To the Stockholders and the Board of Directors of Sunesis Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Sunesis Pharmaceuticals, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Overview
Description of Business
Sunesis Pharmaceutical, Inc. (“Sunesis” or the “Company”) is a biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of cancer. The Company’s primary activities since incorporation have been conducting research and development internally and through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, conducting clinical trials, and raising capital.
The Company’s lead program is vecabrutinib, formerly known as SNS-062, a non-covalent inhibitor of Bruton’s Tyrosine Kinase (“BTK”). Vecabrutinib is being studied in a Phase 1b/2 clinical trial in B-cell malignancies. In January 2017, the Company announced that its Investigational New Drug (“IND”) application with the U.S. Food and Drug Administration (“FDA”) for vecabrutinib had become effective. In July 2017, the Company announced the dosing of the first patient in a Phase 1b/2 study to assess the safety and activity of vecabrutinib in patients with advanced B-cell malignancies after two or more prior therapies, including ibrutinib or another covalent BTK inhibitor, and including patients with BTK C481 mutations.
The Company is also developing SNS-510, a PDK1 inhibitor licensed from Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”). Sunesis acquired from Takeda global commercial rights to several potential first-in class, preclinical inhibitors of the novel target PDK1, including SNS-510. Sunesis is currently characterizing SNS-510 in preclinical pharmacology and toxicology studies with the goal of filing an IND in 2019.
The Company is in a collaboration with Takeda for the development of TAK-580 (formerly MLN2480), an oral pan-RAF inhibitor, for which Takeda is conducting a multi-arm, open-label Phase 1b study in combination with various anticancer agents in adult patients with advanced solid tumor cancers.
Liquidity and Going Concern
The Company has incurred significant losses and negative cash flows from operations since its inception, and as of December 31, 2017, had cash, cash equivalents and marketable securities totaling $31.8 million and an accumulated deficit of $632.9 million.
The Company expects to continue to incur significant losses for the foreseeable future as it continues development of its kinase inhibitor pipeline, including its BTK inhibitor vecabrutinib. Following the decision to withdraw the European Marketing Authorization Application (“MAA”) for vosaroxin, the Company has prioritized development funding on kinase inhibitors with a focus on vecabrutinib. The Company has a limited number of products that are still in the early stages of approval and will require significant additional investment.
The Company’s cash, cash equivalents and marketable securities are not sufficient to support its operations for a period of twelve months from the date the financial statements are issued. These factors raise substantial doubt about its ability to continue as a going concern. The Company will require additional financing to fund working capital, repay debt and pay its obligations as they come due. Additional financing might include one or more offerings and one or more of a combination of equity securities, debt arrangements or partnership or licensing collaborations. However, there can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its operations or on terms favorable to the Company. If the Company is unsuccessful in its efforts to raise additional financing in the near term, the Company will be required to significantly reduce or cease operations. The principal payments due under the Loan Agreement have been classified as a current liability as of December 31, 2017 due to the considerations discussed above and the assessment that the material adverse change clause under the Loan Agreement is not within the Company's control. The Company has not been notified of an event of default by the Lender as of the date of the filing of this Form 10-K. The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern
.
50
Concentrations of Credit Risk
In accordance with its investment policy, the Company invests cash that is not currently being used for operational purposes. The policy allows for the purchase of low risk debt securities issued by: (a) the United States and certain European governments and government agencies, and (b) highly rated banks and corporations, denominated in U.S. dollars, Euros, or British pounds, subject to certain concentration limits. The policy limits maturities of securities purchased to no longer than 24 months and the weighted average maturity of the portfolio to 12 months. Management believes these guidelines ensure both the safety and liquidity of any investment portfolio the Company may hold.
Financial instruments that potentially subject the Company to concentrations of credit risk generally consist of cash, cash equivalents and marketable securities. The Company is exposed to credit risk in the event of default by the institutions holding its cash, cash equivalents and any marketable securities to the extent of the amounts recorded in the balance sheets.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new revenue recognition standard which amends revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance also requires improved disclosures on the nature, amount, timing, and uncertainty of revenue that is recognized. In August 2015, the FASB issued an update to the guidance to defer the effective date by one year, such that the new standard will be effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. The standard allows for adoption using a full retrospective method or a modified retrospective method. The Company will apply the new guidance effective January 1, 2018 using the modified retrospective method to contracts that are not completed as of January 1, 2018.
The Company’s revenues are derived from license arrangements. The consideration the Company is eligible to receive under the license arrangements includes upfront payments, milestone payments, and royalties. In the fourth quarter of 2017, the Company completed its assessment of the new guidance and the adoption of this guidance, including the cumulative effect of any adjustment to the opening balance of retained earnings, will not have a material impact to its consolidated financial statements.
In January 2016, the FASB issued
Accounting Standards Update (“ASU”)
No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU 2016-01 made modifications to how certain financial instruments should be measured and disclosed, including using the exit price notion when measuring the fair value, separating the presentation of financial assets and financial liabilities by measurement category on the balance sheet and eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods. The Company will evaluate the guidance and present the impact in its consolidated financial statements at the time of adoption.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. ASU 2016-02 is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU 2016-02 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter. As currently issued, entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13,
Measurement of Credit Losses on Financial Instruments
, which will require a reporting entity to use a new forward-looking impairment model for most financial assets that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, credit losses will be recognized as allowances rather than as reductions in amortized cost. The standard will be effective for annual periods beginning after December 15, 2019, with early adoption permitted beginning in 2019. Entities will apply the guidance as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company will evaluate the guidance and present the impact in its consolidated financial statements at the time of adoption.
51
In May 2017, the FASB issued ASU No. 2017-09,
Compen
sation - Stock Compensation (Topic 718): Scope of Modification Accounting
. The new guidance does not change the accounting for modifications but provides clarification on when modification accounting should be used for changes to the terms or conditions of
a share-based payment award. Specifically, modification accounting would not apply if the fair value, vesting conditions, and classification of the award are the same immediately before and after the modification. The amendments in this Update should be a
pplied prospectively to an award modified on or after the adoption date and is effective for annual periods beginning after December 15, 2017. The Company has determined the adoption of ASU 2017-09 will not have a material impact on its consolidated financ
ial statements and related disclosures.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Sunesis Europe Limited, a United Kingdom corporation, and Sunesis Pharmaceuticals (Bermuda) Ltd., a Bermuda corporation, as well as a Bermuda limited partnership, Sunesis Pharmaceuticals International LP. All intercompany balances and transactions have been eliminated in consolidation.
Segment Reporting
Management has determined that the Company operates as a single reportable segment.
Significant Estimates and Judgments
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes thereto. Actual results could differ materially from these estimates. Estimates, assumptions and judgments made by management include those related to the valuation of equity and related instruments, revenue recognition, stock-based compensation and clinical trial accounting.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid securities with original maturities of three months or less from the date of purchase to be cash equivalents, which generally consist of money market funds and corporate debt securities. Marketable securities consist of securities with original maturities of greater than three months, which may include U.S. and European government obligations and corporate debt securities.
Management determines the appropriate classification of securities at the time of purchase
and reevaluates such designation at each balance sheet date. The Company generally classifies its entire investment portfolio as available-for-sale. The Company views its available-for-sale portfolio as available for use in current operations. Accordingly, the Company classifies all investments as short-term, even though the stated maturity may be more than one year from the current balance sheet date. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive
income
(loss), which is a separate component of stockholders’
equity
except for unrealized loss determined to be other than temporary, which would be recorded within Other income, net.
