Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q 
(Mark one)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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: 000-30347 
 
CURIS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
04-3505116
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
4 Maguire Road
Lexington, Massachusetts
 
02421
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (617) 503-6500
 
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, Par Value $0.01 per share
 
CRIS
 
Nasdaq Global Market
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.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ¨
Accelerated filer  ¨
Non-accelerated filer  x
Smaller reporting company    x
 
 
 
Emerging growth company    ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
As of November 1, 2019, there were 33,202,871 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

Table of Contents

CURIS, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q
Table of Contents
 
 
 
Page
Number
PART I.
FINANCIAL INFORMATION
 
Item 1.
3
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
7
 
 
 
 
8
 
 
 
Item 2.
24
 
 
 
Item 3.
35
 
 
 
Item 4.
35
 
 
 
PART II.
 
 
 
 
Item 1A.
36
 
 
 
Item 6.
72
 
 
73


2
Table of Contents

PART I—FINANCIAL INFORMATION
Item 1.
UNAUDITED FINANCIAL STATEMENTS

CURIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
21,357

 
$
23,636

Investments
6,652

 
634

Short term investment – restricted
153

 
—

Accounts receivable
2,897

 
2,864

Prepaid expenses and other current assets
1,624

 
827

Total current assets
32,683

 
27,961

Property and equipment, net
203

 
267

Operating lease right-of-use asset
373

 
—

Long-term investment – restricted
—

 
153

Goodwill
8,982

 
8,982

Other assets
3

 
2

Total assets
$
42,244

 
$
37,365

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
2,478

 
$
2,909

Accrued liabilities
1,831

 
3,457

Operating lease liability
409

 
—

Current portion of long term debt, net
—

 
6,884

Total current liabilities
4,718

 
13,250

Long term debt, net
—

 
28,600

Liability related to the sale of future royalties, net
63,544

 
—

Other long term liabilities
—

 
11

Total liabilities
68,262

 
41,861

Stockholders’ Deficit:
 
 
 
Common stock, $0.01 par value—101,250,000 shares authorized; 33,202,871 shares issued and outstanding at September 30, 2019; 67,500,000 shares authorized; 33,159,253 shares issued and outstanding at December 31, 2018
332

 
332

Additional paid-in capital
982,020

 
980,012

Accumulated deficit
(1,008,373
)
 
(984,840
)
Accumulated other comprehensive income
3

 
—

Total stockholders’ deficit
(26,018
)
 
(4,496
)
Total liabilities and stockholders’ deficit
$
42,244

 
$
37,365

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3
Table of Contents

CURIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Royalties
$
2,906

 
$
2,781

 
$
7,185

 
$
7,649

Contra revenue
(50
)
 
66

 
(468
)
 
24

Total revenues
2,856

 
2,847

 
6,717

 
7,673

Costs and expenses:
 
 
 
 
 
 
 
Cost of royalty revenues
145

 
154

 
342

 
417

Research and development
5,147

 
4,983

 
14,840

 
19,700

General and administrative
2,887

 
4,127

 
8,557

 
11,741

Total costs and expenses
8,179

 
9,264

 
23,739

 
31,858

Loss from operations
(5,323
)
 
(6,417
)
 
(17,022
)
 
(24,185
)
Other expense:
 
 
 
 
 
 
 
Loss on debt extinguishment
—

 
—

 
(3,495
)
 
—

Interest income
170

 
166

 
513

 
541

Imputed interest expense related to the sale of future royalties
(1,303
)
 
—

 
(2,721
)
 
—

Interest expense, debt
—

 
(972
)
 
(791
)
 
(2,990
)
Other income (expense), net
20

 
—

 
(17
)
 
—

Total other expense
(1,113
)
 
(806
)
 
(6,511
)
 
(2,449
)
Net loss
$
(6,436
)
 
$
(7,223
)
 
$
(23,533
)
 
$
(26,634
)
Net loss per common share (basic and diluted)
$
(0.19
)
 
$
(0.22
)
 
$
(0.71
)
 
$
(0.80
)
Weighted average common shares (basic and diluted)
33,202,871

 
33,161,592

 
33,170,844

 
33,117,290

Net loss
$
(6,436
)
 
$
(7,223
)
 
$
(23,533
)
 
$
(26,634
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain on marketable securities
3

 
1

 
3

 
2

Comprehensive loss
$
(6,433
)
 
$
(7,222
)
 
$
(23,530
)
 
$
(26,632
)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4
Table of Contents

CURIS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
(In thousands, except share data)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
December 31, 2018
33,159,253

 
$
332

 
$
980,012

 
$
—

 
$
(984,840
)
 
$
—

 
$
(4,496
)
Recognition of stock based compensation
—

 
—

 
651

 
—

 
—

 
—

 
651

Cancellation of restricted stock awards
(8,473
)
 
—

 
—

 
—

 
—

 
—

 
—

Net loss
—

 
—

 
—

 
—

 
(9,884
)
 
—

 
(9,884
)
March 31, 2019
33,150,780

 
$
332

 
$
980,663

 
$
—

 
$
(994,724
)
 
$
—

 
$
(13,729
)
Issuance of common stock under the Employee Stock Purchase Plan
52,091

 
—

 
42

 
—

 
—

 
—

 
42

Recognition of stock based compensation
—

 
—

 
631

 
—

 
—

 
—

 
631

Net loss
—

 
—

 
—

 
—

 
(7,213
)
 
—

 
(7,213
)
June 30, 2019
33,202,871

 
$
332

 
$
981,336

 
$
—

 
$
(1,001,937
)
 
$
—

 
$
(20,269
)
Recognition of stock based compensation
—

 
—

 
684

 
—

 
—

 
—

 
684

Unrealized gain on marketable securities
—

 
—

 
—

 
—

 
—

 
3

 
3

Net loss
—

 
—

 
—

 
—

 
(6,436
)
 
—

 
(6,436
)
September 30, 2019
33,202,871

 
$
332

 
$
982,020

 
$
—

 
$
(1,008,373
)
 
$
3

 
$
(26,018
)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
























5
Table of Contents


CURIS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity - Continued
(In thousands, except share data)
(Unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
December 31, 2017
33,075,949

 
$
331

 
$
977,453

 
$
(1,524
)
 
$
(952,265
)
 
$
(2
)
 
$
23,993

Issuances of common stock under grant of restricted stock awards
294,250

 
3

 
(3
)
 
—

 
—

 
—

 
—

Recognition of employee stock-based compensation
—

 
—

 
1,226

 
—

 
—

 
—

 
1,226

Retirement of Treasury Stock
(244,569
)
 
(3
)
 
(1,521
)
 
1,524

 
—

 
—

 
—

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(4
)
 
(4
)
Net loss
—

 
—

 
—

 
—

 
(10,747
)
 
—

 
(10,747
)
March 31, 2018
33,125,630

 
$
331

 
$
977,155

 
$
—

 
$
(963,012
)
 
$
(6
)
 
$
14,468

Issuance of common stock under the Employee Stock Purchase Plan
55,516

 
1

 
111

 
—

 
—

 
—

 
112

Recognition of stock based compensation
—

 
—

 
1,189

 
—

 
—

 
—

 
1,189

Unrealized gain on marketable securities
—

 
—

 
—

 
—

 
—

 
5

 
5

Net loss
—

 
—

 
—

 
—

 
(8,664
)
 
—

 
(8,664
)
June 30, 2018
33,181,146

 
$
332

 
$
978,455

 
$
—

 
$
(971,676
)
 
$
(1
)
 
$
7,110

Issuance of common stock under the Employee Stock Purchase Plan
—

 
—

 
895

 
—

 
—

 
—

 
895

Cancellation of restricted stock awards
(68,000
)
 
