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2011-03-31
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2010-12-31
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2006-01-25
2012-03-31
0000850261
2012-03-31
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2011-12-31
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2011-01-01
2011-03-31
0000850261
2012-05-15
0000850261
2012-01-01
2012-03-31
iso4217:USD
xbrli:shares
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xbrli:shares
false
--12-31
Q1
2012
2012-03-31
10-Q
0000850261
299877135
Smaller Reporting Company
Sorrento Therapeutics, Inc.
<div> <p style="margin-top: 18px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>3. Significant Agreements and Contracts </b></font></p>
<p style="margin-top: 6px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>License Agreement with OPKO Health, Inc. </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In June 2009, the Company entered into a limited license agreement, or the OPKO License, with OPKO Health, Inc., or OPKO, pursuant to which the Company granted OPKO an exclusive, royalty-free, worldwide license under all U.S. and foreign patents and patent applications owned or controlled by the Company or any of its affiliates, or the STI Patents, to: (i) develop, manufacture, use, market, sell, offer to sell, import and export certain products related to the development, manufacture, marketing and sale of drugs for ophthalmological indications, or the OPKO Field, and (ii) use and screen any population of distinct molecules covered by any claim of the STI Patents or which is derived by use of any process or method covered by any claim of the STI Patents to identify, select and commercialize certain products within the OPKO Field. Subject to certain limitations, OPKO will have the right to sublicense the foregoing rights granted under the OPKO License. Additionally, pursuant to the OPKO License, OPKO has granted the Company an exclusive, royalty-free, worldwide license to any patent or patent application owned or controlled by OPKO or any of its affiliates to develop, use, make, market, sell and distribute certain products in any field of use, other than the OPKO Field, or the OPKO Patents. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company has retained all rights to the STI Patents outside of the OPKO Field and has agreed not to practice the OPKO Patents or the STI Patents outside the STI current field of use. Unless otherwise terminated in accordance with its terms, the License Agreement will expire upon the expiration of the last to expire patent within the STI Patents and OPKO Patents on a country-by-country basis. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; font-size: 1px;"> </p>
<p style="margin-top: 0px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>License Agreement with The Scripps Research Institute </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In January 2010, the Company entered into a license agreement, or the TSRI License, with The Scripps Research Institute, or TSRI. Under the TSRI License, TSRI granted the Company an exclusive, worldwide license to certain TSRI patent rights and materials based on quorum sensing for the prevention and treatment of Staphylococcus aureus ("Staph") infections, including Methicillin-resistant Staph. In consideration for the license, the Company: (i) issued TSRI a warrant for the purchase of common stock, (ii) agreed to pay TSRI a certain annual royalty commencing in the first year after certain patent filing milestones are achieved, (iii) agreed to pay a royalty on any sales of licensed products by the Company or its affiliates and a royalty for any revenues generated by the Company through its sublicense of patent rights and materials licensed from TSRI under the TSRI License. The TSRI License requires the Company to indemnify TSRI for certain breaches of the agreement and other matters customary for license agreements. The parties may terminate the TSRI License at any time by mutual agreement. In addition, the Company may terminate the TSRI License by giving 60 days notice to TSRI and TSRI may terminate the TSRI License immediately in the event of certain breaches of the agreement by the Company or upon the Company's failure to undertake certain activities in furtherance of commercial development goals. Unless terminated earlier by either or both parties, the term of the TSRI License will continue until the final expiration of all claims covered by the patent rights licensed under the agreement. For the three months ended March 31, 2012 and 2011 and for the period from inception (January 25, 2006)("Inception") through March 31, 2012, the Company recorded $2,221, $255 and $93,731 in patent prosecution and maintenance costs associated with the TSRI License, respectively, which have been included in general and administrative expenses. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The fair value of the warrants to purchase Company common stock, issued in connection with the TSRI License, of $17,989 was determined using the Black-Scholes valuation model with the following weighted-average assumptions: risk-free interest rate of 2.48%, no dividend yield, expected term of 10 years, and volatility of 102%. Such fair value has been included in general and administrative expenses for the period from Inception through March 31, 2012. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>NIH Grants </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In May 2010, the NIAID awarded the Company an Advanced Technology Small Business Technology Transfer Research grant to support the Company's program to generate and develop novel antibody therapeutics and vaccines to combat Staph infections, including Methicillin-resistant Staph, or the Staph Grant award. The project period for the Staph Grant award covers a two-year period which commenced in June 2010, with a potential award of $300,000 per year. As of March 31, 2012, the entire Phase 1 grant of $600,000 had been awarded. The Company records revenue associated with the grant as the related costs and expenses are incurred. During the three months ended March 31, 2012 and 2011 and for the period from Inception through March 31, 2012, the Company recorded $56,516, $35,365 and $537,137 of revenue associated with the Staph Grant award, respectively. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In July 2011, the NIAID awarded the Company a second Advanced Technology Small Business Technology Transfer Research grant, with an initial award of $300,000, to support the Company's program to generate and develop antibody therapeutics and vaccines to combat C. diff infections, or the C. diff Grant award. The project period for the C. diff Grant award covers a two-year period which commenced in June 2011, with a potential award of $300,000 per year. During the three months ended March 31, 2012 and for the period from Inception through March 31, 2012, the Company recorded $53,633 and $166,831 of revenue associated with the C. diff Grant award, respectively. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Collaboration Agreement </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In July 2010, the Company entered into the Collaboration Agreement, with a third party. Under the terms of the Collaboration Agreement, the Company provided certain antibody screening services for an upfront cash fee of $200,000 and was reimbursed for certain costs and expenses associated with providing the services, or the Development Costs. The upfront fee and reimbursable Development Costs were accounted for as separate units of accounting. The Company recorded the gross amount of the reimbursable Development Costs as revenue and the costs associated with these reimbursements are reflected as a component of research and development expense. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">Any amounts received by the Company pursuant to the Collaboration Agreement prior to satisfying the Company's revenue recognition criteria are recorded as deferred revenue. For the three months ended March 31, 2012 and 2011 and for the period from Inception through March 31, 2012, the Company recognized $0, $200,000 and $223,453, respectively, in revenue as the agreed upon services were delivered in March 2011 and there were no other significant obligations on the part of the Company. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; font-size: 1px;"> </p>
<p style="margin-top: 0px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>U.S. Treasury Grants </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">During 2010, the U.S. Treasury awarded the Company grants totaling $394,480 for investments in qualifying therapeutic discovery projects under section 48D of the Internal Revenue Code. The proceeds from this grant are classified in "Revenues – Grant " in the condensed statements of operations for the period from Inception through March 31, 2012.</font></p> </div>
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<div> <p style="margin-top: 18px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>1. Reverse Merger Transaction and Accounting </b></font></p>
<p style="margin-top: 6px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Reverse Merger Transaction </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">On September 21, 2009, QuikByte Software, Inc., a Colorado corporation and shell company, or QuikByte, acquired Sorrento Therapeutics, Inc., a privately held Delaware corporation, or STI, in a reverse merger, or the Merger. Pursuant to the Merger, all of the issued and outstanding shares of STI common stock were converted, at an exchange ratio of 25.48433-for-1, into an aggregate of 169,375,807 shares of QuikByte common stock and STI became a wholly owned subsidiary of QuikByte. The holders of QuikByte's common stock as of immediately prior to the Merger held an aggregate of 55,708,320 shares of QuikByte's common stock, which consisted of: (i) 11,073,946 shares of common stock outstanding as of September 17, 2009, and (ii) 44,634,374 shares of common stock issued on September 18, 2009 in connection with a $2.0 million private placement. The accompanying financial statements share and per share information has been retroactively adjusted to reflect the exchange ratio in the Merger. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">STI was originally incorporated as San Diego Antibody Company in California in 2006 and was renamed Sorrento Therapeutics, Inc. and reincorporated in Delaware in 2009, prior to the Merger. QuikByte was originally incorporated in Colorado in 1989. Following the Merger, on December 4, 2009, QuikByte reincorporated under the laws of the State of Delaware, or the Reincorporation. Immediately following the Reincorporation, on December 4, 2009, STI merged with and into QuikByte, the separate corporate existence of STI ceased and QuikByte continued as the surviving corporation, or the Roll-Up Merger. Pursuant to the certificate of merger filed in connection with the Roll-Up Merger, QuikByte's name was changed from QuikByte Software, Inc. to Sorrento Therapeutics, Inc., or the Company. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Reverse Merger Accounting </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">Immediately following the consummation of the Merger, the: (i) former security holders of STI common stock had an approximate 75% voting interest in QuikByte and the QuikByte stockholders retained an approximate 25% voting interest, (ii) former executive management team of STI remained as the primary continuing executive management team for the Company, and (iii) Company's ongoing operations consisted solely of the ongoing operations of STI. Based primarily on these factors, the Merger was accounted for as a reverse merger and a recapitalization in accordance with generally accepted accounting principles in the U.S., or GAAP. As a result, these financial statements reflect the: (i) historical results of STI prior to the Merger, (ii) combined results of the Company following the Merger, and (iii) acquired assets and liabilities at their historical cost, which approximates their fair value at the Merger date. In connection with the Merger, the Company received cash of $104,860, other current assets of $20,150 and assumed accounts payable of $24,624.</font></p> </div>
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<div> <p style="margin-top: 18px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>5. Income Taxes </b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company maintains deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets include net operating loss carryforwards, research credits and capitalized research and development. The net deferred tax asset has been fully offset by a valuation allowance because of the Company's history of losses. Utilization of operating losses and credits may be subject to substantial annual limitation due to ownership change provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.</font></p> </div>