The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in other income, net in the statements of operations and comprehensive loss. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities, if any, are also recorded to other income, net. The cost of securities sold is based on the specific-identification method.
Invoices for certain services provided to the Company are denominated in foreign currencies. To manage the risk of future movements in foreign exchange rates that would affect such amounts, the Company may purchase certain European currencies or highly-rated investments denominated in those currencies, subject to similar criteria as for other investments defined in the Company’s investment policy. There is no guarantee that the related gains and losses will substantially offset each other, and the Company may be subject to significant exchange gains or losses as currencies fluctuate from quarter to quarter. To date, the Company has purchased Euros and Euro-denominated obligations of foreign governments and corporate debt. As of December 31, 2017 and December 31, 2016, the Company held investments denominated in Euros with an aggregate fair value of $0.8 million and $0.7 million, respectively. Any cash, cash equivalent and short-term investment balances denominated in foreign currencies are recorded at their fair value based on the current exchange rate as of each balance sheet date. The resulting exchange gains or losses and those from amounts payable for services originally denominated in foreign currencies are both recorded in other income, net in the statements of operations and comprehensive loss.
52
Fair Value Measurements
The Company measures cash equivalents and marketable securities at fair value on a recurring basis using the following hierarchy to prioritize valuation inputs, in accordance with applicable GAAP:
|
Level 1 -
|
quoted prices (unadjusted) in active markets for identical assets and liabilities that can be accessed at the measurement date
|
|
Level 2 -
|
inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly
|
|
Level 3 -
|
unobservable inputs
|
The Company’s Level 2 valuations of marketable securities are generally derived from independent pricing services based upon quoted prices in active markets for similar securities, with prices adjusted for yield and number of days to maturity, or based on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets.
The
carrying amounts of the Company’s financial instruments, including
cash, prepayments, accounts payable, accrued liabilities, deferred revenue and notes payable approximated their fair value as of December 31, 2017 and December 31, 2016.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease.
Accounting for Royalty Agreement
The payment of $25.0 million by RPI under the Royalty Agreement (see Note 6) is non-refundable, and no revenue participation right payments will be made unless vosaroxin
is
commercialized. Accordingly, the payment received from RPI is being accounted for as a payment for the Company to use commercially reasonable efforts to commercialize vosaroxin. Therefore, the amount is to be deferred and recognized as revenue over the projected performance period under the agreement.
T
he payment
, less $3.1 million
representing the fair value of the warrants granted under the arrangement, was
initially
classified as deferred revenue and is being amortized to revenue over the related performance period
. The fair value of the warrants was recorded to additional paid-in capital.
Accounting for Notes Payable
The accounting for certain fees and expenses related to the Loan Agreement (see Note 8) is as follows. The facility fee is being accounted for as a debt discount and classified within notes payable on the Company’s balance sheet. The fair value of the warrants issued in connection with the Loan Agreement have been recorded as a debt discount within notes payable and an increase to additional paid-in capital on the Company’s balance sheet. The debt discount is being amortized as interest expense over the term of the loan using the effective interest method. The final payment is being accreted as interest expense over the term of the loans using the effective interest method. The legal fees are being accounted for as deferred debt issuance costs within assets on the Company’s balance sheet and are being amortized as other income, net over the term of the loans using the effective interest method.
Revenue Recognition
Revenue arrangements with multiple deliverables are accounted for in accordance with the Financial Accounting Standards Board Accounting Standards Codification, Subtopic 605-25,
Multiple-Element Arrangements
(“ASC 605-25”). Under ASC 605-25, revenue arrangements with multiple deliverables are divided into separate units of accounting based on whether certain criteria are met, including whether the delivered item has stand-alone value to the customer. Consideration is allocated among the separate units of accounting based on their respective fair value, and the applicable revenue recognition is applied to each of the separate units.
Non-refundable fees where the Company has no continuing performance obligations are recognized as revenues when collection is reasonably assured. In situations where continuing performance obligations exist, non-refundable fees are deferred and recognized ratably over the projected performance period.
Milestone payments from license or collaboration agreements which are substantive and at risk at the time the agreement is executed are recognized upon completion of the applicable milestone event. Royalty revenues, if any, will be recognized based on reported product sales by third-party licensees. Research funding from any future agreement will be recognized as the related research services are performed.
53
Research and Development
Research and development expense consists primarily of: (a) clinical trial costs, which include payments for work performed by contract research organizations (“CROs”), clinical trial sites, labs and other clinical service providers, and for drug packaging, storage and distribution; (b) drug manufacturing costs, which include costs for producing drug substance and drug product, and for stability and other testing; (c) personnel costs for related permanent and temporary employees; (d) other outside services and consulting costs; and (e) payments under license agreements. All research and development costs are expensed as they are incurred.
Clinical Trial Accounting
The Company records accruals for estimated clinical trial costs, which include payments for work performed by CROs and participating clinical trial sites. These costs are generally a significant component of research and development expense. Costs incurred for setting up clinical trial sites for participation in trials are generally non-refundable, and are expensed as incurred, with any refundable advances related to enrollment of the first patient recorded as prepayments and assessed for recoverability on a quarterly basis. Costs related to patient enrollment are accrued as patients progress through the clinical trial, including amortization of any first-patient prepayments. This amortization generally matches when the related services are rendered, however, these cost estimates may or may not match the actual costs incurred by the CROs or clinical trial sites, and if the Company has incomplete or inaccurate information, the clinical trial accruals may not be accurate. The difference between accrued expenses based on the Company’s estimates and actual expenses have not been significant to date.
Stock-Based Compensation
The Company grants options to purchase common stock to its employees, directors and consultants under its stock option plans. Under the Company’s Employee Stock Purchase Plan, eligible employees can also purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning of a 12-month offering period or at the end of one of the two related six-month purchase periods.
The Company values these share-based awards using the Black-Scholes option valuation model (the “Black-Scholes model”). The determination of fair value of share-based payment awards on the date of grant using the Black-Scholes model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.
Foreign Currency
Transactions that are denominated in a foreign currency are translated into U.S. dollars at the current exchange rate on the transaction date. Any foreign currency-denominated monetary assets and liabilities are subsequently remeasured at current exchange rates as of each balance sheet date, with gains or losses on foreign exchange recognized in other income, net in the statements of operations and comprehensive loss.
Income Taxes
The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the tax basis of assets and liabilities and their basis for financial reporting. Deferred tax assets or liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company’s policy is to recognize interest charges and penalties in other income, net in the statements of operations and comprehensive loss.
3. Loss per Common Share
Basic loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing (a) net loss, less any anti-dilutive amounts recorded during the period, by (b) the weighted-average number of common shares outstanding for the period plus dilutive potential common shares as determined using the treasury stock method for options and warrants to purchase common stock.