(1
)
 
—

 
—

 
—

 
1

 
—

Net loss
—

 
—

 
—

 
—

 
(7,223
)
 
—

 
(7,223
)
September 30, 2018
33,113,146

 
$
331

 
$
979,350

 
$
—

 
$
(978,899
)
 
$
—

 
$
782

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6
Table of Contents

CURIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(23,533
)
 
$
(26,634
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
97

 
139

Non-cash lease expense
673

 
—

Stock based compensation expense
1,966

 
3,309

Amortization of debt issuance costs
8

 
25

Non-cash imputed interest expense related to the sale of future royalties
267

 
—

Non-cash interest income on investments
(51
)
 
(131
)
Non-cash interest expense on operating lease liability
50

 
—

Loss on extinguishment of debt
3,495

 
—

Loss on disposal of fixed assets
8

 
—

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(33
)
 
218

Prepaid expenses, and other assets
(798
)
 
(138
)
Accounts payable and accrued and other liabilities
(2,006
)
 
(1,913
)
Operating lease liability
(749
)
 
—

Total adjustments
2,927

 
1,509

Net cash used in operating activities
(20,606
)
 
(25,125
)
Cash flows from investing activities:
 
 
 
Purchase of investments
(10,914
)
 
(26,145
)
Sales and maturities of investments
4,950

 
42,950

Purchase of property and equipment
(41
)
 
(85
)
Net cash (used in) provided by investing activities
(6,005
)
 
16,720

Cash flows from financing activities:
 
 
 
Proceeds from royalty interest purchase agreement with Oberland Capital Management, LLC
65,000

 
—

Payment of issuance costs on royalty interest purchase agreement
(584
)
 
—

Proceeds from issuance of common stock under the Company's share-based compensation plan.
42

 
112

Payment of liability of future royalties, net of imputed interest
(1,139
)
 
—

Payment on termination of credit agreement with HealthCare Royalty Partners, III, L.P.
(37,162
)
 
—

Payments on Curis Royalty’s debt
(1,825
)
 
(4,434
)
Net cash provided by (used in) financing activities
24,332

 
(4,322
)
Net decrease in cash and cash equivalents
(2,279
)
 
(12,727
)
Cash and cash equivalents, beginning of period
23,636

 
38,288

Cash and cash equivalents, end of period
$
21,357

 
$
25,561

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

7
Table of Contents

CURIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share data)
 
1.
Nature of Business
Curis, Inc. is a biotechnology company focused on the development of first-in-class and innovative therapeutics for the treatment of cancer. As used throughout these Condensed Consolidated Financial Statements, the term “the Company” refers to the business of Curis, Inc. and its wholly owned subsidiaries, except where the context otherwise requires, and the term “Curis” refers to Curis, Inc.
The Company conducts its research and development programs both internally and through strategic collaborations. The Company’s clinical stage drug candidates are fimepinostat, CA-4948, and CA-170:

•
Fimepinostat is currently being explored in clinical studies in patients with MYC-altered diffuse large B-cell lymphoma (“DLBCL”) and solid tumors and has been granted Orphan Drug Designation and Fast Track Designation for the treatment of DLBCL by the U.S. Food and Drug Administration, (“FDA”) in April 2015 and May 2018, respectively. The Company has begun enrollment in a Phase 1 combination study with venetoclax in DLBCL patients, including patients with translocations in both MYC and the BCL2 gene, also referred to as double-hit lymphoma, or high grade B-cell lymphoma (“HGBL”). The Company expects to report initial clinical data from this combination study in the fourth quarter of 2019.
•
CA-4948 is being tested in a dose escalating clinical trial in patients with non-Hodgkin lymphomas, including those with myeloid differentiation primary response 88, or MYD88, alterations. The Company is currently planning to initiate a separate Phase 1 trial for acute myeloid leukemia (“AML”) and myelodysplastic syndromes (“MDS”) patients. The Company expects to report further clinical data from the study in the fourth quarter of 2019.
•
CA-170 is currently undergoing testing in a clinical study in patients with mesothelioma. The Company will announce initial data in conjunction with the Society for Immunotherapy of Cancer conference in November 2019. Based on this data, no further patients will be enrolled in the study. The Company is currently evaluating future studies for CA-170.
The Company’s pipeline also includes CA-327, which is a pre-Investigational New Drug (“IND”) stage oncology drug candidate.
The Company is party to a collaboration with Genentech Inc. (“Genentech”), a member of the Roche Group, under which F. Hoffmann-La Roche Ltd (“Roche”) and Genentech are commercializing ErivedgeTM (vismodegib), a first-in-class orally administered small molecule Hedgehog signaling pathway inhibitor. Erivedge is approved for the treatment of advanced basal cell carcinoma (“BCC”).
In January 2015, and as amended in September 2016, the Company entered into a collaboration, option and license agreement focused on immuno-oncology and selected precision oncology targets with Aurigene Discovery Technologies Limited (“Aurigene”).
The collaboration with Aurigene comprises multiple programs, and the Company has the option to exclusively license each program, including data, intellectual property and compounds associated therewith, once a development candidate is nominated within such program. In October 2015, the Company exercised options to license two programs under this collaboration. The first licensed program is in the immuno-oncology field and the Company has named CA-170, an orally available small molecule antagonist of two immune checkpoints, V-domain Ig suppressor of T-cell activation (“VISTA”) and programmed death ligand-1 (“PDL1”), as the development candidate from this program. The second licensed program is in the precision oncology field and the Company has named CA-4948, an orally available small molecule inhibitor of Interleukin-1 receptor-associated kinase 4 (“IRAK4”) as the development candidate. In October 2016, the Company exercised its option to license a third program in the collaboration, and designated CA-327, a distinct orally available small molecule antagonist of two immune checkpoints PDL1 and T-cell immunoglobulin and mucin domain containing protein-3 (“TIM3”) as the development candidate from this program. In March 2018, the Company exercised its option to license a fourth program, which is an immuno-oncology program.
The Company operates in a single reportable segment, which is the research and development of innovative cancer therapeutics. The Company expects that any products that are successfully developed and commercialized would be used in the healthcare industry and would be regulated in the United States by the FDA and in overseas markets by similar regulatory authorities.

