Notes to the Unaudited Condensed Financial Statements
NOTE 1 – OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Array BioPharma Inc. (also referred to as "Array,","we", "us", "our" or "the Company"), incorporated in Delaware on February 6, 1998, is a biopharmaceutical company focused on the discovery, development and commercialization of targeted small molecule drugs to treat patients afflicted with cancer.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim reporting and, as permitted under those rules, do not include all of the disclosures required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. The unaudited condensed financial statements reflect all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the Company's financial position, results of operations and cash flows for the interim periods presented. Operating results for an interim period are not necessarily indicative of the results that may be expected for a full year. The Company's management performed an evaluation of its activities through the date of filing of this Quarterly Report on Form 10-Q.
These unaudited condensed financial statements should be read in conjunction with the Company's audited financial statements and the notes thereto for the
fiscal year ended June 30, 2016
, included in its Annual Report on Form 10-K filed with the SEC, from which the Company derived its balance sheet data as of
June 30, 2016
.
The Company operates in
one
reportable segment and, accordingly, no segment disclosures have been presented herein. All of the Company's equipment, leasehold improvements and other fixed assets are physically located within the U.S., and the vast majority of its agreements with its partners are denominated in U.S. dollars.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on the Company's historical experience and on various other assumptions that it believes are reasonable under the circumstances. These estimates are the basis for the Company's judgments about the carrying values of assets and liabilities, which in turn may impact its reported revenue and expenses. The Company's actual results could differ significantly from these estimates under different assumptions or conditions.
The Company believes its financial statements are most significantly impacted by the following accounting estimates and judgments: (i) identifying deliverables under collaboration and license agreements involving multiple elements and determining whether such deliverables are separable from other aspects of the contractual relationship; (ii) estimating the selling price of deliverables for the purpose of allocating arrangement consideration for revenue recognition; (iii) estimating the periods over which the allocated consideration for deliverables is recognized; (iv) estimating accrued outsourcing costs for clinical trials and preclinical testing; (v) estimating the fair value of the notes payables and (vi) estimating the collectible portion of recorded accounts receivable.
Liquidity
With the exception of the 2015 fiscal year, the Company has incurred operating losses and an accumulated deficit as a result of ongoing research and development spending since inception. As of
September 30, 2016
, the Company had an accumulated deficit of
$830.0 million
and it had net losses of
$28.6 million
for the
three months ended September 30, 2016
. We had a net loss of
$92.8 million
for the fiscal year ended June 30, 2016. We had net income of
$9.4 million
for the fiscal year ended June 30, 2015, primarily as a result of an
$80.0 million
net gain related to
the return of rights to binimetinib and our acquisition of rights to encorafenib, as well as
$16.3 million
of realized gains from the sale of marketable securities. We had a net loss of
$85.3 million
the fiscal year ended June 30, 2014.
The Company has historically funded its operations from upfront fees, proceeds from research and development reimbursement arrangements, and license and milestone payments received under its drug collaborations and license agreements, the sale of equity securities, and debt provided by convertible debt and other credit facilities. The Company believes that its cash, cash equivalents, marketable securities and accounts receivable as of
September 30, 2016
will enable it to continue to fund operations in the normal course of business for at least the next 12 months. Until the Company can generate sufficient levels of cash from operations, which it does not expect to achieve in the next two years, and because sufficient funds may not be available to it when needed from existing collaborations, the Company expects that it will be required to continue to fund its operations in part through the sale of debt or equity securities, and through licensing select programs or partial economic rights that include upfront, royalty and/or milestone payments.
The Company's ability to successfully raise sufficient funds through the sale of debt or equity securities or from debt financing from lenders when needed is subject to many risks and uncertainties and, even if it were successful, future equity issuances would result in dilution to its existing stockholders. The Company also may not successfully consummate new collaboration and license agreements that provide for upfront fees or milestone payments, or the Company may not earn milestone payments under such agreements when anticipated, or at all. The Company's ability to realize milestone or royalty payments under existing agreements and to enter into new arrangements that generate additional revenue through upfront fees and milestone or royalty payments is subject to a number of risks, many of which are beyond the Company's control.
The Company's assessment of its future need for funding and its ability to continue to fund its operations is a forward-looking statement that is based on assumptions that may prove to be wrong and that involve substantial risks and uncertainties.
If the Company is unable to generate enough revenue from its existing or new collaboration and license agreements when needed or to secure additional sources of funding and receive related full and timely collections of amounts due, it may be necessary to significantly reduce the current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs, including more costly late phase clinical trials on its wholly-owned programs. Insufficient liquidity may also require the Company to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to the Company and its stockholders than the Company would otherwise choose in order to obtain upfront license fees needed to fund operations. These events could prevent the Company from successfully executing its operating plan and, in the future, could raise substantial doubt about its ability to continue as a going concern. Further, as discussed in Note 4 – Debt, if at any time the Company's balance of total cash, cash equivalents and marketable securities at Comerica Bank
and approved outside accounts falls below
$22.0 million
, the Company must maintain a balance of cash, cash equivalents and marketable securities at Comerica at least equivalent to the entire outstanding debt balance with Comerica, which is currently
$14.6 million
. The Company must also maintain a monthly liquidity ratio for the revolving line of credit with Comerica if it draws from the line of credit, which it has not done as of September 30, 2016.