54
The following table sets forth the computation of basic and diluted loss per common share for the periods presented (in thousands,
except per share amounts):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss—basic
|
|
$
|
(35,458
|
)
|
|
$
|
(38,023
|
)
|
|
$
|
(36,676
|
)
|
Net loss—diluted
|
|
$
|
(35,458
|
)
|
|
$
|
(38,023
|
)
|
|
$
|
(36,676
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding—basic
|
|
|
24,516
|
|
|
|
15,688
|
|
|
|
12,156
|
|
Weighted-average common shares outstanding—diluted
|
|
|
24,516
|
|
|
|
15,688
|
|
|
|
12,156
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.45
|
)
|
|
$
|
(2.42
|
)
|
|
$
|
(3.02
|
)
|
Diluted
|
|
$
|
(1.45
|
)
|
|
$
|
(2.42
|
)
|
|
$
|
(3.02
|
)
|
The following table represents the potential common shares issuable pursuant to outstanding securities as of the related period end dates that were excluded from the computation of diluted loss per common share because their inclusion would have had an anti-dilutive effect (in thousands):
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Warrants to purchase shares of common stock
|
|
|
5,218
|
|
|
|
218
|
|
|
|
938
|
|
Convertible preferred stock
|
|
|
6,331
|
|
|
|
4,270
|
|
|
|
3,353
|
|
Options to purchase shares of common stock
|
|
|
3,532
|
|
|
|
2,697
|
|
|
|
2,153
|
|
Outstanding securities not included in calculations
|
|
|
15,081
|
|
|
|
7,185
|
|
|
|
6,444
|
|
4. Financial Instruments
Financial Assets
The following tables summarize the estimated fair value of the Company’s financial assets measured on a recurring basis as of the dates indicated, which were comprised solely of available-for-sale marketable securities with remaining contractual maturities of one year or less (in thousands):
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Valuation
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
December 31, 2017
|
|
Input Level
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Money market funds
|
|
Level 1
|
|
$
|
20,470
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,470
|
|
U.S. corporate debt obligations
|
|
Level 2
|
|
|
3,282
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
3,277
|
|
U.S. commercial paper
|
|
Level 2
|
|
|
1,498
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
1,496
|
|
Total available-for-sale securities
|
|
|
|
|
25,250
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
25,243
|
|
Less amounts classified as cash equivalents
|
|
|
|
|
(20,470
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,470
|
)
|
Amounts classified as marketable securities
|
|
|
|
$
|
4,780
|
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
4,773
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Valuation
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
December 31, 2016
|
|
Input Level
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Money market funds
|
|
Level 1
|
|
$
|
3,270
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,270
|
|
U.S. treasury securities
|
|
Level 1
|
|
|
16,029
|
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
|
16,020
|
|
U.S. certificates of deposit
|
|
Level 1
|
|
|
4,868
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
4,868
|
|
U.S. corporate debt obligations
|
|
Level 2
|
|
|
11,617
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
11,606
|
|
U.S. commercial paper
|
|
Level 2
|
|
|
2,521
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
2,519
|
|
Total available-for-sale securities
|
|
|
|
|
38,305
|
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
38,283
|
|
Less amounts classified as cash equivalents
|
|
|
|
|
(3,751
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,751
|
)
|
Amounts classified as marketable securities
|
|
|
|
$
|
34,554
|
|
|
$
|
—
|
|
|
$
|
(22
|
)
|
|
$
|
34,532
|
|
55
The following table summarizes the available-for-sale securities that were in an unrealized loss position as of December 31, 2017,
each
having been in such a position for less than 12 months, and none deemed to be other-than-temporarily impaired (in thousands):
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
December 31, 2017
|
|
Losses
|
|
|
Value
|
|
U.S. corporate debt obligations
|
|
|
(5
|
)
|
|
|
3,277
|
|
U.S. commercial paper
|
|
|
(2
|
)
|
|
|
1,496
|
|
Total available-for-sale securities in an unrealized loss
position
|
|
$
|
(7
|
)
|
|
$
|
4,773
|
|
No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of these securities. The gross unrealized losses are not considered to be significant and have generally been for relatively short durations. The Company does not intend to sell these securities before maturity and it is not likely that they will need to be sold prior to the recovery of their amortized cost basis. There were no sales of available-for-sale debt securities in the years ended December 31, 2017,
2016
and
2015
.
5. Other Accrued Liabilities
Other accrued liabilities as of December 31 were as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
Accrued outside services
|
|
$
|
1,096
|
|
|
$
|
1,192
|
|
Accrued professional services
|
|
|
471
|
|
|
|
381
|
|
Other accruals
|
|
|
3
|
|
|
|
118
|
|
Total other accrued liabilities
|
|
$
|
1,570
|
|
|
$
|
1,691
|
|
6. Royalty Agreement
In March 2012, the Company entered into a Revenue Participation Agreement (the “Royalty Agreement”), with RPI Finance Trust (“RPI”), an entity related to Royalty Pharma. In September 2012, pursuant to the provisions of the Royalty Agreement, RPI made a $25.0 million cash payment to the Company. The payment, less $3.1 million representing the fair value of the warrants granted under the arrangement, was initially classified as deferred revenue and amortized to revenue over the related performance period.
Based on the regulatory interactions with the FDA and EMA outlined in Note 1, the Company extended the end date of the estimated performance period through which the balance of deferred revenue was be amortized from September 30, 2016 to March 31, 2017. As a result, the quarterly amortization was adjusted from $0.9 million per quarter to $0.6 million per quarter, commencing with the quarter ended September 30, 2015.
Revenue participation right payments will be made to RPI when and if vosaroxin is commercialized, at a rate of 6.75% of net sales of vosaroxin, on a product-by-product and country-by-country basis world-wide through the later of: (a) the expiration of the last to expire of certain specifically identified patents; (b) 10 years from the date of first commercial sale of such product in such country; or (c) the expiration of all applicable periods of data, market or other regulatory exclusivity in such country with respect to such product.
7. License Agreements
Overview
In August 2004, the Company entered into a collaboration agreement with Biogen MA, Inc. (“Biogen”) to discover, develop and commercialize small molecule inhibitors of the human protein Raf kinase, including family members Raf-1, A-Raf, B-Raf and C-Raf (collectively “Raf”) and up to five additional targets that play a role in oncology and immunology indications (the “Biogen OCA”). In connection with the Company’s June 2008 restructuring, the parties agreed to terminate the research obligations and related funding as of June 30, 2008.
56
In March 2011, as part of a series of agreements among the Company, Biogen and Millennium Pharmaceutical
s, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, (“Takeda”), the Company entered into: (a) an amended and restated collaboration agreement with Biogen (the “Biogen 1st ARCA”); (b) a license agreement with Takeda (the “Takeda Agr
eement”); and (c) a termination and transition agreement among the Company, Biogen and Takeda (the “Termination and Transition Agreement”).
The Termination and Transition Agreement provided for (a) the termination of Biogen’s exclusive rights under the Biogen OCA to all discovery programs under such agreement other than for small molecule inhibitors of the human protein Bruton’s tyrosine kinase (“BTK”); (b) the permitted assignment to Takeda of all related Company collaboration assets and rights to Raf kinase and the human protein phosphoinositide-dependent kinase-1 (“PDK1”); and (c) the payment of $4.0 million upfront from Takeda to the Company, which was recorded as revenue in March 2011.
Biogen Idec
The Biogen 1st ARCA amended and restated the Biogen OCA, to provide for the discovery, development and commercialization of small molecule BTK inhibitors. Under this agreement, the Company no longer has research obligations, but licenses granted to Biogen with respect to the research collaboration under the Biogen OCA (other than the licenses transferred to Takeda under the Takeda Agreement) remain in effect.
In June 2012, the Company received an event-based payment and recognized as revenue of $1.5 million from Biogen for the advancement of pre-clinical work in connection with the Biogen 1st ARCA. Under this agreement, the Company is eligible to receive up to an additional $58.5 million in pre-commercialization event-based payments related to the development by Biogen of the first two indications for licensed products against the BTK target. The Company is also eligible to receive royalty payments depending on related product sales, if any.