8

The Company is subject to risks common to companies in the biotechnology industry as well as risks that are specific to the Company’s business, including, but not limited to: the Company’s ability to advance and expand its research and development programs, the Company’s reliance on Aurigene to successfully discover and preclinically develop drug candidates under the parties’ collaboration agreement, the Company’s reliance on Roche and Genentech to successfully commercialize Erivedge in the approved indication of advanced BCC and to progress its clinical development in indications other than BCC, the Company’s ability to obtain adequate financing to fund its operations, the ability of the Company and its wholly owned subsidiary, Curis Royalty, LLC (“Curis Royalty”), to satisfy the terms of the royalty interest purchase agreement (the “Oberland Purchase Agreement”) with entities managed by Oberland Capital Management, LLC (“Purchasers”), the Company’s ability to obtain and maintain necessary intellectual property protection, development by the Company’s competitors of new or better technological innovations, the Company's dependence on key personnel, the Company’s ability to comply with regulatory requirements, the Company's ability to obtain and maintain applicable regulatory approvals and commercialize any approved product candidates, and the Company’s ability to execute on its overall business strategies.
The Company’s future operating results will largely depend on the progress of drug candidates currently in its development pipeline and the magnitude of payments that it may receive and make under its current and potential future collaborations. The results of the Company’s operations have varied and will likely continue to vary significantly from year to year and quarter to quarter and depend on a number of factors, including, but not limited to: the timing, outcome and cost of the Company’s preclinical studies and clinical trials for its drug candidates; Aurigene’s ability to successfully discover and develop preclinical programs under the Company’s collaboration with Aurigene, as well as the Company’s decision to exclusively license and further develop programs under this collaboration; Roche and Genentech’s ability to successfully commercialize Erivedge; and positive results in Roche and Genentech’s ongoing clinical trials.
The Company has incurred net losses and negative cash flows from operations since its inception. As of September 30, 2019, the Company had an accumulated deficit of approximately $1.0 billion, and for the nine months ended September 30, 2019, the Company incurred a net loss of $23.5 million and used $20.6 million of cash in operations. The Company expects to continue to generate net losses in the foreseeable future. The Company anticipates that its $28.0 million of existing cash, cash equivalents and investments at September 30, 2019 should enable the Company to maintain its planned operations into the second half of 2020. Based on available cash resources, the Company does not have sufficient cash on hand to support current operations within the next 12 months from the date of filing this Quarterly Report on Form 10-Q. The Company’s ability to raise additional funds will depend, among other factors, on financial, economic and market conditions, many of which are outside of its control and it may be unable to raise financing when needed, or on terms favorable to the Company. If sufficient funds are not available, the Company may have to delay, reduce the scope of, or eliminate some of its research and development programs, including related clinical trials and operating expenses, potentially delaying the time to market for or preventing the marketing of any of its product candidates, which could adversely affect the Company’s business prospects and the Company’s ability to continue its operations, and would have a negative impact on the Company’s financial condition and ability to pursue its business strategies. See Note 2, “Basis of Presentation,” for additional information about the Company’s ability to continue as a going concern.
2.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of the Company have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. These statements, however, are condensed and do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”), for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission (“SEC”), on March 26, 2019.
In the opinion of the Company, the unaudited financial statements contain all adjustments (all of which were considered normal and recurring) necessary for a fair statement of the Company’s financial position at September 30, 2019; the results of operations for the three and nine-month periods ended September 30, 2019 and 2018; stockholders' deficit for the three and nine-month periods ended September 30, 2019 and 2018 and the cash flows for the nine-month periods ended September 30, 2019 and 2018. The Condensed Consolidated Balance Sheet at December 31, 2018 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.
In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the Consolidated Financial Statements are issued.
The Company anticipates that its $28.0 million of existing cash, cash equivalents and investments at September 30, 2019 should enable it to maintain its planned operations into the second half of 2020. Based on the Company's available cash resources, recurring losses and cash outflows from operations since inception, an expectation of continuing operating losses and cash outflows from operations for the foreseeable future and the need to raise additional capital to finance our future

9

operations, the Company concluded it does not have sufficient cash on hand to support current operations within the next 12 months from the date of filing this Quarterly Report on Form 10-Q. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.  The Company expects to finance its operations through its current at-the-market sale agreement with Cowen and Company, LLC, or Cowen or other potential equity financings, debt financings or other capital sources. However, the Company may not be successful in securing additional financing on acceptable terms, or at all.
The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at the balance sheet date. Such estimates include the performance obligations under the Company’s collaboration agreements; the estimated repayment term of the Company’s debt and related short- and long-term classification; the fair value of the Company’s debt; the collectability of receivables; the carrying value of property and equipment and intangible assets; and the assumptions used in the Company’s valuation of stock-based compensation and the value of certain investments and liabilities. Actual results may differ from such estimates.
These interim results are not necessarily indicative of results to be expected for a full year or subsequent interim periods.
Reclassifications and Revision
Certain prior period amounts have been reclassified to conform with the current period presentation. Reclassifications had no material impact on previously reported results of operations, financial position or cash flows.
A revision was made to the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019 to correctly reflect the prepayment fees associated with the termination of the credit agreement with HealthCare Royalty Partners, III, L.P. This correction reduced the net cash used in operating activities and reduced the net cash provided by financing activities for the three months ended March 31, 2019 by $3.4 million, from the amounts previously reported. The revision to the Condensed Consolidated Statement of Cash Flows noted above represents an error that is not deemed to be material to the prior period Condensed Consolidated Financial Statements.
3.
Revenue Recognition
The Company’s business strategy includes entering into collaborative license and development agreements with biotechnology and pharmaceutical companies for the development and commercialization of the Company’s drug candidates. The terms of the agreements typically include non-refundable license fees, funding of research and development, payments based upon achievement of clinical development and regulatory objectives, and royalties on product sales.
License Fees and Multiple Element Arrangements
If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license at such time as the license is transferred to the licensee and the licensee is able to use, and benefit from, the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligations to determine whether the combined performance obligations are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
If the Company is involved in a steering committee as part of a multiple element arrangement, the Company assesses whether its involvement constitutes a performance obligation or a right to participate. Steering committee services that are not inconsequential or perfunctory and that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which the Company expects to complete its aggregate performance obligations.
Appropriate methods of measuring progress include output methods and input methods. In determining the appropriate method for measuring progress, the Company considers the nature of service that the Company promises to transfer to the customer. When the Company decides on a method of measurement, the Company will apply that single method of measuring progress for each performance obligation satisfied over time and will apply that method consistently to similar performance obligations and in similar circumstances.
If the Company cannot reasonably measure its progress toward complete satisfaction of a performance obligation because it lacks reliable information that would be required to apply an appropriate method of measuring progress, but the Company can reasonably estimate when the performance obligation ceases or the remaining obligations become inconsequential and perfunctory, then revenue is not recognized until the Company can reasonably estimate when the performance obligation ceases or becomes inconsequential. Revenue is then recognized over the remaining estimated period of performance.

10

Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations under an arrangement.
Contingent Research Milestone Payments
Under the Financial Accounting Standards Board (“FASB”), Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), there is a constraint on the amount of variable consideration included in the transaction price in that either all, or a portion, of an amount of variable consideration should be included in the transaction price. The variable consideration amount should be included only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The assessment of whether variable consideration should be constrained is largely a qualitative one that has two elements: the likelihood of a change in estimate, and the magnitude thereof. Variable consideration is not constrained if the potential reversal of cumulative revenue recognized is not significant, for example.
If the consideration in a contract includes a variable amount, a company will estimate the amount of consideration in exchange for transfer of promised goods or services. The consideration also can vary if a company’s entitlement to the consideration is contingent on the occurrence or nonoccurrence of a future event. The Company considers contingent research milestone payments to fall under the scope of variable consideration, which should be estimated for revenue recognition purposes at the inception of the contract and reassessed ongoing at the end of each reporting period.
The Company assesses whether contingent research milestones should be considered variable consideration that should be constrained and thus not part of the transaction price. This includes an assessment of the probability that all or some of the milestones revenue could be reversed when the uncertainty around whether or not the achievement of each milestone is resolved, and the amount of reversal could be significant.
GAAP provides factors to consider when assessing whether variable consideration should be constrained. All of the factors should be considered, and no factor is determinative. The Company considers all relevant factors.
Reimbursement of Costs
Reimbursement of research and development costs by third party collaborators is recognized as revenue over time provided the Company has determined that it transfers control (i.e. performs the services) of a service over time and, therefore, satisfies a performance obligation according to the provisions outlined in ASC 606-10-25-27, Revenue Recognition.
Royalty Revenue
Since the first quarter of 2012, the Company has recognized royalty revenues related to Genentech’s and Roche’s sales of Erivedge. For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). The Company expects to continue recognizing royalty revenue from Genentech’s sales of Erivedge in the U.S. and in other markets where Genentech and Roche successfully obtain marketing approval, if any (see Note 4 “Research and Development Collaborations”). However, a portion of Erivedge royalties will be paid to the Purchasers under the Oberland Purchase Agreement (see Note 9 “Liability Related to the Sale of Future Royalties”). Contra revenue includes amounts related to the reimbursement of patent related research and development costs and amounts related to potential adjustments in countries where the Company's royalties are subject to reductions.
Summary
During the nine months ended September 30, 2019 and 2018, total gross revenues were 100% from the Company’s collaboration with Genentech.
4.
Research and Development Collaborations
 
