Arena Pharmaceuticals, Inc.
ARENA PHARMACEUTICALS INC (Form: 10-Q, Received: 11/09/2016 16:09:06)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to

Commission File Number: 000-31161

 

ARENA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

23-2908305

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

6154 Nancy Ridge Drive, San Diego, CA

 

92121

(Address of principal executive offices)

 

(Zip Code)

 

858.453.7200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes       No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes       No

The number of shares of common stock outstanding as of the close of business on November 4, 2016:

 

Class

 

Number of Shares Outstanding

Common Stock, $0.0001 par value

 

243,313,807

 

 

 

 


 

ARENA PHARMACEUTICALS, INC.

INDEX

 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets - As of September 30, 2016, and December 31, 2015

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three and Nine Months Ended September 30, 2016, and 2015

2

 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2016, and 2015

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

23

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

25

Item 6.

Exhibits

51

Signatures

52

 

 

TRADEMARKS AND CERTAIN TERMS

Arena Pharmaceuticals®, Arena® and our corporate logo are registered service marks of Arena. BELVIQ®, BELVIQ XR®, and VENESPRI® are registered trademarks of our wholly owned subsidiary, Arena Pharmaceuticals GmbH. Any other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.

In this Quarterly Report on Form 10-Q, “Arena Pharmaceuticals,” “Arena,” “the Company,” “we,” “us” and “our” refer to Arena Pharmaceuticals, Inc., and our wholly owned subsidiaries on a consolidated basis, unless the context otherwise provides. “APD” is an abbreviation for Arena Pharmaceuticals Development.

Lorcaserin has been approved in the United States, South Korea and Mexico for weight management in a twice-a-day dosage formulation. The twice-a-day dosage formulation is being commercialized in the United States and South Korea under the brand name BELVIQ, and is expected to be commercialized in Mexico under the brand name VENESPRI. Lorcaserin has also recently been approved in the United States in a once-a-day dosage formulation, which is BELVIQ XR. In this document, “BELVIQ” refers to each of the formulations of lorcaserin approved for weight management, unless the context otherwise indicates.

 

 

 

i


 

PART I. FINANCI AL INFORMATION

Item 1.  Financial Statements.

ARENA PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,629

 

 

$

156,184

 

Accounts receivable

 

 

18,304

 

 

 

4,934

 

Inventory

 

 

10,166

 

 

 

9,502

 

Prepaid expenses and other current assets

 

 

4,768

 

 

 

4,218

 

Total current assets

 

 

134,867

 

 

 

174,838

 

Land, property and equipment, net

 

 

64,980

 

 

 

71,828

 

Intangibles, net

 

 

7,518

 

 

 

7,775

 

Other non-current assets

 

 

2,883

 

 

 

2,351

 

Total assets

 

$

210,248

 

 

$

256,792

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

14,767

 

 

$

8,334

 

Accrued clinical and preclinical study fees

 

 

6,532

 

 

 

3,286

 

Payable to Eisai

 

 

12,065

 

 

 

12,080

 

Accrued restructuring charges

 

 

1,244

 

 

 

1,793

 

Current portion of deferred revenues

 

 

22,522

 

 

 

21,425

 

Current portion of lease financing obligations

 

 

3,378

 

 

 

2,978

 

Total current liabilities

 

 

60,508

 

 

 

49,896

 

Other long-term liabilities

 

 

853

 

 

 

470

 

Deferred revenues, less current portion

 

 

82,132

 

 

 

87,617

 

Lease financing obligations, less current portion

 

 

62,678

 

 

 

65,267

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock

 

 

24

 

 

 

24

 

Additional paid-in capital

 

 

1,439,745

 

 

 

1,430,917

 

Accumulated other comprehensive income (loss)

 

 

867

 

 

 

(1,179

)

Accumulated deficit

 

 

(1,437,308

)

 

 

(1,376,220

)

Total equity attributable to stockholders of Arena

 

 

3,328

 

 

 

53,542

 

Equity attributable to noncontrolling interest in consolidated variable interest entity

 

 

749

 

 

 

0

 

Total equity

 

 

4,077

 

 

 

53,542

 

Total liabilities and equity

 

$

210,248

 

 

$

256,792

 

 

1

The balance sheet data at December 31, 2015, has been derived from audited financial statements at that date. It does not include, however, all of the information and notes required by US generally accepted accounting principles for complete financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

1


 

ARENA PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

3,323

 

 

$

4,884

 

 

$

11,104

 

 

$

15,787

 

Other Eisai collaboration revenue

 

 

12,954

 

 

 

2,065

 

 

 

18,155

 

 

 

7,414

 

Toll manufacturing

 

 

1,228

 

 

 

1,463

 

 

 

3,276

 

 

 

3,199

 

Other collaboration revenue

 

 

1,737

 

 

 

726

 

 

 

6,066

 

 

 

4,175

 

Total revenues

 

 

19,242

 

 

 

9,138

 

 

 

38,601

 

 

 

30,575

 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

882

 

 

 

1,635

 

 

 

4,161

 

 

 

6,129

 

Cost of toll manufacturing

 

 

1,930

 

 

 

1,584

 

 

 

4,876

 

 

 

3,798

 

Research and development

 

 

17,466

 

 

 

22,072

 

 

 

54,514

 

 