In December 2013, the Company entered into a second amended and restated collaboration agreement with Biogen (the “Biogen 2nd ARCA”), to provide the Company with an exclusive worldwide license to develop, manufacture and commercialize
vecabrutinib
, a BTK inhibitor synthesized under the Biogen 1st ARCA, solely for oncology indications. During the third quarter of 2017, the Company made a milestone payment of $2.5 to Biogen upon the dosing of the first patient in a Phase 1b/2 study to assess the safety and activity of
vecabrutinib
in patients with advanced B-cell malignancies after two or more prior therapies, including ibrutinib or other covalent BTK inhibitor, and including patients with BTD C481 mutations. The payment was recorded in the research and development expenses line item in the accompanying consolidated statement of operations. The Company may also be required to make tiered royalty payments based on percentages of net sales of vecabrutinib, if any, in the mid-single-digits. All other of Sunesis’ rights and obligations contained in the Biogen 1st ARCA remain unchanged, except that potential future royalty payments to Sunesis were reduced to equal those amounts due to Biogen for potential future sales of
vecabrutinib
.
Takeda
Under the Takeda Agreement, the Company granted exclusive licenses to products against two oncology targets originally developed under the Biogen OCA, Raf and PDK1, under substantially the same terms as under the Biogen OCA.
In January 2014, the Company entered into an amended and restated license agreement with Takeda (the “Amended Takeda Agreement”), to provide the Company with an exclusive worldwide license to develop and commercialize preclinical inhibitors of PDK1. In connection with
the
execution of the Amended Takeda Agreement, the Company paid an upfront fee of $0.4 million and may be required to make up to $9.2 million in pre-commercialization milestone payments depending on its development of PDK1 inhibitors and tiered royalty payments based on percentages of net sales, if any, beginning in the mid-single-digits and not to exceed the low-teens.
With respect to the Raf target product rights that were originally licensed to Takeda under the Takeda Agreement, the Company may in the future receive up to $57.5 million in pre-commercialization event-based payments related to the development by Takeda of the first two indications for each of the licensed products directed against the Raf target and royalty payments depending on related product sales. Takeda is currently conducting a Phase 1b clinical study of an oral investigative drug, TAK-580, which is licensed to them under the Amended Takeda Agreement.
8. Notes Payable
On March 31, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with
Western Alliance Bank (“Western Bank”) and Solar Capital Ltd. (“Solar Capital,” and collectively with Western Bank, the “Lenders”) and Western Alliance, as Collateral Agent (the “Collateral Agent”). Pursuant to the terms of the Loan Agreement, the Lenders provided the
57
Company with a loan in the principal amount of $15,000,000 of which $12,500,000 was funded on March 31, 2016 and $2,500,000 was funded on April 1, 2016, for working capital, to fund its general business requirements and
to repay indebtedness of the Company to Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation (collectively, the “Existing Lenders”) pursuant to the Loan and Security Agreement, dated as of October 18, 2011, entered into by and
among the Existing Lenders and the Company (the “Oxford Loan Agreement”). On March 31, 2016, the Company used $7.2 million of the loan proceeds to repay the outstanding principal of $6.0 million, a final payment fee of $1.2 million and accrued interest of
$45,000 under the Oxford Loan Agreement. The Company paid the Lenders a $0.1 million facility fee and $0.1 million in legal fees.
On June 30, 2017, the Company entered into an amendment to the existing Loan Agreement (the “Amended Loan Agreement”). Under terms of the Amended Loan Agreement, the Company will be required to pay interest on the borrowings under the Loan Agreement at a per annum rate equal to 8.54% plus the then effective one-month U.S. LIBOR rate. The Amendment modified the loan repayment terms to be interest-only through July 1, 2018, followed by twenty-two (22) equal monthly payments of principal and interest through the maturity date, contingent upon receipt of at least Fifteen Million Dollars ($15,000,000) in unrestricted cash proceeds received after June 1, 2017 from the issuance by the Company of new equity securities any time after June 1, 2017 through December 31, 2017. Thereafter and until the scheduled maturity date of April 1, 2020, in addition to interest accrued during such period, the monthly payments will include an amount equal to the outstanding principal divided by 28 months, unless the interest only period is extended by a further six months, in which case the amortization period will be 22 months. In addition to principal and interest, a final payment equal to $312,500 will be due upon maturity or such earlier date specified in the Loan Agreement. If the Company repays all amounts owed under the Loan Agreement prior to the maturity date, the Company will pay a prepayment fee equal 1.0% of the amount prepaid if the prepayment occurs after June 30, 2017 through March 31, 2018 and 0.5% of the amount prepaid if the prepayment occurs thereafter.
On October 31, 2017, the Company entered into a second amendment to the Amended Loan Agreement (the “Second Amendment”). The Second amendment modified the loan repayment terms to add two additional extended interest-only periods beyond July 1, 2018. If under the terms of the Amended Loan Agreement, the interest-only period has been extended to July 1, 2018, the Company may further extend the interest-only period to October 1, 2018, contingent upon the receipt of at least Fifteen Million dollars ($15,000,000) in unrestricted net cash proceeds from the issuance by the Company of new equity securities or as a non-refundable upfront payment on a new business development agreement or royalty financing agreement (the “New Capital”), on or after October 24, 2017, but on or prior to December 31, 2017. Subsequently, the Company may further extend the interest-only period to January 1, 2019, contingent upon the receipt of at least Twenty-Five Million dollars ($25,000,000) in New Capital (inclusive of any prior amounts received after October 24, 2017), on or after October 24, 2017, but on or prior to September 15, 2018.
The facility fee and legal fees related to the debt are being accounted for as a debt discount and classified
within notes payable on the Company’s balance sheet and amortized as interest expense over the term of the loan using the effective interest method. The final payment is being accreted as interest expense over the term of the loan using the effective interest method and is included as a component of non-current portion of notes payable on the Company’s consolidated balance sheet.
In conjunction with the Loan Agreement, the Lenders were issued five-year warrants to purchase an
aggregate of up to 208,002 shares of the Company’s common stock at a per share exercise price of $3.2454. The fair value of the warrants issued was estimated to be $0.5 million using a Black-Scholes valuation model with the following assumptions: common stock price at issuance of $3.24; exercise price of $3.2454; risk-free interest rate of 1.21% based upon observed risk-free interest rates; expected volatility of 111.96% based on the Company’s average historical volatility; expected term of five years, which is the contractual life of the warrants; and a dividend yield of 0%. The fair value was recorded as a debt discount within notes payable and an increase to additional paid-in capital on the Company’s balance sheet. The debt discount is being amortized as interest expense over the term of the Loan Agreement, using the effective interest method.