(a)
Genentech
In June 2003, the Company licensed its proprietary Hedgehog pathway technologies to Genentech for human therapeutic use. The primary focus of the collaborative research plan has been to develop molecules that inhibit the Hedgehog pathway for the treatment of various cancers. The collaboration is currently focused on the development of Erivedge, which is being commercialized by Genentech in the U.S. and by Genentech’s parent company, Roche, in several other countries for the treatment of advanced BCC. Pursuant to the agreement, the Company is eligible to receive up to an aggregate of $115.0 million in contingent cash milestone payments, exclusive of royalty payments, in connection with the development of Erivedge or another small molecule Hedgehog pathway inhibitor, assuming the successful achievement by Genentech and Roche of

11

specified clinical development and regulatory objectives. Of this amount, the Company has received $59.0 million in cash milestone payments as of September 30, 2019.
In addition to these payments and pursuant to the collaboration agreement, the Company is entitled to a royalty on net sales of Erivedge that ranges from 5% to 7.5%. The royalty rate applicable to Erivedge may be decreased by 2% on a country-by-country basis in certain specified circumstances, including when a competing product that binds to the same molecular target as Erivedge is approved by the applicable regulatory authority in another country, and is being sold in such country, by a third party for use in the same indication as Erivedge, or, when there is no issued intellectual property covering Erivedge in a territory in which sales are recorded. In 2015, the FDA and the European Medicine Agency’s Committee for Medicinal Products for Human Use, approved another Hedgehog signaling pathway inhibitor, Odomzo® (“sonidegib”), which is marketed by Sun Pharmaceutical Industries Ltd., for use in locally advanced BCC. Beginning in the fourth quarter of 2015, Genentech applied the 2% royalty reduction on U.S. sales of Erivedge as a result of the first commercial sale of Odomzo® in the U.S. and the Company anticipates that Genentech will reduce by 2% royalties on net sales of Erivedge outside of the United States on a country-by-country basis to the extent that sonidegib is approved by the applicable country's regulatory authority and is being sold in such country. However, pursuant to the Oberland Purchase Agreement, Curis has retained its rights with respect to the 2% of royalties that are subject to such reduction in countries where such reduction has not occurred, subject to the terms and conditions of the Oberland Purchase Agreement.
In March 2017, the Company and Curis Royalty entered into a new credit agreement with HealthCare Royalty Partners III, L.P. (“HealthCare Royalty”), for the purpose of refinancing and terminating its prior loan from BioPharma Secured Debt Fund II Sub, S. à r. l., a Luxembourg limited liability company managed by Pharmakon Advisors (“BioPharma-II”). Accordingly, HealthCare Royalty made a $45.0 million loan at an annual interest rate of 9.95% to Curis Royalty, which was used in part to pay off $18.4 million in remaining loan obligations to BioPharma-II under the prior loan, with the residual proceeds of $26.6 million distributed to the Company as sole equity member of Curis Royalty. The final maturity date of the loan was the earlier of such date that the principal is paid in full, or Curis Royalty's right to receive royalties under the collaboration agreement with Genentech is terminated. On March 22, 2019, in connection with entering into the Oberland Purchase Agreement, the Company and Curis Royalty terminated and repaid in full all amounts outstanding under the loan with HealthCare Royalty.
The Company has identified the following performance obligations related to the Genentech collaboration:
1.
To grant the license for its Hedgehog antagonist programs and to provide service on both a steering committee and co-development committee. This performance obligation has been satisfied and only contingent royalty revenue remains to be recognized in the future.
2.
To provide reimbursable research and development services. This performance obligation has been satisfied and no revenue remains to be recognized in the future.
The Company recognized $2.9 million and $2.8 million in royalty revenue under the Genentech collaboration during the three months ended September 30, 2019 and 2018, respectively and $7.2 million and $7.6 million during the nine months ended September 30, 2019 and 2018, respectively. The Company also recorded costs of royalty revenues within the costs and expenses section of its Condensed Consolidated Statements of Operations and Comprehensive Loss of $0.1 million and $0.2 million, during the three months ended September 30, 2019 and 2018, respectively, and $0.3 million and $0.4 million during the nine months ended September 30, 2019 and 2018, respectively. Cost of royalty revenues comprises 5% of the royalties earned by Curis Royalty with respect to Erivedge outside Australia, and 2% direct net sales in Australia (subject to decrease on expiration of the patent in April 2019 to 5% of the royalty payments that Curis Royalty receives from Genentech, through February 2022), that the Company is obligated to pay to university licensors.
As further discussed in Note 9, a portion of royalty revenues received from Genentech on net sales of Erivedge will be paid to the Purchasers pursuant to the Oberland Purchase Agreement.
The Company recorded immaterial research and development revenue during the three and nine months ended September 30, 2019 and $0.1 million research and development revenue during the three and nine months ended September 30, 2018 related to expenses incurred by the Company on behalf of Genentech that were paid by the Company and for which Genentech is obligated to reimburse the Company.
Genentech incurred expenses of $0.1 million during the three months ended September 30, 2019, and an immaterial amount during the three months ended September 30, 2018. Genentech incurred expenses of $0.2 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively. Under this collaboration, the Company is obligated to reimburse Genentech, and the Company records contra-revenues which have been netted against research and development revenues in its Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company will continue to recognize revenue for expense reimbursement as such reimbursable expenses are incurred, provided that the provisions of the ASC 606 are met.

12

The Company recorded a receivable from Genentech under this collaboration, comprised primarily of Erivedge royalties earned in the first half of 2019 and 2018, respectively. The receivable recorded in the Company's current assets section of its Condensed Consolidated Balance Sheets amounted to $2.9 million and $2.9 million as of September 30, 2019 and 2018, respectively.

(b)
Aurigene
In January 2015, the Company entered into an exclusive collaboration agreement with Aurigene for the discovery, development and commercialization of small molecule compounds in the areas of immuno-oncology and selected precision oncology targets. Under the collaboration agreement, Aurigene granted the Company an option to obtain exclusive, royalty-bearing licenses to relevant Aurigene technology to develop, manufacture and commercialize products containing certain of such compounds anywhere in the world, except for India and Russia, which are territories retained by Aurigene.
In connection with the collaboration agreement, the Company issued to Aurigene 3,424,026 shares of its common stock valued at $24.3 million in partial consideration for the rights granted to the Company under the collaboration agreement, which the Company recognized as expense during the year ended December 31, 2015. The shares were issued pursuant to a stock purchase agreement with Aurigene dated January 18, 2015.
In September 2016, the Company and Aurigene entered into an amendment to the collaboration agreement. Under the terms of the amendment, in exchange for the issuance by the Company to Aurigene of 2,041,666 shares of its common stock, Aurigene waived payment of up to a total of $24.5 million in potential milestones and other payments associated with the first four programs in the collaboration that may have become due from the Company under the collaboration agreement. To the extent any of these waived milestones or other payments are not payable by the Company, for example in the event one or more of the milestone events do not occur, the Company will have the right to deduct the unused waived amount from any one or more of the milestone payment obligations tied to achievement of commercial milestone events. The amendment also provides that, in the event supplemental program activities are performed by Aurigene, the Company will provide up to $2.0 million of additional funding for each of the third and fourth licensed program. The shares were issued pursuant to a stock purchase agreement with Aurigene dated September 7, 2016.
As of September 30, 2019, the Company has exercised its option to license the following four programs under the collaboration:
1.
IRAK4 Program - a precision oncology program of small molecule inhibitors of IRAK4. The development candidate is CA-4948, an orally available small molecule inhibitor of IRAK4.
2.
PD1/VISTA Program - an immuno-oncology program of small molecule antagonists of PD1 and VISTA immune checkpoint pathways. The development candidate is CA-170, an orally available small molecule antagonist of VISTA and PDL1.
3.
PD1/TIM3 Program - an immuno-oncology program of small molecule antagonists of PD1 and TIM3 immune checkpoint pathways. The development candidate is CA-327, an orally available small molecule antagonist of PDL1 and TIM3.
4.
In March 2018, the Company exercised its option to license a fourth program, which is an immuno-oncology program.

