Business context and reporting period
The supplied filing is NantKwest, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed March 15, 2017; it is not filed under the name ImmunityBio, Inc. NantKwest was a clinical-stage immunotherapy company developing natural-killer-cell therapies for cancer and other diseases. It had no approved products or product sales.
The filing reports full-year results and unaudited fourth-quarter results. Financial amounts below are in U.S. dollars; annual statement amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $0.044 million | $0.236 million |
| Research and development | $29.153 million | $11.434 million |
| Selling, general and administrative | $95.391 million | $227.678 million |
| Operating loss | $124.500 million | $238.876 million |
| Net loss | $120.809 million | $236.876 million |
| Net loss per share, basic and diluted | $1.47 | $3.31 |
| Cash used in operating activities | $38.593 million | $25.305 million |
Revenue was immaterial and declined after the 2015 spin-out of most nonclinical licensing agreements. No meaningful revenue margin is presented. The lower 2016 net loss mainly reflected substantially lower stock-based compensation, particularly expense related to executive warrants; R&D spending increased as development activities and staffing expanded.
Fourth-quarter 2016 revenue was $14,000, operating expenses were $25.157 million, and net loss was $24.238 million, compared with fourth-quarter 2015 revenue of $15,000, operating expenses of $29.938 million, and net loss of $26.822 million.
At December 31, 2016, cash and cash equivalents were $8.083 million and marketable securities were $278.409 million, totaling approximately $286.5 million in cash and investments. Working capital was $192.6 million; total assets were $317.5 million, total liabilities $24.1 million, and stockholders’ equity $293.4 million. The filing reports no material conventional borrowings outstanding; liabilities include lease and build-to-suit obligations. Operating cash outflow was $38.6 million. The company repurchased 2.16 million shares for $15.8 million during 2016.
Management said cash, cash equivalents and marketable securities were expected to fund operations and capital needs for at least the foreseeable future, while also warning that additional capital would likely be needed and that the estimate depended on assumptions. The notes state the resources were expected to fund at least the next 12 months, but might not fund the company through commercialization.
Material changes and operating developments
- R&D expense rose by $17.7 million year over year, primarily from higher compensation and related services, clinical and laboratory costs, facility expenses, and amortization of the Inex Bio technology license.
- SG&A declined by $132.3 million, chiefly because stock-based compensation fell by $137.0 million from the unusually high 2015 level. 2016 still included $73.9 million of stock-based compensation overall.
- Cash and investments declined from approximately $367.4 million at year-end 2015 to $286.5 million at year-end 2016. Cash used in operations, capital spending and share repurchases contributed to the reduction; purchases and maturities of marketable securities also affected reported investing cash flow.
- The company reported a Phase II Merkel cell carcinoma study, with management describing tumor regression in a patient and no serious or dose-limiting events among the first three patients receiving single-agent aNK. The study was amended to combine aNK with ALT-803.
- Management reported establishing GMP master and working cell banks for haNK and anticipated a first-in-human haNK study in 2017. A HER2.taNK clinical trial in Europe and a U.S. IND submission were also planned for 2017, subject to regulatory progress.
Outlook, risks, contingencies, and unusual items
- The company expected significant ongoing losses and rising R&D and infrastructure spending; it did not expect product revenue for several years, if ever. No quantitative revenue or earnings guidance was provided.
- Key uncertainties include clinical efficacy and safety, trial enrollment and timing, regulatory approval, ability to scale and validate cell manufacturing and distribution, competition, reimbursement, intellectual-property protection, and access to additional financing.
- Prior interim financial statements for the quarters ended June 30 and September 30, 2015 were restated for stock-award accounting and build-to-suit lease accounting. The company said it had remediated the related material weakness and assessed financial reporting controls as effective at year-end 2016; the external auditor did not attest to internal-control effectiveness.
- Securities class-action litigation related to the restatement was pending. The company said it could not reasonably estimate a loss range; an adverse outcome could materially affect results. A shareholder derivative action was also pending. A separate patent appeal was awaiting decision after oral argument in February 2017.
- Related-party exposure is notable: the CEO controlled or had interests in entities involved in leases, shared services, research, and development arrangements. The filing reports rent and shared-service charges, among other transactions. The CEO and affiliates held approximately 57.1% of outstanding shares at year-end and could exercise significant influence.
- Build-to-suit accounting included a $5.1 million estimated asset and corresponding liability for the El Segundo facility under construction. Future minimum lease payments were $25.4 million as of year-end.
Most important facts for investors to verify
- Confirm the issuer identity and reporting period: the provided filing is NantKwest’s 2016 10-K, not a filing in the name ImmunityBio, Inc.
- Review audited statements and notes for cash, marketable-security maturities and credit exposure, cash burn, lease obligations, and the basis for management’s runway estimate.
- Track subsequent clinical-trial data, safety findings, regulatory decisions, and whether the stated 2017 development milestones were achieved; the filing’s clinical claims are early-stage and not proof of efficacy.
- Assess the potential financial and governance effects of the restatement-related litigation, executive compensation and warrants, and related-party contracts.
- Check share dilution and capital allocation, including outstanding options and warrants and the ongoing authorization to repurchase shares.