Pursuant to the Loan Agreement and the amendments, the Company is bound by a variety of affirmative covenants during the term of the Loan Agreement, including, without limitation, certain information delivery requirements, notice requirements and obligations to maintain certain insurance. Additionally, the Company is bound by certain negative covenants setting forth actions that are not permitted to be taken during the term of the Amended Loan Agreement without the Lenders’ consent, including, without limitation, incurring certain additional indebtedness, making certain asset dispositions, entering into certain mergers, acquisitions or other business combination transactions or incurring any non-permitted lien or other encumbrance on the Company’s assets. Upon the occurrence of an event of default under the Amended Loan Agreement (subject to cure periods for certain events of default), all amounts owed by the Company thereunder would begin to bear interest at a rate that is 5.0% higher than the rate that would otherwise be applicable and may be declared immediately due and payable by the Collateral Agent. Events of default under the Amended Loan Agreement include, among other things, the following: the occurrence of certain bankruptcy events; the failure to make payments under the Loan Agreement when due; the occurrence of a material impairment on the Collateral Agent’s security interest over the collateral, a material adverse change in the business, operations or condition (financial or otherwise) of the Company or material impairment of the prospect of repayment of the obligations under the Amended Loan Agreement; the occurrence of a default under
58
certain other agreements entered into by the Company; the rendering of certain types of judgments against the Company; the revocation of certain government approvals of the
Company; any breach by the Company of any covenant (subject to cure periods for certain covenants) made in the Amended Loan Agreement; and the failure of any representation or warranty made by the Company in connection with the Amended Loan Agreement to be
correct in all material respects when made. The Amended Loan Agreement defines certain events of default, including instances of a Material Adverse Change in its operations, which may require prepayment of the outstanding loan. In the event of default by
the Company under the Loan Agreement, the Lenders would be entitled to exercise their remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the Loan Agreement, w
hich could harm the Company's financial condition. The Company was in compliance with all applicable covenants set forth in the Loan Agreement as of December 31, 2017 and 2016.
The principal payments due under the Loan Agreement have been classified as a
current liability at December 31, 2017 due to the considerations discussed in Note 1 and the assessment that the material adverse change clause under the Loan Agreement is not within the Company's control. The Company has not been notified of an event of d
efault by the Lenders as of the date of the filing of this Form 10-K.
The Collateral Agent, for the benefit of the Lenders, has a perfected security interest in substantially all of the Company’s property, rights and assets, except for intellectual property, to secure the payment of all amounts owed to the Lenders under the Loan Agreement.
Aggregate future minimum payments due under the Loan Facility as of December 31, 2017
were as follows (in thousands):
Year ending December 31,
|
|
Total
|
|
2018
|
|
|
1,586
|
|
2019
|
|
|
5,442
|
|
2020
|
|
|
2,014
|
|
Total minimum payments
|
|
|
9,042
|
|
Less amount representing interest
|
|
|
(1,542
|
)
|
Total notes payable as of December 31, 2017
|
|
|
7,500
|
|
Less unamortized debt discount and issuance costs
|
|
|
(296
|
)
|
Less current portion of notes payable
|
|
|
(7,204
|
)
|
Non-current portion of notes payable
|
|
$
|
—
|
|
9. Commitments and Contingencies
Commitments
The Company’s operating lease obligation
s
as of December 31, 2017
relate
solely
to the leas
ing
of office space in a building at 395 Oyster Point Boulevard in South San Francisco, California, which is currently the Company’s headquarters.
In January 2014, a lease for 15,378 square feet was entered into with an expiry date of April 30, 2015. In June 2014, the lease was amended to extend the expiration date to June 30, 2015, and to add 6,105 square feet of additional office space within the same building. The lease has been amended in January 2015 and September 2015 to extend the expiration date to December 31, 2016
and in September 2016, respectively and in May 2016, the lease was again amended to extend the expiration date to June 30, 2018. The lease was last amended in December 2017 to remove the 6,105 square feet of additional office space added in June 2014 and to extend the expiration date to June 30, 2021, with an option to extend the lease for two additional years.
Aggregate non-cancelable future minimum rental payments under operating leases as of December 31, 2017, were as follows (in thousands):
Year Ending December 31,
|
|
Payments
|
|
2018
|
|
$
|
514
|
|
2019
|
|
$
|
562
|
|
2020
|
|
$
|
579
|
|
2021
|
|
$
|
294
|
|
Total rental payments
|
|
$
|
1,949
|
|
The Company recognizes rent expense on a straight-line basis. The Company recorded rent expense of $0.7 million, $0.6
million and $0.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
59
Contingencies
From time to time, the Company may be involved in legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of its business or otherwise. The ultimate outcome of any litigation is uncertain and unfavorable outcomes could have a negative impact on the Company’s results of operations and financial condition. Regardless of outcome, litigation can have an adverse impact on the Company because of the defense costs, diversion of management resources and other factors. The Company is not currently involved in any material legal proceedings.
10. Stockholders’ Equity
Preferred Stock
The Company has 10,000,000 shares of authorized preferred stock available for issuance in one or more series. Upon issuance, the Company can determine the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. There were 17,697 shares and 17,897 shares of preferred stock outstanding as of December 31, 2017
and
2016, respectively. These shares are non-voting Series B, Series C, and Series D Convertible Preferred Stock at a price of $840, $3,850, and $2,000 per share, respectively. Each share of non-voting Series B is convertible into 166 shares of common stock and each share of non-voting Series C Stock and Series D Stock is convertible into 1000 shares of common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.98% of the total number of shares of common stock then outstanding
. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series B, Series C, and Series D Stock will receive a payment equal to $0.0001 per share of Series B, Series C, and Series D Stock before any proceeds are distributed to the holders of Common Stock. Shares of Series B, Series C, and Series D Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series B and Series C Stock will be required to amend the terms of the Series B, Series C, and Series D Stock. Shares of the Series B, Series C, and Series D Stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors, and will rank:
|
•
|
senior to all of the Company’s Common Stock;
|
|
•
|
senior to any class or series of the Company’s capital stock hereafter created specifically ranking by its terms junior to the Series B, Series C, and Series D Stock;
|
|
•
|
on parity with any class or series of the Company’s capital stock hereafter created specifically ranking by its terms on parity with the Series B, Series C, and Series D Stock;
|
|
•
|
junior to any class or series of the Company’s capital stock hereafter created specifically ranking by its terms senior to the Series B, Series C, and Series D Stock; in each case, as to distributions of assets upon the Company’s liquidation, dissolution or winding up whether voluntarily or involuntarily.
|
Common Stock
Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors. Under the terms of the Loan Agreement with the Lenders, the Company is precluded from paying cash dividends without the prior written consent of the Lenders.
Underwritten Offerings
In December 2015, the Company completed underwritten offering of (i) 1,832,698 shares of its common stock, that included the
exercise of the underwriter's over-allotment option of 239,047 shares, at a price of $5.04 per share, and (ii) 20,200 shares of its non-voting Series B Convertible Preferred Stock (“Series B Stock”) at a price of $840.00 per share. Gross proceeds from the sale were $26.2 million and net proceeds were $25.2 million. Each share of non-voting Series B Stock is convertible into 166 shares of Sunesis common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.98% of the total number of shares of Sunesis common stock then outstanding.
60
In October 2016, the Company completed underwritten offering of (i) 5,675,825 shares of its common stock at a price of $3.85 per share, and (ii) 1,558
shares of its non-voting Series C Convertible Preferred Stock (“Series C Stock”) at a price of $3,850.00 per share. Gross proceeds from the sale were $27.9 million and net proceeds were $25.9 million. Each share of non-voting Series C Stock is convertible
into 1,000 shares of Sunesis common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.98% of the total number of shares of Sunesis common stock then outstanding.