For each of the Company's licensed programs (as described above) the Company is obligated to use commercially reasonable efforts to develop, obtain regulatory approval for, and commercialize at least one product in each of the U.S., specified countries in the European Union and Japan, and Aurigene is obligated to use commercially reasonable efforts to perform its obligations under the development plan for such licensed program in an expeditious manner.
Subject to specified exceptions, Aurigene and the Company agreed to collaborate exclusively with each other on the discovery, research, development and commercialization of programs and compounds within immuno-oncology for an initial period of approximately two years from the effective date of the collaboration agreement. At the Company's option, and subject to specified conditions, it may extend such exclusivity for up to three additional one year periods by paying to Aurigene additional exclusivity option fees on an annual basis. The Company exercised the first one-year exclusivity option in the first quarter of 2017. The fee for this exclusivity option exercise was $7.5 million, which the Company paid in two equal installments in the first and third quarters of 2017. The Company elected not to further exercise its exclusivity option and thus did not make the $10.0 million payment required for this additional exclusivity in 2018. As a result of the Company’s election to not further exercise its exclusivity option, Curis is no longer operating under broad immuno-oncology exclusivity with Aurigene. In 2019, the Company elected not to further exercise its exclusivity option related to the IRAK4 and PD1/VISTA programs and did not make the $2.0 million payment required for this continued exclusivity.
Since January 2015, the Company has paid $14.5 million in research payments and has waived $19.5 million in milestone payments under the terms of the 2016 amendment.

13

For each of the IRAK4, PD1/VISTA,PD1/TIM3 programs, and the fourth immuno-oncology program: the Company has remaining unpaid or unwaived payment obligations of $42.5 million per program, related to regulatory approval and commercial sales milestones, plus specified additional payments for approvals for additional indications, if any.
In addition to the collaboration agreement, in June 2017, the Company entered into a master development and manufacturing agreement with Aurigene for the supply of drug substance and drug product. The Company incurred expenses related to Aurigene of $0.8 million and $0.6 for the nine month periods ended September 30, 2019 and September 30, 2018, respectively.
5.
Fair Value of Financial Instruments
The Company has adopted the provisions of the FASB Codification Topic 820, Fair Value Measurements and Disclosures (“Topic 820”). Topic 820 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
GAAP requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In accordance with the fair value hierarchy, the following table shows the fair value as of September 30, 2019 and December 31, 2018 of those financial assets and liabilities that are measured at fair value on a recurring basis, according to the valuation techniques the Company used to determine their fair value. No financial assets or liabilities are measured at fair value on a nonrecurring basis at September 30, 2019 and 2018.
 
Quoted Prices in
Active Markets
(Level 1)
 
Other Observable
Inputs (Level 2)
 
Unobservable
Inputs (Level 3)
 
Fair Value
As of September 30, 2019:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
19,605

 
$
—

 
$
—

 
$
19,605

Corporate commercial paper, bonds and notes
—

 
300

 
—

 
300

Municipal bonds
—

 
90

 
—

 
90

Short-term investments:

 

 

 

Corporate commercial paper, bonds and notes
—

 
6,652

 
—

 
6,652

Total assets at fair value
$
19,605

 
$
7,042

 
$
—

 
$
26,647



14

 
Quoted Prices in
Active Markets
(Level 1)
 
Other Observable
Inputs (Level 2)
 
Unobservable
Inputs (Level 3)
 
Fair Value
As of December 31, 2018:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
18,180

 
$
—

 
$
—

 
$
18,180

Corporate commercial paper, stock, bonds and notes
—

 
2,199

 
—

 
2,199

Municipal bonds
—

 
135

 
—

 
135

Short-term investments:

 

 

 

Corporate commercial paper, stock, bonds and notes
—

 
634

 
—

 
634

Total assets at fair value
$
18,180

 
$
2,968

 
$
—

 
$
21,148

No investments held at September 30, 2019 were transferred between levels.
Fair Value of Financial Liabilities
As of September 30, 2019, the fair value of the liability related to the sale of future royalties is based on the Company's current estimates of future royalties expected to be paid to the Purchasers over the life of the Oberland Purchase Agreement, which are considered Level 3 (see Note 9, “Liability Related to the Sale of Future Royalties”).
6.
Investments
Cash equivalents are highly liquid investments purchased with original maturities of three months or less. All other liquid investments are classified as marketable securities. The Company’s short-term investments are marketable securities with original maturities of greater than three months from the date of purchase, but less than twelve months from the balance sheet date, and the Company's long-term investments are marketable securities with original maturities of greater than twelve months from the balance sheet date. Marketable securities consist of commercial paper, corporate bonds and notes, and government obligations. All of the Company’s investments have been designated available-for-sale and are stated at fair value with any unrealized holding gains or losses included as a component of stockholders’ equity and any realized gains and losses recorded in the statement of operations in the period during which the securities are sold.
Unrealized gains and temporary losses on investments are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Realized gains and losses, dividends and interest income are included in other income (expense). Any premium or discount arising at purchase is amortized and/or accreted to interest income.
The amortized cost, unrealized gains and losses and fair value of investments available-for-sale as of September 30, 2019 were as follows:
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Fair Value
Corporate commercial paper, bonds and notes – short-term
$
6,649

 
$
3

 
$
—

 
$
6,652

Total investments
$
6,649

 
$
3

 
$
—

 
$
6,652

Short-term investments have maturities ranging from one to twelve months with a weighted-average maturity of 0.3 years at September 30, 2019.
The amortized cost, unrealized gains and losses and fair value of investments available-for-sale as of December 31, 2018 were as follows: 
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Fair Value
Corporate bonds and notes – short-term
$
634

 
$
—

 
$
—

 
$
634

Total investments
$
634

 
$
—

 
$
—

 
$
634

Short-term investments have maturities ranging from one to twelve months with a weighted-average maturity of 0.1 years at December 31, 2018.
As of September 30, 2019, the Company did not have any debt securities in an unrealized loss position.



15

7.
Debt

(a)
HealthCare Royalty Partners III
On March 6, 2017, the Company and Curis Royalty entered into a credit agreement, referred to herein as the credit agreement, with HealthCare Royalty for the purpose of refinancing Curis Royalty’s financing arrangement with BioPharma-II, referred to herein as the prior loan. On March 22, 2017, the Company's prior credit agreement with BioPharma-II was terminated in its entirety.
Pursuant to the credit agreement, HealthCare Royalty made a $45.0 million loan at an interest rate of 9.95% to Curis Royalty, which was used to pay off $18.4 million in remaining loan obligations to BioPharma-II under the prior loan. The remaining proceeds of $26.6 million were distributed to Curis as sole equity holder of Curis Royalty.