 

68,241

 

General and administrative

 

 

8,590

 

 

 

9,028

 

 

 

23,979

 

 

 

26,311

 

Restructuring charges

 

 

231

 

 

 

0

 

 

 

6,346

 

 

 

0

 

Total operating costs and expenses

 

 

29,099

 

 

 

34,319

 

 

 

93,876

 

 

 

104,479

 

Loss from operations

 

 

(9,857

)

 

 

(25,181

)

 

 

(55,275

)

 

 

(73,904

)

Interest and Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

54

 

 

 

37

 

 

 

247

 

 

 

105

 

Interest expense

 

 

(1,609

)

 

 

(1,683

)

 

 

(4,907

)

 

 

(5,133

)

Gain from valuation of derivative liabilities

 

 

0

 

 

 

852

 

 

 

0

 

 

 

474

 

Other

 

 

(1,067

)

 

 

(443

)

 

 

(1,275

)

 

 

938

 

Total interest and other expense, net

 

 

(2,622

)

 

 

(1,237

)

 

 

(5,935

)

 

 

(3,616

)

Net loss

 

 

(12,479

)

 

 

(26,418

)

 

 

(61,210

)

 

 

(77,520

)

Less net loss attributable to noncontrolling interest in consolidated

   variable interest entity

 

 

122

 

 

 

0

 

 

 

122

 

 

 

0

 

Net loss attributable to stockholders of Arena

 

$

(12,357

)

 

$

(26,418

)

 

$

(61,088

)

 

$

(77,520

)

Net loss attributable to stockholders of Arena per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.05

)

 

$

(0.11

)

 

$

(0.25

)

 

$

(0.32

)

Diluted

 

$

(0.05

)

 

$

(0.11

)

 

$

(0.25

)

 

$

(0.32

)

Shares used in calculating net loss attributable to stockholders of

   Arena per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

243,254

 

 

 

242,257

 

 

 

243,069

 

 

 

240,033

 

Diluted

 

 

243,254

 

 

 

242,257

 

 

 

243,069

 

 

 

240,033

 

Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(12,479

)

 

$

(26,418

)

 

$

(61,210

)

 

$

(77,520

)

Foreign currency translation gain (loss)

 

 

694

 

 

 

(2,881

)

 

 

2,046

 

 

 

(2,499

)

Comprehensive loss

 

 

(11,785

)

 

 

(29,299

)

 

 

(59,164

)

 

 

(80,019

)

Less comprehensive loss attributable to noncontrolling interest in

   consolidated variable interest entity

 

 

122

 

 

 

0

 

 

 

122

 

 

 

0

 

Comprehensive loss attributable to stockholders of Arena

 

$

(11,663

)

 

$

(29,299

)

 

$

(59,042

)

 

$

(80,019

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

2


 

ARENA PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(61,210

)

 

$

(77,520

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,005

 

 

 

7,401

 

Amortization of intangibles

 

 

104

 

 

 

147

 

Share-based compensation

 

 

9,261

 

 

 

11,795

 

Gain from valuation of derivative liabilities

 

 

0

 

 

 

(474

)

Amortization of prepaid financing costs

 

 

102

 

 

 

102

 

Loss on disposal of property and equipment

 

 

798

 

 

 

1,007

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(13,122

)

 

 

116

 

Inventory

 

 

157

 

 

 

1,240

 

Prepaid expenses and other assets

 

 

(514

)

 

 

(366

)

Payables and accrued liabilities

 

 

8,820

 

 

 

(21,271

)

Deferred revenues

 

 

(4,929

)

 

 

4,506

 

Other long-term liabilities

 

 

62

 

 

 

78

 

Net cash used in operating activities

 

 

(53,466

)

 

 

(73,239

)

Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(644

)

 

 

(10,800

)

Proceeds from sale of property and equipment

 

 

786

 

 

 

2,232

 

Other non-current assets

 

 

(659

)

 

 

(55

)

Net cash used in investing activities

 

 

(517

)

 

 

(8,623

)

Financing Activities

 

 

 

 

 

 

 

 

Principal payments on lease financing obligations

 

 

(2,189

)

 

 

(1,829

)

Proceeds from issuance of common stock

 

 

288

 

 

 

102,934

 

Net cash provided by (used in) financing activities

 

 

(1,901

)

 

 

101,105

 

Effect of exchange rate changes on cash

 

 

1,329

 

 

 

(1,172

)

Net increase (decrease) in cash and cash equivalents

 

 

(54,555

)

 

 

18,071

 

Cash and cash equivalents at beginning of period

 

 

156,184

 

 

 

163,209

 

Cash and cash equivalents at end of period

 

$

101,629

 

 

$

181,280

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


 

ARENA PHARMACEUTICALS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Arena Pharmaceuticals, Inc. should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission, or SEC, from which we derived our balance sheet as of December 31, 2015. The accompanying consolidated financial statements have been prepared in accordance with US generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of our management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The accompanying consolidated financial statements include the balances and activity of our wholly owned subsidiaries and Beacon Discovery, Inc., or Beacon, a variable interest entity for which we have the controlling financial interest (see Note 13). The equity attributable to the noncontrolling interest in Beacon is presented as a separate component from the equity attributable to stockholders of Arena in the equity section of the condensed consolidated balance sheet. The results of operations and comprehensive loss attributable to the noncontrolling interest in Beacon is presented as separate components from the results of operations and comprehensive loss attributable to the stockholders of Arena in the condensed consolidated statement of operations and comprehensive loss.