Concentration of Business Risks
The following counterparties contributed greater than
10%
of the Company's total revenue during at least one of the periods set forth below. The revenue from these counterparties as a percentage of total revenue was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Novartis
|
|
80.9
|
%
|
|
65.0
|
%
|
Loxo
|
|
7.6
|
|
|
17.7
|
|
|
|
88.5
|
%
|
|
82.7
|
%
|
The loss of one or more of the Company's significant partners or collaborators could have a material adverse effect on its business, operating results or financial condition. Although the Company is impacted by economic conditions
in the biotechnology and pharmaceutical sectors, management does not believe significant credit risk exists as of
September 30, 2016
.
Geographic Information
The following table details revenue by geographic area based on the country in which the Company's counterparties are located (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
North America
|
|
$
|
4,098
|
|
|
$
|
5,671
|
|
Europe
|
|
34,306
|
|
|
10,526
|
|
Asia Pacific
|
|
867
|
|
|
—
|
|
Total revenue
|
|
$
|
39,271
|
|
|
$
|
16,197
|
|
Accounts Receivable
Novartis accounted for
91%
and
85%
of the Company's total accounts receivable balance as of
September 30, 2016
and
June 30, 2016
, respectively.
Summary of Significant Accounting Policies
The Company's other significant accounting policies are described in Note 1 to its audited financial statements for the
fiscal year ended June 30, 2016
, included in its Annual Report on Form 10-K filed with the SEC.
Equity Investments
As of September 30, 2016, the shares of preferred stock of VentiRx Pharmaceuticals, Inc. ("VentiRx") that we received under a February 2007 collaboration and licensing agreement with VentiRx had a recorded cost of
$1.5 million
. The Company does not have a controlling interest nor does it exert significant influence over VentiRx. During the quarter ended September 30, 2016, a triggering event occurred related to the underlying viability of the investment, which caused the Company to record a
$1.5 million
impairment loss related to this investment.
Fair Value Measurements
We follow accounting guidance on fair value measurements for financial instruments measured at fair value on a recurring basis, as well as for certain assets and liabilities that are initially recorded at their estimated fair values. Fair value is defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value our financial instruments:
Level 1: Unadjusted quoted prices in active markets for identical instruments.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Unobservable inputs for the asset or liability.Estimated fair values of financial instruments classified in Level 3 of the fair value hierarchy are determined using pricing models, discounted cash flow methodologies, or similar techniques, where the determination of fair value requires significant judgment or estimation.
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires us to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not be indicative of the amount that we or holders of the instruments could realize in a current market exchange.
Certain of our financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, accounts receivable and payable, and other financial instruments in current assets or current liabilities.
Fair Value Option
As described further in Note 4 -
Debt - Notes Payable
, in September 2016, the Company issued Subordinated Convertible Promissory Notes to Redmile Capital Offshore Fund II, Ltd. and Redmile Biopharma Investments I, L.P. in the aggregate original principal amount of
$10,000,000
. The Company has elected the fair value option to account for these notes due to the complexity and number of embedded features. Accordingly, the Company records these notes at fair value with changes in fair value recorded in the statement of operations. As a result of applying the fair value option, direct costs and fees related to the notes were recognized in earnings (as line item "change in fair value of notes payable") as incurred and were not deferred.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “
Revenue from Contracts with Customers
” (“ASU 2014-09”), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first quarter of 2018 to provide companies sufficient time to implement the standards. Early adoption will be permitted, but not before the first quarter of 2017. Adoption can occur using one of two prescribed transition methods. In March and April 2016, the FASB issued ASU 2016-08, “
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
” and ASU 2016-10, “
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
” which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact of these new standards on its financial statements and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements-Going Concern
, which defines management's responsibility to assess an entity's ability to continue as a going concern, and requires related footnote disclosures if there is substantial doubt about its ability to continue as a going concern. ASU No. 2014-15 is effective for Array for the fiscal year ending on June 30, 2017, and for annual and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU No. 2014-15 on its financial statements and related disclosures.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) 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; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU No. 2016-01 will have on its financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
which supersedes FASB ASC Topic 840,
Leases (Topic 840) and
provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The amendment is to simplify several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU No. 2016-09 are effective for annual reporting periods beginning after December 15, 2016 and interim reporting periods within those reporting periods. The Company does not expect the adoption of ASU No. 2016-09 to have a material effect on its financial statements and related disclosures.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customer (Topic 606) Identifying Performance Obligations and Licensing
. The new standard provides clarity on: identifying performance obligations and licensing in ASC 2014-09, which is not yet effective. For public companies, the amendments in ASU No. 2016-10 are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact that ASU No. 2016-10 will have on its financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
(ASU 2016-13). The amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires that companies record expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses when estimated credit losses declines. The new standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption will be available for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect that the impact that ASU 2016-03 will have on its financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
. This amendment will provide guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the effect that ASU 2016-15 will have on its financial statements and related disclosures.
NOTE 2 – MARKETABLE SECURITIES
Marketable securities consisted of the following as of
September 30, 2016
and
June 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Gross
|
|
Gross
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Short-term available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. treasury securities
|
$
|
50,572
|
|
|
$
|
12
|
|
|
$
|
(1
|
)
|
|
$
|
50,583
|
|
Mutual fund securities
|
227
|
|
|
—
|
|
|
—
|
|
|
227
|
|
|
50,799
|
|
|
12
|
|
|
(1
|
)
|
|
50,810
|
|
Long-term available-for-sale securities:
|
|
|
|
|
|
|
|
Mutual fund securities
|
662
|
|
|
—
|
|
|
—
|
|
|
662
|
|
|
662
|
|
|
—
|
|
|
—
|
|
|
662
|
|
Total
|
$
|
51,461
|
|
|
$
|
12
|
|
|
$
|
(1
|
)
|
|
$
|
51,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Gross
|
|
Gross
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Short-term available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. treasury securities
|
$
|
53,113
|
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
$
|
53,120
|
|
Mutual fund securities
|
224
|
|
|
—
|
|
|
—
|
|
|
224
|
|
|
53,337
|
|
|
8
|
|
|
(1
|
)
|
|
53,344
|
|
Long-term available-for-sale securities:
|
|
|
|
|
|
|
|
Mutual fund securities
|
596
|
|
|
—
|
|
|
—
|
|
|
596
|
|
|
596
|
|
|
—
|
|
|
—
|
|
|
596
|
|
Total
|
$
|
53,933
|
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
$
|
53,940
|
|
The majority of the mutual fund securities shown in the above tables are securities held under the Array BioPharma Inc. Deferred Compensation Plan.
