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Geneos Therapeutics, Inc. | 9 Months Ended
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Sep. 30, 2020
Noncontrolling Interest [Abstract] |
Geneos Therapeutics, Inc. | Geneos Therapeutics, Inc. In August 2016, the Company formed Geneos, to develop and commercialize neoantigen-based personalized cancer therapies. Geneos was considered a variable interest entity (VIE) for which the Company was the primary beneficiary. In February 2019, Geneos completed the initial closing of a preferred stock financing. The Company invested $1.2 million in the preferred stock financing, which was led by an outside investor. Following this transaction, the Company held 61% of the outstanding equity, on an as-converted to common stock basis, of Geneos and continued to consolidate its investment in Geneos under ASC 810, Consolidation. In January 2020, Geneos completed the second closing of the preferred stock financing, in which the Company invested $800,000. Following this transaction, as of March 31, 2020, the Company held 52% of the outstanding equity, on an as-converted to common stock basis, of Geneos and continued to consolidate its investment in Geneos. In June 2020, Geneos closed an additional preferred stock financing round, in which the Company invested $800,000. Following this transaction, the Company no longer held a controlling financial interest as the Company, owned 47% of the outstanding equity of Geneos on an as-converted to common stock basis. This transaction triggered a VIE reconsideration. Based on the Company’s assessment, Geneos continued to be a VIE as it did not have sufficient equity at risk to finance its activities without additional subordinated financial support. However, the Company was not the primary beneficiary of Geneos, as it did not have the power to direct the activities that most significantly impact Geneos’ economic performance. Accordingly, the Company deconsolidated its investment in Geneos as of June 1, 2020, resulting in a gain of $4.1 million, of which $2.4 million related to the remeasurement of the retained noncontrolling interest investment to fair value. The gain has been recorded separately on the Company's condensed consolidated statement of operations. The following table shows the amounts related to the deconsolidation accounting:
Working capital (excluding cash) | $ | (59,992) |
Note payable | 171,620 |
Fixed assets, net of accumulated depreciation | (16,340) |
Carrying value of noncontrolling interest | 3,181,640 |
Fair value of investment in Geneos retained | 3,618,998 |
Gain on deconsolidation of Geneos | (4,121,075) |
Decrease in cash resulting from the deconsolidation of Geneos | $ | 2,774,851 |
The details of the Company’s 47% retained equity investment in Geneos is shown in the table below, with fair values calculated as of June 1, 2020, the date of deconsolidation.
Geneos Share Class | Shares |  | Price per Share |  | Fair Value
Common | 3,000,000 |  |  | $ | 0.273 |  |  | $ | 819,000 |
Preferred | 2,113,206 |  |  | $ | 1.325 |  |  | $ | 2,799,998 |
Total | 5,113,206 |  |  |  |  | $ | 3,618,998 |
The fair value of Geneos preferred stock was based on the per share price paid by third-party investors in connection with the most recent closing of preferred stock financing for Geneos on June 1, 2020. The fair value of Geneos common stock was determined by a third-party valuation, as there is no public market for Geneos’ common stock. Geneos’ enterprise value, which was estimated using a market approach that derived an implied total equity value from a transaction involving Geneos’ own securities, was allocated to all classes of equity using the option pricing method. Under the option pricing method, each equity class was modeled as having a call option with a distinct claim on the total value of Geneos. Each option’s exercise price was based on Geneos’ total value available for each participating security holder. The characteristics of each class of ownership determined the claim on the total value for that class of ownership. The estimated value allocated to common stock included assumptions related to the fair value of the enterprise, expected volatility, expected term, and risk-free interest rate. Expected volatility was based on historical asset volatilities derived from daily stock price changes of guideline public companies. The estimated expected term was based on a weighted average of Geneos’ estimated time to their next financing and successful exit timing assumption. The risk-free interest rate was based on the yield of U.S. Treasury with a comparable term. Geneos’s common stock is classified as a Level 3 financial instrument. The assumptions used in the fair value calculation as of June 1, 2020 are presented below:
Expected term (years) | 2.92
Volatility | 70%
Risk-free interest rate | 2.46%
Geneos enterprise value | $4,966,531
The Company applies the equity method to investments in common stock and to other investments in entities that have risk and reward characteristics that are substantially similar to an investment in the investee’s common stock. Since the Company’s preferred stock investment in Geneos has a substantive liquidation preference, it is not substantially similar to the Company’s common stock investment and will therefore be recorded as an equity security under ASC 321. As of June 1, 2020, the Company accounts for its common stock investment in Geneos, in which the Company lacks control but does have the ability to exercise significant influence over operating and financial policies, using the equity method. Generally, the ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. In applying the equity method, the Company records the investment at cost unless the initial recognition is the result of the deconsolidation of a subsidiary, in which case it is recorded at fair value. The Company's proportionate share of net loss of Geneos is recorded in equity in net earnings of Geneos in the Company's condensed consolidated statements of operations. The Company's equity method investments are reviewed for indicators of impairment at each reporting period and are written down to fair value if there is evidence of a loss in value that is other-than-temporary. Any difference between the carrying amount of the Company’s investment and the amount of underlying equity in Geneos’ net assets is amortized into income or expense accordingly. There were no basis differences identified as of the deconsolidation date that would need to be amortized. Upon deconsolidation, the Company recorded its preferred stock investment at fair value based on the per share price paid by third party investors in connection with the preferred stock financing on June 1, 2020. The Company has determined that its preferred stock investment in Geneos does not have a readily determinable fair value and has therefore elected the measurement alternative in ASC 321 to subsequently record the investment at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. When fair value becomes determinable, from observable price changes in orderly transactions, the Company’s investment will be marked to fair value. There have been no observable price changes or impairments identified since the deconsolidation date. The Company’s share of net losses of Geneos for the period from June 1, 2020 through September 30, 2020 was $2.7 million. Of this amount, $819,000 has been allocated to the equity method investment, thereby reducing the balance to $0 as of September 30, 2020. The remaining $1.8 million loss has been allocated to the Company’s preferred stock investment in Geneos, thereby reducing the balance to $958,000 as of September 30, 2020 as shown in the table below:
Investment in Geneos upon deconsolidation |  | $ | 3,618,998 |
Share in net loss of Geneos |  | $ | (2,661,431) |
Investment in Geneos as of September 30, 2020 |  | $ | 957,567 |
The Company continues to exclusively license its SynCon® immunotherapy and CELLECTRA® technology platform to Geneos to be used in the field of personalized, neoantigen-based therapy for cancer. The license agreement provides for potential royalty payments to the Company in the event that Geneos commercializes any products using the licensed technology. The Company is not obligated to use any of its assets to fund the future operations of Geneos.

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