In October 2017, the Company completed underwritten offerings of (i) 7,500,000 shares of its common stock and accompanying warrants to purchase 3,750,000 shares of its common stock at a price to the public of $2.00 for each share of common stock and warrant to purchase 0.5 shares of common stock, and (ii) 2,500 shares of its non-voting Series D Convertible Preferred Stock (“Series D Stock”) and accompanying warrants to purchase 1,250,000 shares of its common stock at a price to the public of $2,000 for each share of Series D Stock and warrant to purchase 500 shares of common stock. The exercise price of the warrants is $3.00 per whole share of common stock. Each share of non-voting Series D Stock is convertible into 1,000 shares of its common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.98% of the total number of shares of its common stock then outstanding. Gross proceeds from the sale were $20.0 million and net proceeds were $18.5 million.
Controlled Equity Offerings
In August 2011, the Company entered into a Controlled Equity Offering
SM
sales agreement (the “Sales Agreement”), with Cantor Fitzgerald & Co. (“Cantor”), as agent and/or principal, pursuant to which the Company could issue and sell shares of its common stock having an aggregate gross sales price of up to $20.0 million. In April 2013, the Sales Agreement was amended to provide for an increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. The Company amended the Sales Agreement again in November, 2017, to provide for an increase in the aggregate offering price under the Sales Agreement to $45.0 million. The Company will pay Cantor a commission of 3.0% of the gross proceeds from any common stock sold through the Sales Agreement, as amended.
During the year ended December 31, 2017, the Company sold an aggregate of
5,321,151
shares of common stock under the Sales Agreement, as amended, at an average price of approximately $
2.72
per share for gross and net proceeds of $
14.2
million, after deducting Cantor’s commission. As of December 31, 2017, $
45.0
million of common stock remained available to be sold under this facility.
Equity Incentive Plans
The Company grants options to purchase shares of its common stock primarily to: (i) new employees, of which 25% of the shares subject to such options become exercisable on the first anniversary of the vesting commencement date, and 1/48th of the shares subject to such options become exercisable each month over the remainder of the four-year vesting period, (ii) existing employees with various vesting schedules over three to four years, (iii) new non-employee members of the board of directors, of which 50% of the shares subject to such options become exercisable on each of the first and second anniversary of the vesting commencement date, and (iv) continuing non-employee members of the board of directors, of which 1/24th of the shares subject to such options become exercisable each month following the date of grant over a two-year vesting period.
On March 15, 2011, the Company’s Board of Directors adopted, and on June 3, 2011, the Company’s stockholders approved, the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan is intended as the successor to and continuation of the Company’s 1998 Stock Plan, 2001 Stock Plan, 2005 Equity Incentive Award Plan and 2006 Employment Commencement Incentive Plan (collectively, the “Prior Plans”). No additional stock awards will be granted under the Prior Plans.
The Company initially reserved a total of 1,006,976 shares of common stock for issuance under the 2011 Plan, which is the sum of (i) the 89,967 shares remaining available as of the Effective Date under the Prior Plans, (ii) an additional 733,333 new shares, and (iii) that portion of the 183,676 shares underlying stock options granted and currently outstanding under the Prior Plans that expire or terminate for any reason prior to exercise or settlement or that are forfeited because of the failure to meet a contingency or condition required to vest such shares.
The number of shares of common stock available for issuance under the 2011 Plan automatically increases on January 1st of each year for a period of 10 years commencing on January 1, 2012 by an amount equal to: (i) 4.0% of the Company’s outstanding shares of common stock on December 31st of the preceding calendar year, or (ii) a lesser amount determined by the Board of Directors. On January 1, 2017 and 2016,
in accordance with the above,
the number of shares of common stock available for issuance under the 2011 Plan was increased by 836,981 and 576,785 shares, respectively
.
During the year ended December 31, 2017, options to purchase
2,105,293
shares of the Company’s common stock were granted under the 2011 Plan. As of December 31, 2017, there were
82,585
shares available for future grants under the 2011 Plan.
61
Employee Stock Purchase Plans
On March 5, 2011, the Company’s Board of Directors adopted, and on June 3, 2011, the Company’s stockholders approved, the 2011 Employee Stock Purchase Plan (the “2011 ESPP”).
The 2011 ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. Eligible employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the common stock at (i) the beginning of a 12-month offering period, or (ii) at the end of one of the two related 6-month purchase periods. No participant in the 2011 ESPP may be issued or transferred shares of common stock valued at more than $25,000 per calendar year.
The Company initially reserved a total of 83,333 shares of common stock for issuance under the 2011 ESPP. The number of shares of common stock available for issuance under the 2011 ESPP automatically increases on January 1st of each year for a period of 10 years commencing on January 1, 2012 by an amount equal to: (i) 1.0% of the Company’s outstanding shares of common stock on December 31st of the preceding calendar year, or (ii) a lesser amount determined by the Board of Directors.
A total of
87,020
and 59,086 shares were issued under the 2011 ESPP during the year ended December 31, 2017 and December 31, 2016, respectively. As of December 31, 2017, there were 168,404 shares available for future issuance under the ESPP.
Warrants
Warrants to purchase shares of the Company’s common stock outstanding as of December 31, 2017 were as follows (in thousands, except per share amounts):
|
|
|
|
|
|
Exercise Price
|
|
|
|
Date Issued
|
|
Shares
|
|
|
Per Share
|
|
|
Expiration
|
February 2015
|
|
|
10
|
|
|
$
|
13.32
|
|
|
February 2020
|
March 2016
|
|
|
208
|
|
|
$
|
3.25
|
|
|
March 2021
|
October 2017
|
|
|
5,000
|
|
|
$
|
3.00
|
|
|
October 2018
|
Total warrants outstanding and exercisable
|
|
|
5,218
|
|
|
|
|
|
|
|
Reserved Shares
Shares of the Company’s common stock reserved for future issuance as of December 31, 2017
were as follows (in thousands):
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
|
|
|
|
Total
|
|
|
|
for Future
|
|
|
Outstanding
|
|
|
Shares
|
|
|
|
Grant
|
|
|
Securities
|
|
|
Reserved
|
|
Warrants
|
|
|
—
|
|
|
|
5,218
|
|
|
|
5,218
|
|
Convertible preferred stock
|
|
|
—
|
|
|
|
6,331
|
|
|
|
6,331
|
|
Stock option plans
|
|
|
83
|
|
|
|
3,532
|
|
|
|
3,615
|
|
Employee stock purchase plan
|
|
|
168
|
|
|
|
—
|
|
|
|
168
|
|
Total reserved shares of common stock
|
|
|
251
|
|
|
|
15,081
|
|
|
|
15,332
|
|
62
11. Stock-Based Compensation
Overview
Employee stock-based compensation expense is calculated based on the grant-date fair value of awards ultimately expected to vest and recognized under the straight-line attribution method, assuming that all stock-based awards will vest. The following table summarizes stock-based compensation expense related to the Company’s stock-based awards for the periods indicated (in thousands):
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
865
|
|
|
$
|
1,630
|
|
|
$
|
2,856
|
|
General and administrative
|
|
|
2,059
|
|
|
|
2,970
|
|
|
|
3,292
|
|
Employee stock-based compensation expense
|
|
|
2,924
|
|
|
|
4,600
|
|
|
|
6,148
|
|
Non-employee stock-based compensation expense
|
|
|
109
|
|
|
|
191
|
|
|
|
196
|
|
Total stock-based compensation expense
|
|
$
|
3,033
|
|
|
$
|
4,791
|
|
|
$
|
6,344
|
|
Option Exchange Program
On June 9, 2017, we filed a Tender Offer Statement (TO) on Schedule TO relating to an option exchange program for its officers and employees (the Option Exchange) to exchange certain stock options to purchase up to an aggregate of 781,505 shares of its common stock that had been granted to eligible holders, for a lesser number of new stock options with a lower exercise price. Stock options with an exercise price greater than or equal to $8.00, and held by eligible holders in continuous service through the termination of the Option Exchange, were eligible for exchange in the program. An exchange ratio of 1.30 for 1 was applied to options priced from $8.00 to $19.99, and an exchange ratio of 1.75 for 1 was applied to options priced at $20.00 or greater.