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. ASU No. 2014-09 is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2017. ASU No. 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU No. 2014-09 is recognized as an adjustment to the opening retained earnings balance for the year of implementation. We have not yet selected an adoption method as we are currently evaluating the impact of ASU No. 2014-09 on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU No. 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. ASU No. 2014-15 applies to all entities and is effective for annual and interim periods ending after December 15, 2016, with early adoption permitted. We do not expect the adoption of ASU No. 2014-15 to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU No. 2016-01 supersedes and amends the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. ASU No. 2016-01 is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2017, and calls for prospective application, with early application permitted. We do not expect the adoption of ASU No. 2016-01 to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU No. 2016-02 amends the accounting guidance for leases. The amendments contain principles that will require lessees to recognize most leases on the balance sheet by recording a right-of-use asset and a lease liability, unless the lease is a short-term lease that has an accounting lease term of 12 months or less. The amendments also contain other changes to the current lease guidance that may result in changes to how entities determine which contractual arrangements qualify as a lease, the accounting for executory costs (such as property taxes and insurance), as well as which lease origination costs will be capitalizable. The new standard also requires expanded quantitative and qualitative disclosures.

4


 

ASU No. 2016-02 is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. ASU No. 2016-02 requires the use of th e modified retrospective transition method, whereby the new guidance will be applied at the beginning of the earliest period presented in the financial statements of the period of adoption. We are currently evaluating the impact of ASU No. 2016-02 on our c onsolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 is designed to simplify several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU No. 2016-09 is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of ASU No. 2016-09 on our consolidated financial statements.

The preparation of financial statements in accordance with GAAP requires our management to make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. The amounts reported could differ under different estimates and assumptions.

 

 

2. Fair Value Disclosures

We measure our financial assets and liabilities at fair value, which 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 valuation hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value our financial assets and liabilities:

 

Level 1

 

-

 

Observable inputs such as unadjusted quoted prices in active markets for identical instruments.

 

 

 

 

 

Level 2

 

-

 

Quoted prices for similar instruments in active markets or inputs that are observable for the asset or liability, either directly or indirectly.

 

 

 

 

Level 3

 

-

 

Significant unobservable inputs based on our assumptions.

 

The following tables present our valuation hierarchy for our financial assets and liabilities that are measured at fair value on a recurring basis, in thousands:

 

 

 

Fair Value Measurements at September 30, 2016

 

 

 

Balance

 

 

Quoted Prices in

Active Markets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 1

 

$

56,327

 

 

$

56,327

 

 

$

0

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2015

 

 

 

Balance

 

 

Quoted Prices in

Active Markets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 1

 

$

113,080

 

 

$

113,080

 

 

$

0

 

 

$

0

 

 

(1)

Included in cash and cash equivalents on our condensed consolidated balance sheets.

 

 

5


 

3. Inventory

Inventory consisted of the following, in thousands:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Raw materials

 

$

2,692

 

 

$

2,487

 

Work in process

 

 

2,969

 

 

 

2,781

 

Finished goods at Arena GmbH

 

 

727

 

 

 

165

 

Finished goods at Eisai

 

 

2,492

 

 

 

3,309

 

Finished goods at Ildong

 

 

1,286

 

 

 

760

 

Total inventory

 

$

10,166

 

 

$

9,502

 

 

 

4. Land, Property and Equipment

Land, property and equipment consisted of the following, in thousands:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Cost

 

$

166,420

 

 

$

172,729

 

Less accumulated depreciation and amortization

 

 

(101,440

)

 

 

(100,901

)

Land, property and equipment, net

 

$

64,980

 

 

$

71,828

 

 

 

5. Accounts Payable and Other Accrued Liabilities

Accounts payable and other accrued liabilities consisted of the following, in thousands:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Accounts payable

 

$

7,645

 

 

$

2,078

 

Accrued compensation

 

 

5,663

 

 

 

5,118

 

Other accrued liabilities

 

 

1,459

 

 

 

1,138

 

Total accounts payable and other accrued liabilities

 

$

14,767

 

 

$

8,334

 

 

 

6. Collaborations

Please refer to our Annual Report on Form 10-K for the year ended December 31, 2015, for additional information regarding the collaborations described below.

Eisai.

We have a collaboration agreement with Eisai Inc. and Eisai Co., Ltd. (collectively with Eisai Inc., Eisai). Under this agreement, or Eisai Agreement, Eisai is the exclusive distributor of BELVIQ in the United States and most other countries in the world except for South Korea, Taiwan, Australia, New Zealand and Israel.

In July 2016, the US Food and Drug Administration approved the New Drug Application for our once-daily formulation of lorcaserin for chronic weight management under the brand name BELVIQ XR. Eisai will pay us a $10.0 million substantive milestone payment earned from this achievement. Eisai has the exclusive rights to distribute BELVIQ XR in the United States. In October 2016, Eisai announced the commercial launch of BELVIQ XR in the United States.