The estimated fair value of the Company's marketable securities, all of which are classified as Level 1 (quoted prices are available), was
$51.5 million
and
$53.9 million
as of
September 30, 2016
and
June 30, 2016
, respectively. The estimated fair value of the Company's marketable securities is determined using quoted prices in active markets for identical assets based on the closing price as of the balance sheet date.
As of
September 30, 2016
, the amortized cost and estimated fair value of available-for-sale securities by contractual maturity were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Fair
|
|
Cost
|
|
Value
|
Due in one year or less
|
$
|
50,572
|
|
|
$
|
50,583
|
|
Total
|
$
|
50,572
|
|
|
$
|
50,583
|
|
NOTE 3 – COLLABORATION AND OTHER AGREEMENTS
The following table summarizes total revenue recognized for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
2015
|
Reimbursement revenue
|
|
|
|
|
|
Novartis (1)
|
|
|
$
|
31,321
|
|
|
$
|
9,623
|
|
|
|
|
|
|
|
Collaboration and other revenue
|
|
|
|
|
Loxo
|
|
|
2,867
|
|
|
2,870
|
|
Pierre Fabre
|
|
|
1,778
|
|
|
—
|
|
Mirati
|
|
|
875
|
|
|
676
|
|
Novartis (2)
|
|
|
450
|
|
|
900
|
|
Asahi Kasei
|
|
|
267
|
|
|
—
|
|
Cascadian Therapeutics
|
|
|
37
|
|
|
29
|
|
Biogen Idec
|
|
|
—
|
|
|
1,218
|
|
Celgene
|
|
|
—
|
|
|
721
|
|
Other partners
|
|
|
15
|
|
|
160
|
|
Total collaboration and other revenue
|
|
6,289
|
|
|
6,574
|
|
|
|
|
|
|
|
License and milestone revenue
|
|
|
|
|
|
Pierre Fabre
|
|
|
750
|
|
|
—
|
|
Asahi Kasei
|
|
|
600
|
|
|
—
|
|
Mirati
|
|
|
208
|
|
|
—
|
|
Loxo
|
|
|
103
|
|
|
—
|
|
Total license and milestone revenue
|
|
|
1,661
|
|
|
—
|
|
Total revenue
|
|
|
$
|
39,271
|
|
|
$
|
16,197
|
|
|
|
|
|
|
|
(1) Consists of reimbursable expenses incurred and accrued as reimbursement revenue that are receivable under the Novartis Agreements.
|
|
(2)
|
Represents the recognition of revenue that was deferred from the consideration received in March 2015 upon the effective date of the Binimetinib Agreement.
|
Deferred revenue balances were as follows for the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
June 30,
|
|
2016
|
|
2016
|
Pierre Fabre
|
$
|
27,645
|
|
|
$
|
28,395
|
|
Asahi Kasei
|
10,800
|
|
|
11,400
|
|
Mirati
|
2,958
|
|
|
3,167
|
|
Loxo
|
1,384
|
|
|
4,049
|
|
Novartis
|
1,350
|
|
|
1,800
|
|
Other partners
|
4
|
|
|
6
|
|
Total deferred revenue
|
44,141
|
|
|
48,817
|
|
Less: Current portion
|
(9,846
|
)
|
|
(12,856
|
)
|
Deferred revenue, long-term portion
|
$
|
34,295
|
|
|
$
|
35,961
|
|
Milestone Payments
The Development and Commercialization Agreement with Pierre Fabre Medicament SAS contains substantive potential milestone payments of up to
$35.0 million
for achievement of
three
regulatory milestones relating to European Commission marketing approvals for
three
specified indications and of up to
$390.0 million
for achievement of
seven
commercialization milestones if certain net sales amounts are achieved for any licensed indications.
The Drug Discovery Collaboration Option Agreement with Mirati Therapeutics, Inc. contains substantive potential milestone payments of up to
$9.3 million
for
four
remaining developmental milestones and up to
$337.0 million
for the achievement of
seven
commercialization milestones if certain net sales amounts are achieved in the United States, the European Union and Japan.
The Collaboration and License Agreement with Asahi Kasei contains milestone payments of up to
$11.0 million
related to the achievement of
four
regulatory milestones for up to
five
drug candidates and up to
$52.5 million
for a milestone payment at the time of the first commercial sale and the achievement of
three
commercialization milestones if certain net sales amounts are achieved for any licensed drug candidates.
The Collaboration and License Agreement with AstraZeneca, PLC contains substantive potential milestone payments of up to
$36.0 million
for
nine
remaining developmental milestones for Selumetinib and a back-up program and up to
$34.0 million
for the achievement of
three
commercialization milestones if certain net sales amounts are achieved in the United States, the European Union and Japan. Array is also entitled to double-digit royalties based on net sales under the agreement.