As of the closing of the Option Exchange on July 10, 2017, 25 eligible holders had tendered an aggregate of 778,928 options for 543,650 new options to purchase shares of its common stock. Each new stock option was granted on July 10, 2017, pursuant to its 2011 Equity Incentive Plan with an exercise price per share of $2.62, which was the closing market price on the grant date of the new options. The exchange of stock options was treated as a modification for accounting purposes and resulted in an incremental expense of $50,957, for the vested options, which was calculated using the Black-Scholes option pricing model. The incremental expense together with the unamortized expense remaining on the unvested options is being amortized over the vesting period of the new options.
Fair Value of Awards
The Company determines the fair value of stock-based awards on the grant date using the Black-Scholes model, which is impacted by the Company’s stock price, as well as assumptions regarding a number of highly subjective variables. The following table summarizes the weighted-average assumptions used as inputs to the Black-Scholes model, and resulting weighted-average and total estimated grant date fair values of employee stock options granted during the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (years)
|
|
|
4.8
|
|
|
|
5.3
|
|
|
|
5.2
|
|
Expected volatility
|
|
|
112.5
|
%
|
|
|
110.0
|
%
|
|
|
99.9
|
%
|
Risk-free interest rate
|
|
|
2.1
|
%
|
|
|
1.9
|
%
|
|
|
1.7
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average estimated grant date fair value per
share
|
|
$
|
2.68
|
|
|
$
|
3.12
|
|
|
$
|
6.20
|
|
Options granted to employees (in thousands)
|
|
|
1,280
|
|
|
|
750
|
|
|
|
531
|
|
Total estimated grant date fair value (in thousands)
|
|
$
|
3,434
|
|
|
$
|
2,344
|
|
|
$
|
3,294
|
|
The estimated fair value of stock options that vested in the years ended December 31, 2017, 2016 and 2015, was $
1.9
million, $
4.6
million and $
5.8
million, respectively. The Company based its assumptions for the expected term on historical cancellation and exercise data, and the contractual term and vesting terms of the awards. Expected volatility is based on historical volatility of the Company’s common stock. The Company does not anticipate paying any cash dividends in the foreseeable future, and therefore uses an expected dividend yield of zero.
63
Option Plan Activity
The following table summarizes stock option activity for the Company’s stock option plans in the periods presented (in thousands, except per share amounts):
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Price Per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Share
|
|
|
Term (Years)
|
|
|
Value
|
|
Outstanding as of December 31, 2016
|
|
|
2,641
|
|
|
$
|
13.50
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
2,105
|
|
|
$
|
3.19
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(8
|
)
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(1,206
|
)
|
|
$
|
17.00
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
|
3,532
|
|
|
$
|
6.18
|
|
|
|
7.19
|
|
|
$
|
1,064
|
|
Vested and expected to vest as of December 31, 2017
|
|
|
3,532
|
|
|
$
|
6.18
|
|
|
|
7.19
|
|
|
$
|
1,064
|
|
Exercisable as of December 31, 2017
|
|
|
1,327
|
|
|
$
|
10.74
|
|
|
|
4.13
|
|
|
$
|
246
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by option holders if they had exercised all their options on December 31, 2017.
The intrinsic value of options exercised during the years ended December 31, 2017,
2016
and
2015
was less than
$
0.1 million,
nil,
and
$0.2 million, respectively. As the Company believes it is more likely than not that no stock option related tax benefits will be realized, the Company does not record any net tax benefits related to exercised options.
Total estimated unrecognized stock-based compensation cost related to unvested stock options was $
4.1
million as of December 31, 2017, which is expected to be recognized over the respective vesting terms of each award. The weighted average term of the unrecognized stock-based compensation expense is
2.7
years.
Bonus Awards
On February 11, 2016, the Compensation Committee of the Company’s Board of Directors approved cash bonuses to certain of the Company’s employees, including its named executive officers, pursuant to the Company’s 2015 Bonus Program. Under the 2015 Bonus Program, each participant was eligible to receive a cash bonus in an amount up to a specified target percentage of such participant’s annual base salary for 2015 based on the level of achievement of certain corporate and individual objectives. The bonus payment amounts approved by the Compensation Committee were based on its determination of the degree to which such corporate and individual objectives were achieved. A portion of the bonuses awarded consisted of 122,000 fully vested shares of the Company’s common stock granted under the 2011 Plan. The stock portion of the bonus awards were granted effective as of February 29, 2016 and the cash portion of the bonus awards were paid on February 29, 2016. The number of shares of the Company’s common stock awarded to Mr. Daniel N. Swisher, Jr., the Company’s former CEO and President, and Mr. Eric H. Bjerkholt, the Company’s former Executive Vice President, Corporate Development and Finance, Chief Financial Officer and Corporate Secretary, under the 2011 Plan were determined based on the closing price of the Company’s common stock as quoted on the NASDAQ Capital Market on February 29, 2016, rounded down to the nearest whole share.
Performance Awards
On February 25, 2015, the Compensation Committee of the Board approved equity awards in the form of restricted stock units (“RSUs”) for certain of the Company’s employees (“participant”) under 2011 Stock Incentive Plan. The RSUs have an exercise price of $0 and vesting is subject to the achievement of the earlier of one of two milestones: acceptance of NDA (U.S.) or approval of MAA (EU) and the participant being an employee at time of milestone achievement. In May 2017, the RSUs were cancelled following the Company’s decision to withdraw the European MAA for vosaroxin as a treatment for relapsed/refractory AML in patients aged 60 years or older.
