Quarterly report pursuant to Section 13 or 15(d)

Variable Interest Entities

v2.4.1.9
Variable Interest Entities
3 Months Ended
Mar. 31, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Variable Interest Entities
Variable Interest Entities

In May 2014, the Company entered into a Master License Agreement ("MLA") to license rights to five programs to Viking, an unrelated clinical-stage biopharmaceutical company focused on the development of novel therapies for metabolic and endocrine disorders. As part of this transaction, the Company extended a $2.5 million loan to Viking under a Loan and Security Agreement ("LSA") and evidenced by a convertible note. Under the terms of the LSA, the principal amount outstanding accrues interest at a fixed rate equal to the lesser of 5% and the maximum interest rate permitted by law. The loan is due and payable in May 2016, unless the Company has opted to convert the note into Viking common stock or extend the maturity date. Upon the earlier to occur of (i) the one-year anniversary of the closing of Viking's Initial Public Offering ("IPO") or (ii) certain other qualified financing events, the Company may elect to be repaid in cash or equity equal to 200% of accrued principal amount plus accrued and unpaid interest.

As partial consideration for the grant of the rights and licenses under the MLA, upon Viking's consummation of an IPO or certain other qualified financing events, Viking will issue to the Company shares of Viking common stock having an aggregate value of approximately $29 million, subject to adjustment in certain circumstances. At the closing of an IPO a number of shares of common stock having an aggregate value of $29.0 million will be issued to the Company, subject to adjustment in certain circumstances. In the event Viking consummates a private financing prior to an IPO, the Company has the option to receive a number of shares of the same class and type of securities issued in the private financing having an aggregate value of approximately $29.0 million, subject to adjustment in certain circumstances. The Company has the right to terminate the MLA on or after April 30, 2015 if Viking has neither completed an IPO nor received aggregate net proceeds of at least $20.0 million in one or more private financings. The Company also has the right to terminate the MLA in the event of insolvency or bankruptcy of Viking.

In April 2015, the Company entered into an amendment to the MLA with Viking (the "MLA Amendment"). The MLA Amendment increased the royalty rates payable to the Company on the annual aggregate worldwide net sales of the EPOR, SARM and TR-Beta licensed compounds.  The MLA Amendment also revised the calculation of and adjustments to the upfront payments to the Company of Viking capital stock upon completion of an IPO by Viking.  Upon completion of an IPO, Viking will issue to the Company a number of shares of Viking common stock based on Viking’s valuation as of immediately prior to such IPO.  The Company’s aggregate ownership of Viking common stock is capped at 49.9% of the Viking capital stock outstanding following the closing of the IPO. Additionally, the Company and Viking entered into an amendment to the LSA(the "LSA Amendment"). Pursuant to the LSA Amendment, the loans are no longer due and payable upon completion of an IPO, but were extended to become due upon the earlier of: (i) a certain private qualified financing transaction with aggregate net proceeds to Viking of at least $20.0 million or (ii) a public offering subsequent to IPO with aggregate net proceeds to Viking of at least $20.0 million or (iii) one year after the closing of an IPO. The Company may elect to receive equity of Viking common stock or cash equal to 200% of the principal amount plus accrued and unpaid interest.

Upon execution of the MLA and the LSA, the Company determined it held a variable interest in Viking based on management's assessment that Viking does not have sufficient resources to carry out its principal activities without the support of the Company. The Company's variable interests in Viking are a loan provided by the Company to Viking and a license agreement executed concurrently. The Company examines specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE and therefore required to consolidate the investment. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of its partner, voting rights, involvement in day-to-day operating decisions, representation on Viking's executive committee, and level of economics between the Company and Viking.

The Company has recorded 100% of the losses incurred since May 21, 2014, the effective date of the transaction, as net loss attributable to noncontrolling interest due to the fact that it is considered a primary beneficiary with no equity interest in the VIE. The advances under the loan agreement are included as notes payable by Viking and are eliminated in consolidation.    
    
The following table represents the consolidated assets and liabilities, which are owned by and are obligations of Viking and are with no recourse to the Company, as of March 31, 2015 and December 31, 2014 (in thousands):

 
March 31, 2015
 
December 31, 2014
Cash and cash equivalents
327

 
756

Other current assets
32

 
18

Capitalized IPO expenses
2,408

 
2,268

     Total current assets
$
2,767

 
$
3,042

 
 
 
 
Other assets
1

 
1

     Total assets
$
2,768

 
$
3,043

 
 
 
 
Accounts payable
$
2,397

 
$
2,211

Accrued liabilities
113

 
77

Current portion of notes payable
348

 
334

     Total current liabilities
$
2,858

 
$
2,622

 
 
 
 
Long-term portion of notes payable
2,663

 
2,331

     Total liabilities
$
5,521

 
$
4,953



In May 2015, Viking closed its IPO of 3.0 million shares of its common stock at an initial offering price of $8.00 per share for an aggregate offering price of $24.0 million before underwriters discounts. Viking granted the underwriters a 30-day option to purchase up to an additional 450,000 shares of common stock at the initial public offering price to cover over-allotments. Viking shares are currently traded under the ticker symbol VKTX on the Nasdaq capital market.

In connection with the Viking IPO, the Company purchased 1.1 million shares of Viking common stock for an aggregate price of $9.0 million at the initial public offering price. In addition, pursuant to the amended MLA Amendment, the Company received approximately 3.4 million shares of Viking common stock on the closing date of the Viking IPO, the Company will receive additional shares of Viking common stock in the event that the underwriters exercise their option to purchase additional shares to cover over-allotments, if any. As of the closing date, the Company owned an aggregate of 49.8% of the outstanding common stock of Viking, based on the shares of outstanding Viking common stock at the closing of the Viking IPO.

In connection with the share of Viking common stock received pursuant to the MLA, the Company will make a cash payment to the holders of certain Metabasis CVRs. Pursuant to the CVR agreements, the Company estimates that the aggregate cash payment will be approximately $3.2 million, subject to adjustment in the event the underwriters exercise their option to purchase additional shares to cover over-allotments, if any. The payment is expected to be made on or about January 1, 2016.