NOTE 4 – DEBT
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
June 30,
|
|
2016
|
|
2016
|
Notes payable at fair value
|
$
|
10,200
|
|
|
$
|
—
|
|
Notes Payable at fair value (current)
|
$
|
10,200
|
|
|
$
|
—
|
|
|
|
|
|
Comerica term loan
|
$
|
14,550
|
|
|
$
|
14,550
|
|
Convertible senior notes
|
132,250
|
|
|
132,250
|
|
Long-term debt, gross
|
146,800
|
|
|
146,800
|
|
Less: Unamortized debt discount and fees
|
(31,447
|
)
|
|
(33,145
|
)
|
Long-term debt, net
|
$
|
115,353
|
|
|
$
|
113,655
|
|
Notes Payable
On September 2, 2016, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Redmile Capital Offshore Fund II, Ltd. and Redmile Biopharma Investments I, L.P. (collectively, “Redmile”) pursuant to which the Company issued to Redmile Subordinated Convertible Promissory Notes (the “Notes”) in the aggregate original principal amount of
$10.0 million
. The Notes bear interest at the rate of
5%
per annum and, unless converted or otherwise repaid or satisfied as described below, the principal amount and all accrued interest thereon plus an aggregate exit fee of
$3.0 million
(the “Repayment Amount”) is due and payable on September 1, 2017 (the “Maturity Date”). If an event of default specified under the Notes occurs, subject to the terms and conditions contained in a Subordination Agreement with Comerica Bank described below, the Note holders may declare the Repayment Amount, and any other amounts payable under the Notes, immediately due and payable.
Conversion of the Notes
The Notes contemplate that, solely at the Company’s choice, the Company may elect to form a subsidiary (the “797 Subsidiary”) and contribute certain assets and rights relating to its drug ARRY-797 in exchange for all of the outstanding equity of such 797 Subsidiary. In such event, and if a preferred stock financing of the 797 Subsidiary of at least
$10.0 million
in aggregate gross proceeds (excluding conversion of the Note) to bona fide institutional investors other than the Note holders (a “Qualified Financing”) closes prior to the Maturity Date, then all outstanding principa
l and accrued interest under the Notes shall convert automatically into the shares of capital stock issued in the Qualified Financing at a conversion price equal to the lesser of (A)
80%
of the purchase price of the securities sold in the Qualified Financing if the closing of the Qualified Financing occurs on or prior to March 1, 2017, or
70%
of the purchase price of the securities sold in the Qualified Financing if the closing of the Qualified Financing occurs after March 1, 2017, and (B) the price per share calculated in the same manner as the price per share of equity securities sold in the Qualified Financing, but instead based on a pre-money valuation of the 797 Subsidiary of
$75.0 million
.
If the Company has not formed the 797 Subsidiary by the Maturity Date or, if a 797 Subsidiary was formed and a Qualified Financing has not closed on or prior to the Maturity Date, then the Company shall have the right to convert, on the Maturity Date, the Repayment Amount into shares of a newly established series of the Company's preferred stock, to be designated as Series A Convertible Preferred Stock, at a conversion price equal to the average daily volume-weighted average price per share of the Company’s common stock during the ten (
10
) consecutive trading days ending on the trading day immediately preceding the Maturity Date. The shares issued upon any such conversion shall be subject to an aggregate cap equal to
19.99%
of the outstanding shares of the Company’s common stock, on an as-converted basis, on the Maturity Date.
Other Repayment Provisions
If, solely at the Company’s choice, prior to the closing of a Qualified Financing or other conversion or repayment or other satisfaction in full of the Notes, the Company sells or transfers substantially all of the assets and rights relating to ARRY-797 to a third party other than the holders of the Notes or any of its affiliates (a “797 Sale”), then upon the closing of such 797 Sale and in full satisfaction of the Notes, the Company is required to pay to the Note holders an amount equal to the greater in the aggregate of (i)
$20.0 million
or (ii)
15%
of the fair market value of the consideration actually paid to the Company or the 797 Subsidiary (or any of their respective affiliates or stockholders) in the 797 Sale, subject to an aggregate
$100.0 million
cap.
If, solely at the Company’s choice, the Company enters into an agreement with a third party other than the holders of the Notes or any of their affiliates to license ARRY 797 on an exclusive basis for the development and commercialization of ARRY-797 in all fields of use in the United States and any other territories (a “Qualified 797 License”) prior to the closing of a Qualified Financing or other conversion or repayment or other satisfaction in full of the Notes, then upon entering into such Qualified 797 License and in full satisfaction of the Notes, the Company is required to pay to the Note holders an amount in the aggregate equal to
50%
of the first
$50.0 million
in aggregate milestone or royalty payments plus
20%
of any subsequent milestone or royalty payments, in each case actually paid to the Company or the 797 Subsidiary (or any of their respective affiliates), as the case may be, pursuant to such Qualified 797 License, subject to an aggregate cap of
$100.0 million
. In addition, if solely at its choice the Company enters into an exclusive license for the development and commercialization of ARRY-797 to a third party in one or more territories that do not include the United States, the Note holders have the right to elect to treat such license agreement as a “Qualified 797 License” by giving Array written notice of such election with five business days of the effective date of the license agreement.
If all or substantially all of the assets of the Company are sold or other change in control of the Company specified in the Notes occurs prior to the closing of a Qualified Financing or other conversion or repayment or other satisfaction in full of the Notes, then upon the closing of such transaction and in full satisfaction of the Notes, at the third party acquirer’s option, the Company is required to either: (i) pay to the Note holders a cash amount in the aggregate equal to
$40.0 million
; or (ii) (A) pay to the Note holders a cash amount in the aggregate equal to
$25.0 million
; and (B) grant, or cause to be granted, a right of first refusal to the Note holders to acquire the 797 Subsidiary or the 797 Assets, as the case may be.