In July 2016, the Federal Commission for the Protection Against Sanitary Risk approved the Marketing Authorization Application in Mexico for our twice-daily formulation of lorcaserin for chronic weight management. The product will be sold under the brand name VENESPRI. Eisai will pay us a $1.0 million substantive milestone payment earned from this achievement. Eisai has the exclusive rights to distribute VENESPRI in Mexico.

Under the Eisai Agreement, in addition to the $11.0 million in milestones mentioned above and the other $86.5 million in milestones previously achieved since we entered the agreement in 2010, we are eligible to receive up to 16 substantive regulatory

6


 

milestones totaling $1 6 5.0 million . These payments are based on 16 milestone events of which eight milestones with an aggregate value of $105.0 million are related to a second or third product approval.

The following table summarizes the revenues we recognized for the periods presented under the Eisai Agreement, in thousands:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net product sales

 

$

1,868

 

 

$

3,274

 

 

$

7,179

 

 

$

11,603

 

Milestone payments

 

 

11,000

 

 

 

0

 

 

 

11,000

 

 

 

0

 

Amortization of upfront payments

 

 

1,886

 

 

 

1,886

 

 

 

5,656

 

 

 

5,656

 

Reimbursement of development expenses

 

 

11

 

 

 

107

 

 

 

1,242

 

 

 

1,454

 

Reimbursement of patent and trademark expenses

 

 

57

 

 

 

72

 

 

 

257

 

 

 

304

 

Subtotal other Eisai collaborative revenue

 

 

12,954

 

 

 

2,065

 

 

 

18,155

 

 

 

7,414

 

Total

 

$

14,822

 

 

$

5,339

 

 

$

25,334

 

 

$

19,017

 

 

The following table summarizes the deferred revenues under the Eisai Agreement, in thousands:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Upfront payments

 

$

81,278

 

 

$

86,933

 

Net product sales

 

 

7,331

 

 

 

10,754

 

Total deferred revenues attributable to Eisai

 

 

88,609

 

 

 

97,687

 

Less current portion

 

 

(14,872

)

 

 

(18,295

)

Deferred revenues attributable to Eisai, less current portion

 

$

73,737

 

 

$

79,392

 

 

Ildong Pharmaceutical Co., Ltd.

We and Ildong Pharmaceutical Co., Ltd., or Ildong, have an exclusive agreement, or Ildong Agreement, under which Ildong has exclusive rights to commercialize BELVIQ in South Korea for weight loss or weight management in obese and overweight patients. We also provide certain services and manufacture and sell BELVIQ to Ildong. There are no milestones we are eligible to receive in the future under the Ildong Agreement.

CY Biotech Company Limited

We have an agreement with CY Biotech Company Limited, or CYB. Under this agreement, we granted CYB exclusive rights to commercialize BELVIQ in Taiwan for weight loss or weight management in obese and overweight patients, subject to regulatory approval of BELVIQ by the Taiwan Food and Drug Administration. We also provide certain services and will manufacture and sell BELVIQ to CYB. There are no material milestones we are eligible to receive in the future under this agreement.

Abic Marketing Limited (Teva)

We granted Teva exclusive rights to commercialize BELVIQ in Israel for weight loss or weight management in obese and overweight patients, subject to regulatory approval of BELVIQ by the Israeli Ministry of Health, or MOH. We also provide certain services and will manufacture and sell BELVIQ to Teva. There are no material milestones we are eligible to receive in the future under this agreement.

Axovant Sciences Ltd.

We and Axovant Sciences, Ltd., or Axovant, have an exclusive agreement, or Axovant Agreement, under which Axovant has exclusive worldwide rights to develop and commercialize nelotanserin, subject to regulatory approval. We also provide certain services and will manufacture and sell nelotanserin to Axovant.

Under the Axovant Agreement, we are eligible to receive up to an aggregate of $41.5 million in success milestones in case of full development and regulatory success of nelotanserin. Of these payments, two development milestones totaling $4.0 million are substantive and four regulatory milestones totaling $37.5 million are substantive.

7


 

Boehringer Ingelheim International GmbH.

We and Boehringer Ingelheim GmbH, or Boehringer Ingelheim, have an exclusive agreement, or Boehringer Ingelheim Agreement, to conduct joint research to identify drug candidates targeting an undisclosed G protein-coupled receptor, or GPCR, that belongs to the group of orphan central nervous system, or CNS, receptors.

Under the Boehringer Ingelheim Agreement, we are eligible to receive up to an aggregate of $251.0 million in success milestones in case of full commercial success of multiple drug products. Of these payments, three development milestones totaling $7.0 million are substantive, three development milestones totaling $30.0 million are non-substantive, nine regulatory milestones totaling $84.0 million are non-substantive and four commercial milestones totaling $130.0 million are non-substantive.

 

 

7. Share-based Activity

Share-based Compensation.

We recognized share-based compensation expense as follows, in thousands:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of product sales

 

$

0

 

 

$

0

 

 

$

20

 

 

$

0

 

Research and development

 

 

1,200

 

 

 

2,097

 

 

 

4,940

 

 

 

6,338

 

General and administrative

 

 

981

 

 

 

1,751

 

 

 

3,269

 

 

 

5,457

 

Restructuring charges

 

 

0

 

 

 

0

 

 

 

1,032

 

 

 

0

 

Total share-based compensation expense

 

$

2,181

 

 

$

3,848

 

 

$

9,261

 

 

$

11,795

 

Total share-based compensation expense capitalized

   into inventory

 

$

64

 

 

$

41

 

 

$

149

 

 

$

146

 

 

Share-based Award Activity.