Under the terms of the credit agreement with HealthCare Royalty, quarterly Erivedge royalty and royalty-related payments from Genentech were to be first applied to pay, collectively: (i) escrow fees payable by the Company pursuant to an escrow agreement, (ii) the Company’s royalty obligations to academic institutions, (iii) certain expenses incurred by HealthCare Royalty in connection with the credit agreement and related transaction documents, including enforcement of its rights in the case of an event of default under the credit agreement and (iv) expenses incurred by the Company enforcing its right to indemnification under the collaboration agreement. Subsequently, remaining amounts were to be applied first, to pay interest and second, to pay principal on the loan. If royalties owed under the Genentech collaboration agreement were insufficient to pay the accrued interest on the outstanding loan, the unpaid interest outstanding would be added to the loan principal on a quarterly basis. On March 22, 2019, the Company and Curis Royalty terminated and repaid all amounts outstanding under the credit agreement, consisting of approximately $33.8 million in remaining loan principal and approximately $3.4 million in accrued and unpaid interest and prepayment fees. The $3.4 million in accrued and unpaid interest and prepayment fees along with the remaining deferred issuance costs of $0.1 million were recorded as a loss on debt extinguishment.

(b)
Debt Payments to HealthCare Royalty Partners III
During the nine months ended September 30, 2019 Curis Royalty made payments totaling $39.9 million, of which $35.6 million was applied to the principal, with the remainder applied to prepayment fees and accrued interest. The Company repaid all outstanding debt and related accrued interest during the first quarter of 2019. During the nine months ended September 30, 2018 Curis Royalty made payments totaling $5.1 million, of which $3.1 million was applied to the principal, with the remainder applied to accrued interest.
At December 31, 2018, the Company recorded short-and long-term debt of $6.9 million and $28.6 million, respectively, and accrued interest of $0.2 million in the Company’s Condensed Consolidated Balance Sheets.
As related to its debt with HealthCare Royalty Partners III, the Company recognized interest expense of $0.8 million and $2.0 million respectively, for the nine months ended September 30, 2019 and 2018 in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
8.
Accrued Liabilities
Accrued liabilities consisted of the following:
 
September 30,
2019
 
December 31,
2018
Accrued compensation
$
1,319

 
$
2,774

Professional fees
247

 
233

Accrued interest on debt (Note 7)
—

 
165

Other
265

 
285

Total
$
1,831

 
$
3,457

 
9.
Liability Related to the Sale of Future Royalties
On March 22, 2019, the Company and Curis Royalty entered into the Oberland Purchase Agreement pursuant to which the Company sold to the Purchasers a portion of its rights to receive royalties from Genentech on potential net sales of Erivedge.
As upfront consideration for the purchase of the royalty rights, at closing the Purchasers paid to Curis Royalty $65.0 million less certain transaction expenses. Curis Royalty will also be entitled to receive up to approximately $70.7 million in

16

milestone payments based on sales of Erivedge as follows: (i) $17.2 million if the Purchasers and Curis Royalty receive aggregate royalty payments pursuant to the Oberland Purchase Agreement in excess of $18.0 million during the calendar year 2021, subject to certain exceptions and (ii) $53.5 million if the Purchasers receive payments pursuant to the Oberland Purchase Agreement in excess of $117.0 million on or prior to December 31, 2026.
Concurrently with the closing of the Oberland Purchase Agreement, Curis Royalty used a portion of the proceeds to terminate and repay the loan with Healthcare Royalty. In connection with such termination, Curis Royalty paid approximately $37.2 million to satisfy its remaining loan obligations to HealthCare Royalty, including approximately $33.8 million in principal balance on the loan and $3.4 million in accrued and unpaid interest and prepayment fees. Curis Royalty also used a portion of the proceeds to pay transaction costs of approximately $0.3 million, resulting in net proceeds of approximately $27.5 million.
The Oberland Purchase Agreement provides that after the occurrence of an event of default as defined under the security agreement by Curis Royalty, the Purchasers shall have the option, for a period of 180 days, to require Curis Royalty to repurchase a portion of certain royalty and royalty related payments, excluding a portion of non U.S. royalties retained by Curis Royalty, referred to as the Purchased Receivables, at a price, referred to as the Put/Call Price, equal to a percentage, beginning at a low triple digit percentage and increasing over time up to a low mid triple digit percentage of the sum of the upfront purchase price and any portion of the milestone payments paid in a lump sum by the Purchasers, if any, minus certain payments previously received by the Purchasers with respect to the Purchased Receivables. Additionally, Curis Royalty shall have the option at any time to repurchase the Purchased Receivables at the Put/Call Price as of the date of such repurchase.
As a result of our obligation to pay future royalties to Oberland, we recorded the proceeds from this transaction as a liability on our Condensed Consolidated Balance Sheet that will be accounted for using the interest method over the estimated life of the Oberland Purchase Agreement. As a result, we impute interest on the transaction and record imputed interest expense at the estimated interest rate. Our estimate of the interest rate under the agreement is based on the amount of royalty payments expected to be received by Oberland over the life of the arrangement. We periodically assess the expected royalty payments to Curis Royalty from Genentech using a combination of historical results and forecasts from market data sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, we will adjust the amortization of the liability.
The Company determined the fair value of the liability related to the sale of future royalties at the time of the Oberland Purchase Agreement to be $65.0 million, with a current effective annual imputed interest rate of 7.9%. The Company incurred $0.6 million of transaction costs in connection with the agreement. These transaction costs will be amortized to imputed interest expense over the estimated term of the Oberland Purchase Agreement.
The following table shows the activity with respect to the liability related to the sale of future royalties during the nine months ended September 30, 2019.
Liability related to the sale of future royalties at March 22, 2019
$
65,000

Capitalized issuance costs
(584
)
Imputed interest expense recognized for the nine months ended September 30, 2019
2,721

Less: payments to Oberland Capital, LLC
(3,593
)
Carrying value of liability related to the sale of future royalties at September 30, 2019
$
63,544

10.
Lease
Leased assets represent the Company's right to use an underlying asset for the expected lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. These assets and related lease liabilities are recognized at the commencement date based on the present value of lease payments over the expected lease term, including any contractually specified annual rent increases. When determinable, the Company uses the rate implicit in the lease to determine the present value of lease payments. If a lease agreement does not contain an implicit rate in the agreement, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The Company leases 24,529 square feet of property that is used for office, research and laboratory space located at 4 Maguire Road in Lexington, Massachusetts.
The term of the 4 Maguire Road lease agreement commenced on December 1, 2010, and was set to expire in February 2018. The Company had the option to extend the term for one additional five year period upon the Company’s written notice to the lessor at least one year and no more than 18 months in advance of the extension. On November 1, 2017, the Company entered into a second amendment to the lease agreement pursuant to which the Company agreed to extend the lease for an additional two year period. The term of the lease amendment commenced on March 1, 2018, and expires on February 29, 2020.