Registration Rights
If the Company elects to convert the Notes into shares of Series A Convertible Preferred Stock as described above, the Company has agreed in the Note Purchase Agreement to register such shares under the Securities Act of 1933, as amended (the “Securities Act”), on a registration statement on Form S-3. In such event, the Company must file the registration statement on the Maturity Date and use commercially reasonable efforts to cause the registration statement to become effective as promptly as possible after such filing, but no later than
75
days after the Maturity Date. The Company may suspend the availability of the registration statement for up to
90
days for no more than
45
days in any
12
-month period for any bona fide reason. If the Company defaults on certain of its obligations relating to the registration of such shares of Series A Preferred Stock, the Company must pay an amount in the aggregate equal to
5%
of the purchase price of the Notes to which the affected registered shares relate. The Company has
agreed to pay all costs and expenses associated with the registration of the Series A Convertible Preferred Stock and, with certain exceptions, to indemnify the holders of shares registered on any such registration against liabilities relating to any such registration.
Subordination
The obligations of the Company under the Notes have been subordinated to the obligations of the Company under the Loan and Security Agreement, dated as of June 28, 2005, as amended, with Comerica Bank pursuant to a Subordination Agreement by and among the Company, Redmile and Comerica Bank.
Accounting for the Notes
Due to the complexity and number of embedded features within the Notes and as permitted under accounting guidance, the Company elected to account for the Notes and all the embedded features under the fair value option. The Company recognizes the Notes at fair value rather than at historical cost, with changes in fair value recorded in the statements of operations. Direct costs and fees incurred to issue the Notes were recognized in earnings as incurred and were not deferred. On the initial measurement date of September 2, 2016, the fair value of the Notes was estimated at
$10.0 million
. Upfront costs and fees related to items for which the fair value option is elected was
$0.1 million
and was recorded as a component of other expenses for the three months ended September 30, 2016. As of September 30, 2016, the fair value of the Notes was
$10.2 million
. For more information on the fair value determination of the Notes, see
Note 5 - Redmile Notes
.
Comerica Term Loan
The Company has entered into a Loan and Security Agreement with Comerica Bank dated June 28, 2005, which has been subsequently amended and provides for a
$15.0 million
term loan and a revolving line of credit of
$2.8 million
. The term loan bears interest at a variable rate and the Company currently has
$14.6 million
outstanding under the term loan. The revolving line of credit was established to support standby letters of credit in relation to the Company's facilities leases.
Under the terms of the amended Loan and Security Agreement, the term loan will mature in October 2017 and, pursuant to a recent amendment, the revolving line of credit which will mature in October 2017. The interest rate on the term loan equals the Prime Rate, if the balance of the Company's cash, cash equivalents and marketable securities maintained at Comerica is greater than or equal to
$10.0 million
, or equals the Prime Rate plus
2%
if this balance is less than
$10.0 million
. As of
September 30, 2016
, the term loan with Comerica had an interest rate of
3.5%
per annum. All principal is due at maturity and interest is paid monthly.
The Loan and Security Agreement requires the Company to maintain a balance of cash at Comerica that is at least equivalent to the Company's total outstanding obligation under the term loan if the Company's overall balance of cash, cash equivalents and marketable securities at Comerica and approved outside accounts is less than
$22.0 million
. The Company must also maintain a monthly liquidity ratio equal to at least
1.25
to 1.00 as of the last day of each month for the revolving line of credit calculated in accordance with the Loan and Security Agreement if the Company draws upon the revolving line of credit.
The Company's obligations under the amended Loan and Security Agreement are secured by a first priority security interest in all of the Company's assets, other than its intellectual property. The amended Loan and Security Agreement contains representations and warranties and affirmative and negative covenants that are customary for credit agreements of this type. The Company's ability to, among other things, sell certain assets, engage in a merger or change in control transaction, incur debt, pay cash dividends and make investments, are restricted by the Loan and Security Agreement as amended. The amended Loan and Security Agreement also contains events of default that are customary for credit agreements of this type, including payment defaults, covenant defaults, insolvency type defaults and events of default relating to liens, judgments, material misrepresentations and the occurrence of certain material adverse events.
The Company uses a discounted cash flow model to estimate the fair value of the Comerica term loan. The fair value was estimated at
$14.6 million
as of both
September 30, 2016
and
June 30, 2016
, and was determined using Level 2, observable inputs other than quoted prices in active markets.
Amendment to Comerica Loan Agreement
On September 2, 2016, the Company further amended the Loan and Security Agreement pursuant to a Fourteenth Amendment to Loan and Security Agreement. This amendment amended the calculation of the Liquidity Ratio that Array is required to maintain under the Loan and Security Agreement to exclude all subordinated debt from the calculation.
Convertible Senior Notes
On June 10, 2013, through a registered underwritten public offering, the Company issued and sold
$132.3 million
aggregate principal amount of
3.00%
convertible senior notes due 2020 (the "Convertible Notes"), resulting in net proceeds to Array of approximately
$128.0 million
after deducting the underwriting discount and offering expenses.
The Convertible Notes are the general senior unsecured obligations of Array. The Convertible Notes bear interest at a rate of
3.00%
per year, payable semi-annually on June 1 and December 1 of each year with all principal due at maturity. The Notes will mature on June 1, 2020, unless earlier converted by the holders or redeemed by the Company.
