |
Operating margins are not meaningful given negligible revenue and substantial development spending. Q1 2016 net loss included $20.5 million of stock-based compensation. Investment income was $0.8 million, compared with $32,000 a year earlier.
At March 31, 2016, cash and cash equivalents were $63.3 million and marketable securities totaled $274.7 million, for combined cash and securities of approximately $338.0 million. Total current assets were $225.5 million; current liabilities were $7.9 million. Total liabilities were $12.9 million and stockholders’ equity was $344.5 million. No conventional borrowings are reported in the presented balance sheet; lease-related obligations include a $2.5 million long-term build-to-suit liability. The company reported an accumulated deficit of $281.0 million.
Cash and cash equivalents fell from $175.9 million at year-end 2015, largely because the company shifted funds into marketable securities. Investing cash outflow was $101.9 million, including $100.8 million net purchases of securities and $1.1 million of property and equipment. The company repurchased 300,000 shares for $2.6 million during the quarter.
Material changes versus the prior comparable period
- Revenue declined by $114,000, primarily following the transfer of most non-clinical licensing agreements to Brink Biologics in 2015.
- R&D expense rose $4.3 million, reflecting higher compensation and shared-service costs, laboratory and clinical spending, facility costs, and amortization of the Inex Bio technology license.
- SG&A expense declined $5.0 million. The comparison was affected by 2015 Inex Bio acquisition-related compensation and stock-based compensation; Q1 2016 still included $20.3 million of SG&A stock compensation.
- Net loss improved by $2.2 million, with higher investment income and no repeat of the prior-year warrant-liability expense also contributing.
Outlook, risks, contingencies and unusual items
- Management expected existing cash and marketable securities to fund operating and capital requirements for at least 24 months, but cautioned that assumptions could prove wrong and available funds might not last through commercialization. The company had no committed external funding source and expected to need additional capital.
- Management expected significant future R&D and operating losses; it did not expect product sales for at least several years, if ever. No specific revenue or earnings guidance was provided.
- Material weaknesses in internal financial controls remained unresolved. The company had restated interim financial statements for the second and third quarters of 2015 and said remediation was ongoing. Management concluded disclosure controls were not effective as of December 31, 2015, while stating the current quarter’s financial statements fairly presented results in all material respects.
- A securities class action filed in March 2016 relates to the prior-period restatements. The company said it could not estimate a possible loss and intended to defend the case. It was also appealing an adverse court ruling concerning certain patent claims; no loss range was estimated.
- Related-party arrangements with NantWorks affiliates included shared services, laboratory space, and sequencing services. The CEO controlled NantWorks, and the company reported $1.5 million payable to NantWorks at quarter-end.
- Stock-based compensation and the 2015 Inex Bio acquisition were significant unusual factors in expense comparisons. The filing also describes the build-to-suit lease accounting that contributed to prior-period restatements.
Important facts for investors to verify
- Confirm the filing entity and reporting period: this is NantKwest’s Q1 2016 filing, despite the ImmunityBio metadata.
- Review the status and effectiveness of internal-control remediation, and any further financial-statement corrections.
- Track cash burn, investment maturities and liquidity against the stated 24-month runway, particularly as clinical and manufacturing spending increases.
- Monitor the securities litigation, patent appeal and any resulting financial or operational effects.
- Assess the terms, costs, oversight and potential conflicts associated with related-party arrangements and the share-repurchase program.