The following table summarizes our stock option activity during the nine months ended September 30, 2016, in thousands (except per share data):

 

 

 

Options

 

 

Weighted-

Average

Exercise Price

 

Outstanding at January 1, 2016

 

 

16,407

 

 

$

5.01

 

Granted

 

 

16,502

 

 

 

1.61

 

Exercised

 

 

(63

)

 

 

1.57

 

Forfeited/cancelled/expired

 

 

(7,281

)

 

 

3.70

 

Outstanding at September 30, 2016

 

 

25,565

 

 

$

3.20

 

 

The following table summarizes activity with respect to our time-based restricted stock unit awards, or RSUs, during the nine months ended September 30, 2016, in thousands (except per share data):

 

 

 

RSUs

 

 

Weighted-

Average

Grant-Date

Fair Value

 

Unvested at January 1, 2016

 

 

273

 

 

$

4.67

 

Granted

 

 

0

 

 

 

 

 

Vested

 

 

(193

)

 

4,51

 

Forfeited/cancelled

 

 

(9

)

 

 

4.31

 

Unvested at September 30, 2016

 

 

71

 

 

$

5.16

 

 

During the nine months ended September 30, 2016, the remaining Total Stockholder Return, or TSR, performance restricted stock unit, or PRSU, awards that we granted to our executive officers in March 2013 were forfeited without any earnout based on the TSR of our common stock relative to the TSR of the NASDAQ Biotechnology Index over the three-year performance period that began on March 1, 2013. In the aggregate, the target number of shares of common stock that could have been earned under the PRSUs

8


 

granted in March 2013 was 780,000. Ex cept for those cancelled due to employment separation from Arena, the PRSU awards granted in March 2014 and March 2015 are still outstanding at September 30, 2016.

 

 

8. Concentrations of Credit Risk and Major Customers

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents. We limit our exposure to credit loss by holding our cash primarily in US dollars or, from time to time, placing our cash and investments in US government, agency and government-sponsored enterprise obligations and in corporate debt instruments that are rated investment grade, in accordance with an investment policy approved by our Board of Directors.

Eisai and Ildong are the exclusive distributors of BELVIQ in the United States and South Korea, respectively. Eisai is also the exclusive distributor of BELVIQ XR in the United States. We also produce drug products for Siegfried AG, or Siegfried, and, to a lesser extent, another third party under toll manufacturing agreements.

Percentages of our total revenues are as follows:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Eisai Agreement (See Note 6)

 

 

77.0

%

 

 

58.4

%

 

 

65.6

%

 

 

62.2

%

Ildong Agreement

 

 

8.2

%

 

 

18.6

%

 

 

11.0

%

 

 

24.4

%

Toll manufacturing agreements

 

 

6.4

%

 

 

16.0

%

 

 

8.5

%

 

 

10.5

%

Boehringer Ingelheim Agreement (See Note 6)

 

 

5.6

%

 

 

0.0

%

 

 

10.0

%

 

 

0.0

%

Axovant Agreement (See Note 6)

 

 

2.4

%

 

 

6.1

%

 

 

4.3

%

 

 

2.2

%

Other collaborative agreements

 

 

0.4

%

 

 

0.9

%

 

 

0.6

%

 

 

0.7

%

Total percentage of revenues

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

9. Net Loss Per Share

We calculate basic and diluted net loss attributable to stockholders of Arena per share using the weighted-average number of shares of common stock outstanding during the period.

Since we are in a net loss position, in addition to excluding potentially dilutive out-of-the money securities, we exclude from our calculation of diluted net loss attributable to stockholders of Arena per share all potentially dilutive in-the-money (i) stock options, (ii) RSUs, (iii) PRSUs, (iv) unvested restricted stock in our deferred compensation plan and (v) our previously outstanding warrant, and our diluted net loss per share is the same as our basic net loss per share.

The following table presents the weighted-average number of potentially dilutive securities that were excluded from our calculation of diluted net loss attributable to stockholders of Arena per share, in thousands:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock options

 

 

28,559

 

 

 

17,462

 

 

 

24,791

 

 

 

17,033

 

RSUs and unvested restricted stock

 

 

175

 

 

 

690

 

 

 

242

 

 

 

576

 

Warrant

 

 

0

 

 

 

0

 

 

 

0

 

 

 

26

 

Total

 

 

28,734

 

 

 

18,152

 

 

 

25,033

 

 

 

17,635

 

 

Because the market conditions for the PRSUs were not satisfied at September 30, 2016, or September 30, 2015, such securities are excluded from the table above.