Prior to March 1, 2020, holders may convert the Convertible Notes only upon the occurrence of certain events described in a supplemental indenture the Company entered into with Wells Fargo Bank, N.A., as trustee, upon issuance of the Notes. On or after March 1, 2020, until the close of business on the scheduled trading day immediately prior to the maturity date, holders may convert their Notes at any time. Upon conversion, the holders will receive, at the Company's option, shares of the Company's common stock, cash or a combination of shares and cash. The Convertible Notes will be convertible at an initial conversion rate of
141.8641
shares per $1,000 in principal amount of Convertible Notes, equivalent to a conversion price of approximately
$7.05
per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the supplemental indenture. Holders of the Notes may require the Company to repurchase all or a portion of their Convertible Notes for cash at a price equal to
100%
of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest, if there is a qualifying change in control or termination of trading of the Company's common stock.
On or after June 4, 2017, the Company may redeem for cash all or part of the outstanding Convertible Notes if the last reported sale price of its common stock exceeds
130%
of the applicable conversion price for
20
or more trading days in a period of
30
consecutive trading days ending within
seven
trading days immediately prior to the date the Company provides the notice of redemption to holders. The redemption price will equal
100%
of the principal amount of the Convertible Notes to be redeemed, plus all accrued and unpaid interest. If the Company were to provide a notice of redemption, the holders could convert their Convertible Notes up until the business day immediately preceding the redemption date.
In accordance with ASC 470-20, the Company used an effective interest rate of
10.25%
to determine the liability component of the Convertible Notes. This resulted in the recognition of
$84.2 million
as the liability component of the Convertible Notes and the recognition of the residual
$48.0 million
as the debt discount with a corresponding increase to additional paid-in capital for the equity component of the Convertible Notes. The underwriting discount and estimated offering expenses of
$4.3 million
were allocated between the debt and equity issuance costs in proportion to the allocation of the liability and equity components of the Convertible Notes. Equity issuance costs of
$1.6 million
were recorded as an offset to additional paid-in capital. Total debt issuance costs of
$2.7 million
were recorded on the issuance date, and are reflected in the Company's balance sheets for all periods presented on a consistent basis with the debt discount, or as a direct deduction from the carrying value of the associated debt liability. The debt discount and debt issuance costs will be amortized as non-cash interest expense through June 1, 2020. The balance of unamortized debt issuance costs was
$1.7 million
and
$1.8 million
as of
September 30, 2016
and
June 30, 2016
, respectively.
The fair value of the Convertible Notes was approximately
$157.7 million
and
$110.2 million
at
September 30, 2016
and
June 30, 2016
, respectively, and was determined using Level 2 inputs based on their quoted market values.
Summary of Interest Expense
The following table shows the details of the Company's interest expense for all of its debt arrangements outstanding during the periods presented, including contractual interest, and amortization of debt discount, debt issuance costs and loan transaction fees that were charged to interest expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Notes payable
|
|
|
|
|
Simple interest
|
|
$
|
38
|
|
|
$
|
—
|
|
Fees paid
|
|
118
|
|
|
—
|
|
Total interest expense on the notes payable at fair value
|
|
156
|
|
|
—
|
|
Comerica Term Loan
|
|
|
|
|
Simple interest
|
|
130
|
|
|
121
|
|
Amortization of fees paid for letters of credit
|
|
3
|
|
|
10
|
|
Total interest expense on the Comerica term loan
|
|
133
|
|
|
131
|
|
|
|
|
|
|
Convertible Senior Notes
|
|
|
|
|
Contractual interest
|
|
992
|
|
|
992
|
|
Amortization of debt discount
|
|
1,607
|
|
|
1,451
|
|
Amortization of debt issuance costs
|
|
91
|
|
|
82
|
|
Total interest expense on the convertible senior notes
|
|
2,690
|
|
|
2,525
|
|
Total interest expense
|
|
$
|
2,979
|
|
|
$
|
2,656
|
|
NOTE 5 – FAIR VALUE MEASUREMENTS
The following tables classify into the fair value hierarchy financial instruments measured at fair value on a recurring basis on the condensed balance sheets as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of September 30, 2016
|
|
($ in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
50,583
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,583
|
|
|
Mutual fund securities
|
|
$
|
227
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
227
|
|
|
Long-term Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund securities
|
|
$
|
662
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,200
|
|
|
$
|
10,200
|
|
|
The table below provides a rollforward of the changes in fair value of Level 3 financial instruments for the three months ended September 30, 2016:
|
|
|
|
|
|
($ in thousands)
|
|
Notes Payable at Fair Value
|
Balance at June 30, 2016
|
|
$
|
—
|
|
Additions during the period
|
|
10,000
|
|
Change in fair value
|
|
200
|
|
Balance at September 30, 2016
|
|
$
|
10,200
|
|
Redmile Notes
To measure the fair value of the principal amount on the Notes issued to Redmile, the Company utilized a Monte Carlo simulation to determine the mode of payment of the principal amount by potential outcome and scenario, and the income approach, discounting the principal amount due under the Notes Payable by market interest rates by potential scenario. The Monte Carlo simulation utilized the following assumptions: (i) expected term; (ii) common stock price; (iii) risk-free interest rate; and (iv) expected volatility. Assumptions used in the estimates represent what market participants would use in pricing the liability components, including market interest rates, credit standing, yield curves, volatilities, and risk-free rates, all of which are defined as Level 2 observable inputs. To measure the fair value of the conversion feature of the Notes issued to Redmile, an analysis was performed to determine the pre-money value of the 797 Subsidiary. The pre-money value of the 797 Subsidiary was then utilized to determine the fair value of the conversion feature, based on the conversion mechanics of the Notes Payable by potential scenario. The estimated volatilities and the risk-free rates were incorporated into the Monte Carlo simulation for the principal amount of these Notes by potential scenario and were weighted based on the probability of each scenario occurring. Subsequently, the estimated implied interest rates were applied to the principal amount of these Notes by potential scenario and were weighted based on the probability of each scenario occurring. Scenarios and probabilities were based on management estimates and were incorporated into the determination of the fair values of the principal amount and the conversion feature of the Notes .