17

The amendment provides for no option to extend the term beyond the two year period, nor does it provide an option for early termination of the lease.
The total cash obligations for the base rent over the initial term of the lease agreement and the extended term of the lease agreement were approximately $4.4 million and $2.0 million, respectively. In addition to the base rent, the Company is also responsible for its share of operating expenses and real estate taxes, in accordance with the terms of the lease agreement. The Company has provided a security deposit to the lessor in the form of an irrevocable letter of credit in the original amount of $0.3 million. The original deposit has been reduced throughout the lease term since its inception to $0.2 million during each of 2019 and 2018, respectively, in accordance with the terms of the lease. These amounts have been classified as restricted investments in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.
The Company’s maturities of operating lease liabilities were as follows at September 30, 2019.
Year Ending December 31,
 
2019
$
251

2020
168

Total minimum payments
419

Less: present value adjustments
(10
)
Total operating lease liability
$
409

The Company’s remaining lease commitments for all leased facilities with an initial or remaining term of at least one year were as follows as of December 31, 2018.
Year Ending December 31,
 
2019
$
1,002

2020
168

Total minimum payments
$
1,170

Operating lease cost was $0.8 million for the nine month periods ended September 30, 2019 and 2018.
11.
Stock Plans and Stock Based Compensation
As of September 30, 2019, the Company had two stockholder approved, share based compensation plans: (i)  the Amended and Restated 2010 Employee Stock Purchase Plan (“ESPP”), adopted by the Company's board of directors in April 2017 and approved by stockholders in June 2017, and (ii) the Third Amended and Restated 2010 Stock Incentive Plan, (“2010 Plan”). New employees are typically issued options as an inducement equity award under Nasdaq Listing Rule 5635(c)(4) outside of the 2010 Plan.
The Third Amended and Restated 2010 Stock Incentive Plan
The 2010 Plan permits the granting of incentive and non-qualified stock options and stock awards to employees, officers, directors, and consultants of the Company and its subsidiaries at prices determined by the Company’s Board of Directors. On May 23, 2019 the Company's stockholders approved an amendment to the Company's Third Amended and Restated 2010 Stock Incentive Plan to reserve an additional 4,700,000 shares of common stock for issuance under the 2010 Plan. The Company can issue up to 10,890,000 shares of its common stock pursuant to awards granted under the 2010 Plan. Options become exercisable as determined by the Board of Directors and expire up to ten years from the date of grant. The 2010 Plan uses a “fungible share” concept under which each share of stock subject to awards granted as options and stock appreciation rights, will cause one share per share under the award to be removed from the available share pool, while each share of stock subject to awards granted as restricted stock, restricted stock units, other stock based awards or performance awards where the price charged for the award is less than 100% of the fair market value of the Company’s common stock will cause 1.3 shares per share under the award to be removed from the available share pool. As of September 30, 2019 the Company had only granted options to purchase shares of the Company’s common stock with an exercise price equal to the closing market price of the Company’s common stock on the Nasdaq Global Market on the grant date. As of September 30, 2019, 4,743,559 shares remained available for grant under the 2010 Plan.
During the nine months ended September 30, 2019, the Company’s board of directors granted options to purchase a total of 3,875,865 shares of the Company’s common stock to employees and directors of the Company, under the 2010 Plan or in the form of inducement awards pursuant to Nasdaq Marketplace Rules. Of these options, options to purchase 3,155,865 shares were granted to employees and vest as to 25% of the shares underlying the award after the first year and as to an additional 6.25% of the shares underlying the award in each subsequent quarter, based upon continued employment over a four year

18

period, and are exercisable at a price equal to the closing price of the Company’s common stock on the Nasdaq Global Market on the grant dates.
Additionally, the Company’s board of directors authorized a grant of options to purchase 1,502,867 shares of the Company’s common stock to its officers in January 2019. Such stock options have an exercise price equal to $1.16 per share, the closing price of the Company’s common stock on the Nasdaq Global Market on the date of grant, and will vest and become exercisable as to 25% of the shares underlying the award after the first year and as to an additional 6.25% of the shares underlying the award in each subsequent quarter, based upon continued employment over a four year period.
During the first quarter of 2019, the Company’s board of directors granted options to its non-employee directors to purchase 720,000 shares of common stock under the 2010 Plan, which will vest and become exercisable in one year from the date of grant. These options were granted at an exercise price of $1.16 per share, which equals the closing market price of the Company’s common stock on the Nasdaq Global Market on the grant date. There were no additional non-employee grants made in the current quarter.
Nonstatutory Inducement Grants
For certain new employees the Company issues options as an inducement equity award under Nasdaq Listing Rule 5635(c)(4) outside of the 2010 Plan. Each option will vest as to 25% of the shares underlying the option on the first anniversary of the grant date, and as to an additional 6.25% of the shares underlying the option on each successive three month period thereafter. During the nine months ended September 30, 2019, the Company’s board of directors granted options to purchase 418,000 shares of common stock as inducement equity awards. These options were granted at a weighted average exercise price of $1.88 which is based on the closing market price of the Company’s common stock on the Nasdaq Global Market on the grant date.
Employee and Director Grants
Vesting Tied to Service Conditions
In determining the fair value of stock options, the Company generally uses the Black-Scholes option pricing model. The Black-Scholes option pricing model employs the following key assumptions for employee and director options awarded during the nine months ended September 30, 2019 and 2018 based on the assumptions noted in the following table:
 
Nine Months Ended
September 30,
 
2019
 
2018
Expected term (years) – employees and officers
5.5
 
5.5
Expected term (years) – directors
5.5
 
6.25
Risk free interest rate
2.3-2.6%
 
2.5-2.8%
Expected Volatility
75.8-78.7%
 
66.0-72.0%
Expected Dividends
None
 
None
The expected volatility is based on the annualized daily historical volatility of the Company’s stock price for a time period consistent with the expected term of each grant. Management believes that the historical volatility of the Company’s stock price best represents the future volatility of the stock price.
The risk free interest rate is based on the U.S. Treasury yield in effect at the time of grant for the expected term of the respective grant. The Company has not historically paid cash dividends, and does not expect to pay cash dividends in the foreseeable future.
The expected terms and stock price volatility utilized in the calculation involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option. GAAP also requires that the Company recognize compensation expense for only the portion of options that are expected to vest. Therefore, management calculated an estimated annual pre-vesting forfeiture rate that is derived from historical employee termination behavior since the inception of the Company, as adjusted. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

19

A summary of stock option activity under the 2010 Plan, the 2000 Stock Incentive Plan, the 2000 Director Stock Option Plan and nonstatutory inducement awards are summarized as follows:
 
Number of
Shares
 
Weighted
Average
Exercise
Price per
Share
 
Weighted
Average
Remaining Contractual Life
 
Aggregate Intrinsic Value
Outstanding, December 31, 2018
3,714,394

 
$
7.68

 
 
 
 
Granted
3,875,865

 
1.26

 
 
 
 
Exercised
—

 
—

 
 
 
 
Canceled
(1,577,558
)
 
7.95

 
 
 
 
Outstanding, September 30, 2019
6,012,701

 
$
3.48

 
8.53
 
$
3,797

Exercisable at September 30, 2019
1,435,808

 
$
8.84

 
6.52
 
$
122

Vested and unvested expected to vest at September 30, 2019
5,284,182

 
$
3.75

 
8.43
 
$
3,200

The weighted average grant date fair values of the stock options granted during the nine months ended September 30, 2019 and 2018 were $0.83 and $1.46, respectively. As of September 30, 2019, there was approximately $3.7 million of unrecognized compensation cost related to unvested employee stock option awards outstanding, net of the impact of estimated forfeitures that is expected to be recognized as expense over a weighted average period of 2.54 years. There were no options exercised during the nine months ended September 30, 2019 and September 30, 2018.
The following table presents a summary of unvested restricted stock awards (“RSAs”) under the 2010 Plan as of September 30, 2019:
 
Number of
Shares
 
Weighted
Average
Grant Date Fair Value
Unvested, December 31, 2018
226,250

 
$
3.45

Awarded
—

 
—

Vested
(195,313
)
 