 

 

10. Legal Proceedings

Beginning on September 20, 2010, a number of complaints were filed in the US District Court for the Southern District of California against us and certain of our current and former employees and directors on behalf of certain purchasers of our common stock. The complaints were brought as purported stockholder class actions, and, in general, include allegations that we and certain of our current and former employees and directors violated federal securities laws by making materially false and misleading statements

9


 

regarding our BELVIQ program, thereby artificially inflating the price of our common stock. The plaintiffs sought unspecified monetary damages and other relief. On August 8, 2011, the Court consolidated the actions and appoi nted a lead plaintiff and lead counsel. On November 1, 2011, the lead plaintiff filed a consolidated amended complaint. On March 28, 2013, the Court dismissed the consolidated amended complaint without prejudice. On May 13, 2013, the lead plaintiff filed a second consolidated amended complaint. On November 5, 2013, the Court dismissed the second consolidated amended complaint without prejudice as to all parties except for Robert E. Hoffman, who was dismissed from the action with prejudice. On November 27, 2 013, the lead plaintiff filed a motion for leave to amend the second consolidated amended complaint. On March 20, 2014, the Court denied plaintiff’s motion and dismissed the second consolidated amended complaint with prejudice. On April 18, 2014, the lead plaintiff filed a notice of appeal, and on August 27, 2014, the lead plaintiff filed his appellate brief in the US Court of Appeals for the Ninth Circuit. On October 24, 2014, we filed our answering brief in response to the lead plaintiff’s appeal. On Dece mber 5, 2014, the lead plaintiff filed his reply brief. A panel of the Ninth Circuit heard oral argume nt on the appeal on May 4, 2016. On October 26, 2016, the Ninth Circuit panel reversed the district court’s dismissal of the second consolidated amended c omplaint and remanded the case back to the district court for further proceedings. Due to the stage of these proceedings, we are not able to predict or reasonably estimate the ultimate outcome or possible losses relating to these claims.

On September 30, 2016, we and Eisai filed a patent infringement lawsuit against Lupin Limited and Lupin Pharmaceuticals, Inc. (collectively with Lupin Limited, Lupin) in the U.S. District Court for the District of Delaware. The lawsuit relates to a “Paragraph IV certification” notification we and Eisai received regarding an abbreviated new drug application, or ANDA, submitted to the FDA by Lupin requesting approval to engage in the commercial manufacture, use, importation, offer for sale or sale of a generic version of BELVIQ® (lorcaserin hydrochloride tablets, 10 mg). In its notification, Lupin alleged that no valid, enforceable claim of any of the patents which are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) for BELVIQ® will be infringed by Lupin’s manufacture, importation, use, sale or offer for sale of the product described in its ANDA. The lawsuit claims infringement of U.S. Patent Nos. 6,953,787; 7,514,422; 7,977,329; 8,207,158; 8,273,734; 8,546,379; 8,575,149; 8,999,970 and 9,169,213. In accordance with the Hatch-Waxman Act, as a result of filing a patent infringement lawsuit within 45 days of receipt of Lupin’s notification, the FDA cannot approve the ANDA any earlier than 7.5 years from NDA approval unless a District Court finds that all of the asserted claims of the patents-in-suit are invalid, unenforceable or not infringed. We and Eisai are seeking a determination from the court that, among other things, Lupin has infringed our patents, Lupin’s ANDA should not be approved until the expiration date of our patents, and Lupin should be enjoined from commercializing a product that infringes our patents. We cannot predict the ultimate outcome of any proceeding.

 

 

11. Restructuring Charges

In the fourth quarter of 2015, we committed to a reduction in our US workforce of approximately 35%, or approximately 80 employees, which we substantially completed by the end of 2015. In the fourth quarter of 2015, we committed to a reduction in our Swiss workforce of approximately 17%, or approximately 14 employees, which we substantially completed by the end of the second quarter of 2016. As a result of these workforce reductions, we recorded a restructuring charge in the fourth quarter of 2015 for termination benefits, including severance and other benefits, of $4.0 million, and at September 30, 2016, all of this charge has been paid.

In the second quarter of 2016, we committed to a reduction in our US workforce of approximately 73%, or approximately 100 employees, which we substantially completed in the third quarter of 2016. As a result of this workforce reduction, we recorded a restructuring charge in the second quarter of 2016 of $6.1 million for termination benefits, including severance and other benefits. Included within this amount is non-cash, share-based compensation expense of $1.0 million related to the accelerated vesting of stock options and the extension of the exercise period of vested options for employees impacted by the workforce reduction. At September 30, 2016, $4.0 million of the cash portion of the restructuring charge has been paid, resulting in a remaining accrual of $1.1 million.

In the third quarter of 2016, we committed to a reduction of our manufacturing workforce in Zofingen, Switzerland of approximately 23%, or approximately 15 employees, which we plan to substantially complete by the end of the first quarter of 2017. As a result of this workforce reduction, we recorded a restructuring charge in the third quarter of 2016 of $0.2 million for cash termination benefits. At September 30, 2016, $0.1 million of this charge has been paid, resulting in a remaining accrual of $0.1 million.

 

 

12. Management Changes

Appointment of President and Chief Executive Officer.

In May 2016, our Board of Directors appointed Amit Munshi as our President and Chief Executive Officer, and he joined our Board of Directors in June 2016 following our 2016 Annual Stockholders’ Meeting. Harry F. Hixson, Jr., Ph.D., who served as our interim Chief Executive Officer from October 2015 to May 2016, continues to serve on our Board of Directors.

10


 

In connection with Mr. Munshi’s appointment as an officer, our Board of Directors’ Compensation Committee approved an inducement stock option grant to Mr. Munshi to purchase 3,800,000 share s of our common stock under our 2013 Long-Term Incentive Plan, as amended in May 2016 , to reserve an additional 3,800,000 shares of common stock for inducement awards. The nonstatutory stock options have a seven-year term and will vest over four years, wit h 25% of the shares subject to vesting one year after grant and the remainder of the shares vesting quarterly over the following three years in equal installments, subject to his continued service through the applicable vesting dates and possible accelerat ion in specified cir cumstances.