The fair values of the principal amount of the Notes were impacted by certain unobservable inputs, most significantly the discount rates used, the probabilities of certain scenarios occurring, expected volatility, share price performance, and expected scenario timing. Significant changes to these inputs in isolation could result in a significantly different fair value measurement.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Controlled Equity Offering
The Company has entered into a Sales Agreement with Cantor Fitzgerald & Co. ("Cantor") dated March 27, 2013, which has been subsequently amended to permit the sale by Cantor, acting as its sales agent, of up to
$75.0 million
in additional shares of the Company's common stock from time to time in an at-the-market offering under the Sales Agreement. All sales of shares have been and will continue to be made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC. The Company pays Cantor a commission of approximately
2%
of the aggregate gross proceeds the Company receives from all sales of the Company's common stock under the Sales Agreement. The amended Sales Agreement continues indefinitely until either party terminates the Sales Agreement, which may be done on
10
days prior written notice. The Company received net proceeds on sales under the Sales Agreement of approximately
$12.2 million
at a weighted average price of
$3.58
during the
three months ended September 30, 2016
.
NOTE 7 – SHARE-BASED COMPENSATION
Share-based compensation expense for all equity awards issued pursuant to the Array BioPharma Amended and Restated Stock Option and Incentive Plan (the "Option and Incentive Plan") and for estimated shares to be issued under the Employee Stock Purchase Plan ("ESPP") for the current purchase period was approximately
$1.9 million
and
$1.8 million
for the
three months ended
September 30, 2016
and 2015, respectively.
The Company uses the Black-Scholes option pricing model to estimate the fair value of its share-based awards. In applying this model, the Company uses the following assumptions:
|
|
•
|
Risk-free interest rate - The Company determines the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate.
|
|
|
•
|
Expected term - The Company estimates the expected term of its options based upon historical exercises and post-vesting termination behavior.
|
|
|
•
|
Expected volatility - The Company estimates expected volatility using daily historical trading data of its common stock.
|
|
|
•
|
Dividend yield - The Company has never paid dividends and currently have no plans to do so; therefore, no dividend yield is applied.
|
Option Awards
The fair value of the Company's option awards were estimated using the assumptions below:
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.06% - 1.24%
|
|
1.6% - 1.8%
|
Expected option term in years
|
5.5
|
|
6.25
|
Expected volatility
|
57.0% - 58.6%
|
|
59.3% - 60.1%
|
Dividend yield
|
0%
|
|
0%
|
Weighted average grant date fair value
|
$1.92
|
|
$3.29
|
The following table summarizes the Company's stock option activity under the Option and Incentive Plan for the
three months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding at June 30, 2016
|
11,647,595
|
|
|
$
|
4.80
|
|
|
|
|
|
Granted
|
768,000
|
|
|
$
|
3.74
|
|
|
|
|
|
Exercised
|
(110,541
|
)
|
|
$
|
3.47
|
|
|
|
|
|
Forfeited
|
(47,838
|
)
|
|
$
|
5.51
|
|
|
|
|
|
Expired or canceled
|
(179,929
|
)
|
|
$
|
8.23
|
|
|
|
|
|
Outstanding balance at September 30, 2016
|
12,077,287
|
|
|
$
|
4.69
|
|
|
7.5
|
|
$
|
27,112
|
|
Vested and expected to vest at September 30, 2016
|
10,244,745
|
|
|
$
|
4.73
|
|
|
7.2
|
|
$
|
22,611
|
|
Exercisable at September 30, 2016
|
5,675,371
|
|
|
$
|
4.78
|
|
|
6.0
|
|
$
|
12,450
|
|
The aggregate intrinsic value in the above table is calculated as the difference between the closing price of the Company's common stock at
September 30, 2016
, of
$6.75
per share and the exercise price of the stock options that had strike prices below the closing price. The total intrinsic value of all options exercised was
$295 thousand
during the
three months ended
September 30, 2016
. The total intrinsic value of all options exercised during the
three months ended
September 30, 2015
was
$571 thousand
.
As of
September 30, 2016
, there was approximately
$9.5 million
of total unrecognized compensation expense, including estimated forfeitures, related to the unvested stock options shown in the table above, which is expected to be recognized over a weighted average period of
2.6 years
.
Restricted Stock Units ("RSUs")
The Option and Incentive Plan provides for the issuance of RSUs that each represent the right to receive one share of Array common stock, cash or a combination of cash and stock, typically following achievement of time- or performance-based vesting conditions. The Company's RSU grants that vest subject to continued service over a defined period of time, will typically vest between
two
to
four
years, with a percentage vesting on each anniversary date of the grant, or they may be vested in full on the date of grant. Vested RSUs will be settled in shares of common stock upon the vesting date, upon a predetermined delivery date, upon a change in control of Array, or upon the employee leaving Array. All outstanding RSUs may only be settled through the issuance of common stock to recipients, and the Company intends to continue to grant RSUs that may only be settled in stock. RSUs are assigned the value of Array common stock at date of grant, and the grant date fair value is amortized over the applicable vesting period.