64
The following table summarizes the Company's RSU activity for the year ended December 31, 2017 (in thousands, except per share amounts):
|
|
Number
|
|
|
|
of
|
|
Performance based restricted stock units
|
|
Shares
|
|
Outstanding as of December 31, 2016
|
|
|
56
|
|
Stocks granted
|
|
|
—
|
|
Stocks exercised
|
|
|
—
|
|
Stocks cancelled
|
|
|
(56
|
)
|
Outstanding as of December 31, 2017
|
|
|
—
|
|
12. Income Taxes
Loss before the provision for income taxes consisted of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S. operations
|
|
$
|
(24,776
|
)
|
|
$
|
(26,942
|
)
|
|
$
|
(23,705
|
)
|
Foreign operations
|
|
|
(10,682
|
)
|
|
|
(11,081
|
)
|
|
|
(12,971
|
)
|
Loss before provision for income taxes
|
|
$
|
(35,458
|
)
|
|
$
|
(38,023
|
)
|
|
$
|
(36,676
|
)
|
No provision for income taxes was recorded in the periods presented due to tax losses incurred in each period. The income tax provision differs from the amount computed by applying the statutory income tax rate of 34% to pre-tax loss as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Tax (benefit) at statutory federal rate
|
|
|
34.0
|
|
%
|
|
34.0
|
|
%
|
|
34.0
|
|
%
|
State tax (benefit), net of federal benefit
|
|
|
1.2
|
|
|
|
0.6
|
|
|
|
(1.6
|
)
|
|
Foreign tax rate differential
|
|
|
(10.2
|
)
|
|
|
(9.9
|
)
|
|
|
(12.0
|
)
|
|
Permanent differences
|
|
|
(1.0
|
)
|
|
|
(3.2
|
)
|
|
|
2.9
|
|
|
Research and development credits
|
|
|
0.7
|
|
|
|
1.0
|
|
|
|
(0.8
|
)
|
|
Change in valuation allowance
|
|
|
127.2
|
|
|
|
(22.5
|
)
|
|
|
(22.5
|
)
|
|
Change in tax rate
|
|
|
(151.6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
|
(0.3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Effective tax rate
|
|
|
-
|
|
%
|
|
-
|
|
%
|
|
-
|
|
%
|
Deferred income taxes reflect the net tax effects of loss and credit carry-forwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets for federal and state income taxes are as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carry-forwards
|
|
$
|
109,714
|
|
|
$
|
156,066
|
|
Federal and state research credit carry-forwards
|
|
|
14,520
|
|
|
|
13,177
|
|
Capitalized research costs
|
|
|
6,304
|
|
|
|
4,824
|
|
Deferred revenue
|
|
|
—
|
|
|
|
244
|
|
Stock-based compensation
|
|
|
4,528
|
|
|
|
5,739
|
|
Property and equipment
|
|
|
83
|
|
|
|
120
|
|
Accrued liabilities
|
|
|
117
|
|
|
|
207
|
|
Gross deferred tax assets
|
|
|
135,266
|
|
|
|
180,377
|
|
Valuation allowance
|
|
|
(135,266
|
)
|
|
|
(180,377
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
65
The Company’s unrecognized tax
benefits relate to research and development tax credits claimed on the Company’s tax returns. The research and development tax credits have not been utilized, are fully offset by a valuation allowance, and currently have no tax expense impact.
A reconciliation of the Company’s beginning and ending amount of unrecognized tax benefits is follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Unrecognized tax benefits at beginning of period
|
|
$
|
1,441
|
|
|
$
|
1,381
|
|
Increases related to current year tax positions
|
|
|
57
|
|
|
|
60
|
|
Increase related to change in tax rate
|
|
|
271
|
|
|
|
—
|
|
Unrecognized tax benefits at the end of period
|
|
$
|
1,769
|
|
|
$
|
1,441
|
|
Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance decreased by approximately $45.1 million during the year ended December 31, 2017, and increased by approximately $8
.5
million and $
8.4
million during the years ended December 31, 2016 and
2015
, respectively.
As of December 31, 2017, the Company had federal net operating loss carry-forwards of $
432.9
million and federal research and development tax credit carry-forwards of $
8.5
million. If not utilized, the federal net operating loss and tax credit carry-forwards will expire at various dates beginning in 2018. As of December 31, 2017, the Company had state net operating loss carry-forwards of $
269.0
million, which expire beginning in 2018, and state research and development tax credit carry-forwards of $7
.4
million, which do not expire.
Utilization of these net operating loss and tax credits carry-forwards may be subject to a substantial annual limitation due to the ownership change rules under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). The limitations are applicable if an “ownership change,” as defined in the Code, is deemed to have occurred or occurs in the future. The annual limitation may result in the expiration of net operating loss and credit carry-forwards before they can be utilized.
The Company recognizes the financial statement effect of tax positions when it is more likely than not that the tax positions will be sustained upon examination by the appropriate taxing authorities. As of December 31, 2017, 2016 and 2015, the Company had unrecognized tax benefits of $1.8 million, $1.4 million, and $1.4 million, respectively.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Act") was enacted into law and the new legislation reduces the corporate tax rate to 21 percent, effectively January 1, 2018. Consequently, the Company remeasured the deferred tax assets and recorded a decrease in deferred tax assets and valuation allowance of $53.7 million. The Company believes that the one-time transition tax does not apply because there were no post-1986 earnings and profits (E&P) previously deferred from US income taxes. The Company had reviewed the effects of global intangible low-taxed income (“GILTI”) tax rules and does not expect any significant impact to its deferred tax assets. In accordance with SAB 118, the income tax effects from the Act are considered provisional and will be finalized before December 22, 2018.
The Company files U.S. federal and California tax returns. The Company’s wholly owned subsidiaries, Sunesis Europe Limited and Sunesis Pharmaceuticals (Bermuda) Ltd., are currently not required to file tax returns. To date, neither the Company nor any of its subsidiaries have been audited by the Internal Revenue Service, any state income tax authority or tax authority in the related jurisdictions. Due to net operating loss carry-forwards, substantially all of the Company’s tax years remain open to federal tax examination.
66
13. Guarantees and Indemnification
As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The indemnification agreements with the Company’s officers and directors terminate upon termination of their employment, but the termination does not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company’s officer and director insurance policy reduces the Company’s exposure and may enable the Company to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification agreements is minimal. In addition, in the ordinary course of business the Company enters into agreements, such as licensing agreements, clinical trial agreements and certain services agreements, containing standard indemnifications provisions. The Company believes that the likelihood of an adverse judgment related to such indemnification provisions is remote. Accordingly, the Company has not recorded any liabilities for any of these agreements as of December 31, 2017.
14. Subsequent Events
On March 2, 2018, the Company amended the task order pursuant and subject to the terms of the Master Services Agreement, dated April 26, 2012, as amended on December 31, 2015, with Medpace, Inc., a clinical research organization conducting global clinical research for the development of drugs and medical devices, to reduce the retainer from $1.3 million to $0.3 million. The retainer is currently recorded as prepaids and other current assets on the Company’s consolidated balance sheets.
15. Selected Quarterly Financial Data (unaudited, and in thousands, except per share amounts)
The following table sets forth the Company’s unaudited consolidated financial results for the last eight fiscal quarters.
|
|
Three Months Ended
|
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sep. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sep. 30,
|
|
|
Dec. 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
Revenue
|
|
$
|
669
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
640
|
|
|
$
|
610
|
|
|
$
|
610
|
|
|
$
|
676
|
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(9,834
|
)
|
|
$
|
(8,842
|
)
|
|
$
|
(10,159
|
)
|
|
$
|
(6,623
|
)
|
|
$
|
(10,086
|
)
|
|
$
|
(10,446
|
)
|
|
$
|
(8,954
|
)
|
|
$
|
(8,537
|
)
|
Diluted
|
|
$
|
(9,834
|
)
|
|
$
|
(8,842
|
)
|
|
$
|
(10,159
|
)
|
|
$
|
(6,623
|
)
|
|
$
|
(10,086
|
)
|
|
$
|
(10,446
|
)
|
|
$
|
(8,954
|
)
|
|
$
|
(8,537
|
)
|
Shares used in computing net loss per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,029
|
|
|
|
21,521
|
|
|
|
23,678
|
|
|
|
31,667
|
|
|
|
14,443
|
|
|
|
14,493
|
|
|
|
14,503
|
|
|
|
19,285
|
|
Diluted
|
|
|
21,029
|
|
|
|
21,521
|
|
|
|
23,678
|
|
|
|
31,667
|
|
|
|
14,443
|
|
|
|
14,493
|
|
|
|
14,503
|
|
|
|
19,285
|
|
Net loss per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.47
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.44
|
)
|
Diluted
|
|
$
|
(0.47
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.44
|
)
|
(1)
|
Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarter per-share calculations will not necessarily equal the annual per share calculation.
|
67