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<div> <p style="margin-top: 18px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>2. Nature of Operations and Summary of Significant Accounting Policies </b></font></p>
<p style="margin-top: 6px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Nature of Operations and Basis of Presentation </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company is a biopharmaceutical company focused on the discovery, development and commercialization of novel and proprietary biotherapeutics for the treatment of a variety of disease conditions, including cancer, inflammation, metabolic and infectious diseases. The Company's objective is to either independently or through one or more partnerships with pharmaceutical or biopharmaceutical organizations identify drug development candidates derived from the libraries. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">As of March 31, 2012, the Company had devoted substantially all of its efforts to product development, raising capital and building infrastructure, and had not realized revenues from its planned principal operations. Accordingly, the Company is considered to be in the development stage. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The accompanying interim condensed financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with GAAP. The balance sheet at December 31, 2011 is derived from the audited balance sheet at that date which is not presented herein. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of financial position, results of operations and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Operating results for interim periods are not necessarily indicative of operating results for the Company's 2012 fiscal year. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; font-size: 1px;"> </p>
<p style="margin-top: 0px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Liquidity </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The accompanying financial statements have been prepared on the going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed financial statements, the Company has incurred operating losses since its inception in 2006, and as of March 31, 2012, had an accumulated deficit of $7,011,117. At March 31, 2012, the Company had working capital of $2,218,784. Based on the Company's resources at March 31, 2012, including the sale of 37,500,000 shares of the Company's common stock for gross proceeds of $6.0 million in May 2012, and our current plan of expenditure on research and development programs, management believes the Company has the ability to fund the Company's operations for at least the next twelve months. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Use of Estimates </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management believes that these estimates are reasonable; however, actual results may differ from these estimates. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Cash and Cash Equivalents </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company minimizes its credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. The Company has not experienced any losses on such accounts. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Fair Value of Financial Instruments </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company's financial instruments consist of cash and cash equivalents, grants receivable, prepaid expenses and other assets, accounts payable and accrued expenses. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. As of March 31, 2012 and December 31, 2011, the carrying amount of cash and cash equivalents, grants receivable, prepaid expenses and other assets, accounts payable and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Grants Receivable </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">Grants receivable at March 31, 2012 and December 31, 2011 represent amounts due under two federal contracts with the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, or NIH, collectively, the NIH Grants. The Company considers the grants receivable to be fully collectible; accordingly, no allowance for doubtful amounts has been established. If amounts become uncollectible, they are charged to operations. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Property and Equipment </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary from three to five years. Leasehold improvements are amortized over the lesser of the life of the lease or the life of the asset. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Impairment of Long-Lived Assets </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company evaluates its long-lived assets with definite lives, such as property and equipment, for impairment. The Company records impairment losses on long-lived assets used for operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying value of the assets. There have not been any impairment losses of long-lived assets through March 31, 2012. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Income Taxes </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740-10, Uncertainty in Income Taxes, address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company has determined that it has no uncertain tax positions. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. </font></p>
<p style="margin-top: 12px; margin-bottom: 0px; font-size: 1px;"> </p>
<p style="margin-top: 0px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company has deferred tax assets, which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company evaluates the recoverability of the deferred tax assets annually. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Revenue Recognition </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company's revenues are generated from the NIH and U.S. Treasury grant awards and a feasibility study agreement, or the Collaboration Agreement, that the Company entered into with a third party in July 2010. The revenue from the NIH and U.S. Treasury grant awards are based upon subcontractor and internal costs incurred that are specifically covered by the grant, and where applicable, a facilities and administrative rate that provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by subcontractors or when the Company incurs internal expenses that are related to the grant. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The revenue from the Collaboration Agreement is derived from the completion of certain development services and the reimbursement of certain development costs incurred to provide such development services. Revenue from upfront, nonrefundable service fees are recognized when earned, as evidenced by written acknowledgement from the collaborator, or other persuasive evidence that all service deliverables have been achieved, provided that the service deliverables are substantive and their achievability was not reasonably assured at the inception of the Collaboration Agreement. Any amounts received prior to satisfying the Company's revenue recognition criteria are recorded as deferred revenue. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Research and Development Costs </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">All research and development costs are charged to expense as incurred. Such costs primarily consist of lab supplies, contract services, stock-based compensation expense, salaries and related benefits. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Stock-based Compensation </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee's requisite service period (generally the vesting period of the equity grant). </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company accounts for equity instruments, including restricted stock or stock options, issued to non-employees in accordance with authoritative guidance for equity-based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. Restricted stock issued to non-employees is accounted for at estimated fair value as they vest. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Net Loss per Share </i></b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">Net loss per share is presented as both basic and diluted net loss per share. Basic net loss per share excludes any dilutive effects of options, shares subject to repurchase and warrants. Diluted net loss per share includes the impact of potentially dilutive securities. No dilutive effect was calculated for the three months ended March 31, 2012 and 2011 as the Company reported a net loss for each respective period and the effect would have been anti-dilutive. The Company had outstanding common share equivalents of 6,504,686 and 6,203,162 at March 31, 2012 and 2011, respectively.</font></p> </div>
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3404531
<div> <p style="margin-top: 18px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>4. Stockholders' Equity </b></font></p>
<p style="margin-top: 6px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>Common Stock </b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In December 2011, the Company entered into a Stock Purchase Agreement, or the Stock Purchase Agreement, and issued 12,500,000 shares of common stock, in a private placement transaction, at $0.16 per share for aggregate gross proceeds of $2.0 million. In May 2012, the Company entered into an Amended and Restated Stock Purchase Agreement and issued an additional 37,500,000 shares of common stock at $0.16 per share for aggregate gross proceeds of $6.0 million. See Note 6. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><i>Stock Incentive Plans </i></b></font></p>
<p style="margin-top: 6px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><i>2009 Equity Incentive Plan </i></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In February 2009, prior to the Merger, the Company's Board of Directors approved the 2009 Equity Incentive Plan, or the EIP, under which 10,000,000 shares of common stock were reserved for issuance to employees, non-employee directors and consultants of the Company. The EIP provided for the grant of incentive stock options, non-incentive stock options, restricted stock awards and stock bonus awards to eligible recipients. In March 2009, the Company issued 7,403,861 restricted common stock awards to certain consultants for aggregate gross proceeds of $291. The restricted shares vest monthly over four years and the Company has the option to repurchase any unvested shares at the original purchase price upon any voluntary or involuntary termination. Any unvested shares immediately vest in the event of a merger, sale, or other transaction resulting in a change in control of the Company. In January 2011, the Company repurchased 1,104,135 unvested shares of restricted common stock for $43. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">At March 31, 2012, 1,342,186 shares were unvested and subject to repurchase by the Company. The Company has the right of first refusal to purchase any proposed disposition of shares issued under the EIP. As a result of the Merger, no further shares are available for grant under the EIP. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><i>2009 Non-Employee Director Grants </i></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In September 2009, prior to the adoption of the 2009 Stock Incentive Plan, the Company's Board of Directors approved the reservation and issuance of 200,000 nonstatutory stock options to the Company's non-employee directors. The outstanding options vested on the one year anniversary of the vesting commencement date in October 2010. Such options are exercisable on the two year anniversary of the grant date and are generally exercisable for up to 10 years from the grant date. As of December 31, 2010, no further shares may be granted under this plan and, as of March 31, 2012, 120,000 options were outstanding. </font></p>
<p style="margin-top: 18px; margin-bottom: 0px; margin-left: 2%;"><font style="font-family: Times New Roman;" class="_mt" size="2"><i>2009 Stock Incentive Plan </i></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In October 2009, the Company's stockholders approved the 2009 Stock Incentive Plan, or the Stock Plan, which became effective in December 2009 and under which 14,400,000 shares of the Company's common stock are reserved for issuance to employees, non-employee directors and consultants of the Company. In addition, this amount will be automatically increased annually on the first day of each fiscal year by the lesser of: (i) 1% of the aggregate number of shares of the Company's common stock outstanding on the last day of the immediately preceding fiscal year, (ii) 1,200,000 shares, or (iii) an amount approved by the administrator of the Stock Plan. The Stock Plan provides for the grant of incentive stock options, non-incentive stock options, stock appreciation rights, restricted stock awards, unrestricted stock awards, restricted stock unit awards and performance awards to eligible recipients. Recipients of stock options shall be eligible to purchase shares of the Company's common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the Stock Plan is ten years. Employee option grants will generally vest 25% on each anniversary of the original vesting date over four years. The vesting schedules for grants to non-employee directors and consultants will be determined by the Company's Compensation Committee. Stock options are generally not exercisable prior to the applicable vesting date, unless otherwise accelerated under the terms of the applicable stock plan agreement. Unvested shares of the Company's common stock issued in connection with an early exercise however, may be repurchased by the Company upon termination of the optionee's service with the Company. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">During the three months ended March 31, 2012 and 2011, the Company's Board of Directors awarded 2,055,000 and 1,240,000 options to certain employees and consultants and 10,372,500 and 9,880,000 shares were available for grant under the Stock Plan, respectively. </font></p>
<p style="margin-top: 12px; margin-bottom: 0px; font-size: 1px;"> </p>
<p style="margin-top: 0px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. Stock based compensation expense is recognized over the vesting period using the straight-line method. The fair value of employee stock options was estimated at the grant date using the following assumptions: </font></p>
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<td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="6" align="center"><font style="font-family: Times New Roman;" class="_mt" size="1"><b>Three months ended March 31,</b></font></td>
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<td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center"><font style="font-family: Times New Roman;" class="_mt" size="1"><b>2012</b></font></td>
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<td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center"><font style="font-family: Times New Roman;" class="_mt" size="1"><b>2011</b></font></td>
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<p style="text-indent: -1em; margin-left: 1em;"><font style="font-family: Times New Roman;" class="_mt" size="2">Dividend yield</font></p></td>
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<p style="text-indent: -1em; margin-left: 1em;"><font style="font-family: Times New Roman;" class="_mt" size="2">Volatility</font></p></td>
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<td valign="bottom" align="right"><font style="font-family: Times New Roman;" class="_mt" size="2">102</font></td>
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<td valign="bottom" align="right"><font style="font-family: Times New Roman;" class="_mt" size="2">102</font></td>
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<p style="text-indent: -1em; margin-left: 1em;"><font style="font-family: Times New Roman;" class="_mt" size="2">Risk-free interest rate</font></p></td>
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<td valign="bottom" align="right"><font style="font-family: Times New Roman;" class="_mt" size="2">1.02</font></td>
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<td valign="bottom" align="right"><font style="font-family: Times New Roman;" class="_mt" size="2">2.61</font></td>
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<p style="text-indent: -1em; margin-left: 1em;"><font style="font-family: Times New Roman;" class="_mt" size="2">Expected life of options</font></p></td>
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<td valign="bottom" align="right"><font style="font-family: Times New Roman;" class="_mt" size="2">5.7 years</font></td>
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<td valign="bottom" align="right"><font style="font-family: Times New Roman;" class="_mt" size="2">6.1 years</font></td>
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<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The weighted average grant date fair value per share of employee stock options granted during the three months ended March 31, 2012 and 2011 was $0.13 and $0.11, respectively. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The assumed dividend yield was based on the Company's expectation of not paying dividends in the foreseeable future. Due to the Company's limited historical data, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. The risk-free interest rate assumption was based on the United States Treasury's rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The total employee stock-based compensation recorded as operating expenses was $26,728, $10,473 and $120,586 for the three months ended March 31, 2012 and 2011 and for the period from Inception through March 31, 2012, respectively. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">As of March 31, 2012, unrecognized compensation cost related to the options was approximately $214,267, which will be recognized over 2.9 years. </font></p>
<p style="margin-top: 12px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Company records equity instruments issued to non-employees as expense at their fair value over the related service period as determined in accordance with the applicable authoritative guidance and periodically revalues the equity instruments as they vest. Stock-based compensation expense related to non-employee consultants recorded as operating expenses was $74,440, $13,229 and $584,094 for the three months ended March 31, 2012 and 2011 and for the period from Inception through March 31, 2012, respectively.</font></p> </div>
<div> <p style="margin-top: 18px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>6. Subsequent Event </b></font></p>
<p style="margin-top: 6px; text-indent: 32px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In May 2012, the Company entered into an Amended and Restated Stock Purchase Agreement to provide for the issuance of an additional 37,500,000 shares of common stock at $0.16 per share for aggregate gross proceeds of $6.0 million. The Amended and Restated Stock Purchase Agreement amended the Company's previously-announced Stock Purchase Agreement dated December 29, 2011 pursuant to which the Company issued and sold 12,500,000 shares of common stock in consideration for an aggregate investment of $2.0 million. The additional 37,500,000 shares were issued effective on May 15, 2012. 12,500,000 of the shares were purchased by an investor, Hongye San Diego Group, LLC, of which Dr. Henry Ji, our interim Chief Executive Officer and Chief Scientific Officer, is a managing director.</font></p> </div>