A summary of the status of the Company's unvested RSUs as of
September 30, 2016
and changes during the
three months ended
September 30, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted
Average
Grant Date Fair Value
|
Unvested at June 30, 2016
|
832,100
|
|
|
$
|
4.55
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Vested
|
(100,141
|
)
|
|
$
|
3.74
|
|
Forfeited
|
(1,714
|
)
|
|
$
|
3.45
|
|
Unvested at September 30, 2016
|
730,245
|
|
|
$
|
4.59
|
|
As of
September 30, 2016
, there was
$1.5 million
of total unrecognized compensation cost related to unvested RSUs granted under the Option and Incentive Plan. The cost is expected to be recognized over a weighted-average period of approximately
2.6 years
. The fair market value on the grant date for RSUs that vested during the
three months ended
September 30, 2016
and 2015 was
$375 thousand
and
$497 thousand
, respectively. RSUs granted during the
three months ended
September 30, 2016
and
2015
had a value of
$0
and
$100 thousand
, respectively, as of the grant date.
Employee Stock Purchase Plan
As of September 30, 2016, an aggregate of
5,250,000
shares of the Company's common stock are reserved for issuance under the ESPP. The ESPP allows qualified employees (as defined in the ESPP) to purchase shares of the Company's common stock at a price equal to
85%
of the lower of (i) the closing price at the beginning of the offering period or (ii) the closing price at the end of the offering period. Effective each January 1, a new
12
-month offering period begins that will end on December 31 of that year. However, if the closing stock price on July 1 is lower than the closing stock price on the preceding January 1, then the original
12
-month offering period terminates, and the purchase rights under the original offering period roll forward into a new
six
-month offering period that begins July 1 and ends on December 31. As of
September 30, 2016
, the Company had
586,104
shares available for issuance under the ESPP.
On October 27, 2016, the stockholders of the Company approved an increase, previously approved by the Board of Directors, in the number of shares of common stock reserved for issuance under the ESPP by
750,000
shares to an aggregate of
6,000,000
shares.
NOTE 8 - RELATED PARTY TRANSACTION
The Company is party to an agreement with Mirati Therapeutics, Inc. ("Mirati") whereby Array conducted a feasibility program for Mirati related to a particular target in exchange for an upfront payment of
$1.6 million
that was received in October 2014 (which was recognized as revenue over the subsequent
twelve months
) and other payments and potential payments as described below. In September 2015, Mirati exercised an option to extend the feasibility program for
six months
, for which Array received a
$750 thousand
option extension fee (which was recognized as revenue over the subsequent
six months
). During April 2016, Mirati elected to exercise an option to take an exclusive, worldwide license to an active compound under the agreement and Array received
$2.5 million
("Option Exercise Fee") and will receive additional fess as reimbursement for research and development services. In accordance with the revenue recognition criteria under ASC Topic 605, the Company determined that the Mirati agreement is a multi-deliverable arrangement with multiple deliverables: (1) the license rights, (2) services related to obtaining enhanced intellectual property rights through the issuance of a particular patent and (3) clinical development services.
The Company determined that the license granted under the Mirati Agreement does not have stand-alone value apart from the services Array will provide. Accordingly, the Option Exercise Fee received in the quarter ended June 30, 2016 is recorded as deferred revenue and is being recognized on a straight-line basis over
three years
, the period during which management expects that substantial development activities will be performed. Revenue recognized under this agreement was
$1.1 million
and
$676 thousand
for the three months ended September 30, 2016 and 2015, respectively.
Dr. Charles Baum, a current member of Array’s Board of Directors, is the President and Chief Executive Officer of Mirati.
NOTE 9 - NET LOSS PER SHARE
Basic and diluted loss per common share are computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that would occur if securities or other contracts to issue common stock were exercised, vested or converted into common stock, unless they are anti-dilutive. Diluted weighted average common shares include common stock potentially issuable under our convertible notes, notes payable at fair value, vested and unvested stock options and unvested RSUs, except where the effect of including them is anti-dilutive.
The following table summarizes the earnings (loss) per share calculation (in thousands, except per share amount):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Net loss - basic and diluted
|
|
$
|
(28,608
|
)
|
|
$
|
(20,987
|
)
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
145,100
|
|
|
142,216
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
145,100
|
|
|
142,216
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
Basic
|
|
$
|
(0.20
|
)
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.20
|
)
|
|
$
|
(0.15
|
)
|
For the periods where the Company reported losses, all common stock equivalents are excluded from the computation of diluted loss per share, since the result would be anti-dilutive. Common stock equivalents not included in the calculations of diluted loss per share because to do so would have been anti-dilutive, include the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Convertible senior notes
|
|
18,762
|
|
|
18,762
|
|
Warrants
|
|
—
|
|
|
12,000
|
|
Stock options
|
|
12,077
|
|
|
10,430
|
|
RSUs
|
|
730
|
|
|
595
|
|
Total anti-dilutive common stock equivalents excluded from diluted loss per share calculation
|
|
31,569
|
|
|
41,787
|
|
NOTE 10 - SUBSEQUENT EVENTS
On October 3, 2016, Array closed an underwritten public offering of
21,160,000
shares of its common stock, which included
2,760,000
shares of common stock issued upon the exercise in full of the option to purchase additional shares granted to the underwriters in the offering, at a public offering price of
$6.25
per share. The total net proceeds from the offering were
$124.3 million
, after underwriting discounts and commissions and offering expenses.