Termination of Chief Medical Officer.

In June 2016, our Board of Directors terminated without cause our former Senior Vice President and Chief Medical Officer, William R. Shanahan, Jr., M.D., J.D. Under our Amended and Restated Severance Benefit Plan, as amended, or Severance Benefit Plan, Dr. Shanahan is entitled to receive the following termination benefits: (1) a cash severance payment of approximately $0.5 million (subject to applicable withholdings); (2) continuation of health insurance coverage for a period of 12 months; (3) acceleration of the stock options and RSUs (other than PRSUs) held by Dr. Shanahan that would otherwise have vested through the 12-month period following the date of his termination, provided that, for purposes of calculating such vesting acceleration, any unvested portion of such equity awards that were scheduled to vest in annual installments are treated as if the original grant provided for vesting in equal monthly installments rather than annually; and (4) continued stock option exercisability until the later of (i) the end of the original post-termination exercise period provided in the applicable stock option agreement or (ii) 12 months (but not beyond the original contractual life of the option). In addition, with respect to outstanding PRSUs, when our Board of Directors’ Compensation Committee determines our relative performance for an applicable performance period, a pro-rata portion of the relevant PRSUs held by Dr. Shanahan is eligible to vest (based on the percentage of the performance period that Dr. Shanahan provided service prior to his termination). The pro-rata vesting may be accelerated if we undergo a change in control before the scheduled end of the performance period. We recorded a charge of $1.0 million in the second quarter of 2016 related to these benefits, including non-cash, share-based compensation expense of $0.4 million, which is included in research and development expenses in our condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2016. As of September 30, 2016, there are remaining accruals for these benefits of $0.6 million included in accounts payable and other accrued expenses, the majority of which we expect to pay in the fourth quarter of 2016.

In July 2016, we and Dr. Shanahan entered into a one-year services agreement whereby Dr. Shanahan performs services for us relating to our research and development programs. As compensation, Dr. Shanahan receives a fixed monthly fee along with reimbursement of certain pre-approved expenses and continued stock option exercisability until 24 months from the July 2016 effective date of this agreement (but not beyond the original contractual life of the option). We recorded a charge of $0.1 million in the third quarter of 2016 related to this compensation, including non-cash, share-based compensation expense, which is included in research and development expenses in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2016.

Appointment of Chief Financial Officer.

In June 2016, our Board of Directors appointed Kevin R. Lind as our Executive Vice President and Chief Financial Officer. In connection with such appointment, our Board’s Compensation Committee approved an inducement stock option grant to Mr. Lind to purchase 800,000 shares of our common stock under our 2013 Long-Term Incentive Plan, as amended in May 2016 and June 2016, to reserve an additional 800,000 shares of common stock for inducement awards in addition to the 3,800,000 shares it previously reserved for such awards. The nonstatutory stock options have a seven-year term and will vest over 4 years, with 25% of the shares subject to vesting one year after grant and the remainder of the shares vesting monthly over the following three years in equal installments, subject to his continued service through the applicable vesting dates and possible acceleration in specified circumstances.

Appointment of Chief Business Officer.

In August 2016, our Board of Directors appointed Vincent Aurentz as our Executive Vice President and Chief Business Officer. In connection with such appointment, our Board’s Compensation Committee approved an inducement stock option grant to Mr. Aurentz to purchase 800,000 shares of our common stock under our 2013 Long-Term Incentive Plan, as amended in May 2016, June 2016 and August 2016, to reserve an additional 800,000 shares of common stock for inducement awards in addition to the 4,600,000 shares it previously reserved for such awards. The nonstatutory stock options have a seven-year term and will vest over 4 years, with 25% of the shares subject to vesting one year after grant and the remainder of the shares vesting monthly over the following three years in equal installments, subject to his continued service through the applicable vesting dates and possible acceleration in specified circumstances.

11


 

Resignation of Chief Scientific Of ficer.

In September 2016, Dominic P. Behan, Ph.D., D.Sc., our former Executive Vice President and Chief Scientific Officer resigned from the Company, including from our Board of Directors, and became the Chief Executive Officer of Beacon (see Note 13). Dr. Behan's resignation follows our strategic shift in priorities to emphasize our proprietary clinical stage pipeline, which was announced on June 30, 2016. Dr. Behan’s resignation was for good reason under our Severance Benefit Plan resulting from Dr. Behan’s materially diminished duties and responsibilities following this strategic shift.

Following his resignation from the Company, Dr. Behan acts as the Chair of our Scientific Advisory Board and provides consulting services to us regarding our research and development program under a five-year consulting agreement, or Consulting Agreement, which may be terminated earlier by either party on 30 days advanced written notice. Dr. Behan receives a market rate hourly consulting fee, along with reimbursement of certain pre-approved expenses. In addition, Dr. Behan’s consulting services constitute continuous service with us, and as a result, the outstanding equity awards we previously granted to Dr. Behan continue to vest and/or be exercisable, as those services are provided in accordance with the applicable plan(s) and written grant instrument(s) for such awards.

Under the Severance Benefit Plan, Dr. Behan is entitled to receive the following termination benefits: (1) a cash severance payment of approximately $0.9 million (subject to applicable withholdings); (2) continuation of health insurance coverage for a period of 18 months; (3) acceleration of the stock options and RSUs (other than PRSUs) held by Dr. Behan that would otherwise have vested through the 18-month period following his Arena employee-status termination date, provided that, for purposes of calculating such vesting acceleration, any unvested portion of such equity awards that were scheduled to vest in annual installments are treated as if the original grant provided for vesting in equal monthly installments rather than annually; (4) for options that were vested as of his Arena employee-status termination date, including those for which vesting was accelerated upon his termination, continued stock option exercisability until the later of (i) the end of the original post-termination exercise period provided in the applicable stock option agreement measured from the date of cessation of services under the Consulting Agreement or (ii) 18 months following his Arena employee status termination date (but not beyond the original contractual life of the option) and (5) for options that were not vested as of his Arena employee-status termination date, continued stock option exercisability, to the extent vested as of the date of cessation of services under the Consulting Agreement, until the end of the original post-termination exercise period provided in the applicable stock option agreement measured from the date of cessation of services under the Consulting Agreement (but not beyond the original contractual life of the option).

We recorded a charge of $2.6 million in the third quarter of 2016 related to these benefits, including non-cash, share-based compensation expense of $1.6 million, which is included in research and development expenses in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2016. As of September 30, 2016, there are remaining accruals for these benefits of $0.9 million included in accounts payable and other accrued expenses, the majority of which we expect to pay in the first quarter of 2017.

 

 

13. Beacon Discovery, Inc.

In the third quarter of 2016, Beacon was formed. Beacon is a privately held drug discovery incubator which focuses on identifying and advancing molecules targeting GCPRs. Dr. Behan is the Chief Executive Officer of Beacon (see Note 12). On September 1, 2016, we entered into various agreements with Beacon described in further detail below.

We entered into a license and collaboration agreement with Beacon, pursuant to which we transferred certain equipment to Beacon and granted Beacon a non-exclusive, non-assignable and non-sublicensable license to certain database information relating to compounds, receptors and pharmacology, and transferred certain equipment to Beacon. Beacon will seek to engage global partners to facilitate discovery and development. Beacon has agreed to assign to us any intellectual property relating to our existing research and development programs developed in the course of performing research for us, and grant us a non-exclusive license to any intellectual property developed outside the course of performing work for us that is reasonably necessary or useful for developing or commercializing the products under our research and development programs. We are also entitled to rights of negotiation and rights of first refusal to potentially obtain licenses to compounds discovered and developed by Beacon. In addition, we are entitled to receive (i) a percentage of any revenue received by Beacon on or after the second anniversary of the effective date of the agreement from any third party pursuant to a third party license, including upfront payments, milestone payments and royalties; (ii) single-digit royalties on the aggregate net sales of any related products sold by Beacon and its affiliates; and (iii) in the event that Beacon is sold, a percentage of the consideration for such sale transaction.

We entered a master services agreement with Beacon, pursuant to which Beacon performs certain research services for us.

12


 

We also entered into a separate services agreement with Beacon , pursuant to which Beacon now perform s our researc h obligations under the Boehringer Ingelheim Agreement. In consideration for performing these research obligations, Beacon is entitled to receive the applicable FTE payments that are paid to us by B oehringer Ingelheim for the research services and certain milestone payments.

We also entered into a sublease agreement, or Sublease, with Beacon, pursuant to which we sublease approximately 15,000 square feet of laboratory, office and meeting room space to Beacon for a period of five years. Beacon can defer payments due to us under the Sublease by increasing the outstanding principal amount under a secured promissory note, or Note, we issued to Beacon. The outstanding principal amount and all accrued or unpaid interest thereon (calculated at a simple interest rate of seven percent per annum) shall be due and payable on the earlier of (i) August 31, 2022 or (ii) Beacon receiving cumulative cash proceeds of $10,000,000 from the sale of equity, issuance of debt or third party license revenue.

As Beacon would not be able to finance its activities without the financial support we are providing pursuant to these agreements, Beacon is a variable interest entity. Arena does not own any equity in Beacon; however, as these agreements provide us the controlling financial interest in Beacon, we consolidate Beacon’s balances and activity within our condensed consolidated financial statements. The noncontrolling interest attributable to Beacon presented on our condensed consolidated financial statements is comprised of Beacon’s equity ownership interests as we do not own any voting interest in Beacon.

The following table presents a reconciliation of the equity attributable to the stockholders of Arena and the equity attributable to Beacon, in thousands:

 

 

 

Equity Attributable to Stockholders of Arena

 

 

Equity Attributable to Noncontrolling Interest in Consolidated Variable Interest Entity

 

 

Total Equity

 

Balance at December 31, 2015

 

$

53,542

 

 

$

0

 

 

$

53,542

 

Net loss

 

 

(61,088

)

 

 

(122

)

 

 

(61,210

)

Translation gain

 

 

2,046

 

 

 

0

 

 

 

2,046

 

Contribution of equipment and other assets

   from Arena to Beacon

 

 

(871

)

 

 

871

 

 

 

0

 

Other

 

 

9,699

 

 

 

0