3.45

Forfeited
—

 
—

Unvested, September 30, 2019
30,937

 
$
3.45

As of September 30, 2019, there were 30,937 shares outstanding covered by RSAs that are expected to vest. The weighted average fair value of these shares of restricted stock was $3.45 per share and the aggregate fair value of these shares of restricted stock was approximately $0.1 million. As of September 30, 2019, there were approximately $0.1 million of unrecognized compensation costs, net of estimated forfeitures, related to RSAs granted to officers, which are expected to be recognized as expense over a remaining weighted average period of 2.31 years.
Second Amended and Restated 2010 Employee Stock Purchase Plan
The Company has reserved 2,000,000 of its shares of common stock for issuance under the ESPP. Eligible employees may purchase shares of the Company’s common stock at 85% of the lower closing market price of the common stock at the beginning of the enrollment period or ending date of the any purchase period within a two year enrollment period, as defined. The Company has four six month purchase periods per each two year enrollment period. If, within any one of the four purchase periods in an enrollment period, the purchase period ending stock price is lower than the stock price at the beginning of the enrollment period, the two year enrollment resets at the new lower stock price. This aspect of the plan was amended in 2017. Prior to 2017, the plan included two six month purchase periods per year with no defined enrollment period. As of September 30, 2019, 231,053 shares were issued under the ESPP, of which none were issued during the quarter ended September 30, 2019. As of September 30, 2019, there were 1,716,856 shares available for future purchase under the ESPP.
ESPP compensation expense for the three and nine months ended September 30, 2019 was not material. ESPP compensation expense for the three months ended September 30, 2018 was not material and $0.2 million was recorded for the nine months ended September 30, 2018.


20

Stock Based Compensation Expense
The Company recorded a total of $0.7 million and $2.0 million, respectively, in compensation expense for the three and nine months ended September 30, 2019 and $0.9 million and $3.3 million, respectively, for the three and nine months ended September 30, 2018 related to employee and director stock option grants.
Total Stock Based Compensation Expense
For the three and nine months ended September 30, 2019 and 2018, the Company recorded stock based compensation expense to the following line items in its costs and expenses section of the Condensed Consolidated Statements of Operations and Comprehensive Loss, including expense related to its ESPP:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Research and development expenses
$
130

 
$
295

 
$
254

 
$
1,143

General and administrative expenses
554

 
600

 
1,712

 
2,166

Total stock based compensation expense
$
684

 
$
895

 
$
1,966

 
$
3,309

12.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income as of September 30, 2019.
 
Unrealized Gain on Securities 
Available-for-Sale
Balance, as of December 31, 2018
$
—

Unrealized gain on marketable securities
3

Net current period other comprehensive income
3

Balance, as of September 30, 2019
$
3

The following table summarizes the changes in accumulated other comprehensive income (loss) as of September 30, 2018.
 
Unrealized Losses
and Gain on
Securities Available-for-Sale
Balance, as of December 31, 2017
$
(2
)
Unrealized gain on marketable securities
2

Net current period other comprehensive income
2

Balance, as of September 30, 2018
$
—

13.
Common Stock
(a)
Reverse Stock Split
On May 29, 2018 (“Effective Date”), the Company filed a Certificate of Amendment to the Company’s Restated Certificate of Incorporation with the Secretary of State of the State of Delaware (“Certificate of Amendment”), which effected, as of 5:00 p.m. Eastern Time on the Effective Date, a 1-for-5 reverse stock split (“Reverse Stock Split”) of the Company’s issued and outstanding common stock, $0.01 par value per share.
As a result of the Reverse Stock Split, every five shares of common stock issued and outstanding was converted into one share of common stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would have otherwise been entitled to a fractional share of common stock were instead entitled to receive a proportional cash payment.
The Reverse Stock Split proportionately reduced the number of authorized shares of common stock. The Reverse Stock Split did not change the par value of the common stock or the authorized number of shares of preferred stock of the Company. All outstanding stock options were adjusted as a result of the Reverse Stock Split, as required by the terms of such stock options

21

(b)
2015 Sales Agreement with Cowen and Company, LLC
On July 2, 2015, the Company entered into a sales agreement with Cowen and Company, LLC (“Cowen”), pursuant to which the Company may sell from time to time up to $30.0 million of the Company’s common stock through an “at-the-market” equity offering program under which Cowen will act as sales agent. Subject to the terms and conditions of the sales agreement, Cowen may sell the common stock by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the Nasdaq Global Market, on any other existing trading market for the common stock or to or through a market maker other than on an exchange. In addition, with the Company’s prior written approval, Cowen may also sell the common stock by any other method permitted by law, including in negotiated transactions. Cowen will use its commercially reasonable efforts consistent with its normal trading and sales practices and applicable state and federal laws, rules and regulations and the rules of the Nasdaq Global Market to sell on the Company’s behalf all of the shares requested to be sold by the Company. The Company has no obligation to sell any of the common stock under the sales agreement. Either the Company or Cowen may at any time suspend solicitations and offers under the sales agreement upon notice to the other party. The sales agreement may be terminated at any time by either the Company or Cowen upon written notice to the other party as specified in the sales agreement. The aggregate compensation payable to Cowen shall be 3% of the gross sales price of the common stock sold by Cowen pursuant to the sales agreement. Each party has agreed in the sales agreement to provide indemnification and contribution against certain liabilities, including liabilities under the Securities Act, subject to the terms of the sales agreement. The shares sold under the sales agreement, have been issued and sold pursuant to the universal shelf registration statement on Form S-3, filed with the Securities and Exchange Commission on July 2, 2015. The remaining shares that may be sold under the sales agreement are expected to be issued and sold, if at all, pursuant to the currently effective universal shelf registration statement on Form S-3, filed with the Securities and Exchange Commission on May 3, 2018. The Company did not sell shares of common stock under this sales agreement during the three and nine months ended September 30, 2019.
As of September 30, 2019, the Company has sold an aggregate of 420,796 shares of common stock pursuant to this sales agreement, for net proceeds of $6.2 million.
(c)
Treasury Stock Retirement
Since 2002, the Company has repurchased 244,569 shares of common stock at a total cost of $1.5 million. The shares were repurchased through a combination of a repurchase program of up to $3.0 million approved by the Board of Directors in 2002 and through employee purchases of common stock upon the exercise of stock options by remittance of shares of Company stock. The Company accounts for its common stock repurchases as treasury stock under the cost method.
In March 2018, the Company retired all 244,569 shares of common stock at a total cost of $1.5 million. This was a non-cash transaction and thus only affected the classifications within the stockholders' deficit section of the Company's Condensed Consolidated Balance Sheet.
(d)
2018 Charter Amendment
On May 15, 2018, the Company's stockholders approved an increase to the number of authorized shares of its common stock from 45,000,000 shares to 67,500,000 shares.
(e)
2019 Charter Amendment
On May 23, 2019, the Company's stockholders approved an increase to the number of authorized shares of its common stock from 67,500,000 shares to 101,250,000 shares.
14.
Loss Per Common Share
Basic and diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common share for the three months ended September 30, 2019 and 2018, because the effect of the potential common stock equivalents would be antidilutive due to the Company’s net loss position for these periods. Antidilutive securities consist of stock options outstanding of 6,012,701 and 3,802,637 as of September 30, 2019 and 2018, respectively.

22

15.
Related Party Transactions
(a)
Agreement with Head of Research and Development - Robert E. Martell, M.D., Ph.D.
On October, 17, 2018, the Company entered into an exclusive option and license agreement with Epi-Cure Pharmaceuticals, Inc., (“Epi-Cure”) a privately held early stage biotechnology company. Robert E. Martell, M.D., Ph.D., the Company’s Head of Research and Development and a former director of the Company, is a founder of Epi-Cure, was formerly an officer and director of Epi-Cure, and is currently a holder of a convertible promissory note to Epi-Cure. Under the terms of the option and license agreement, Epi-Cure has granted Curis an exclusive option to certain program compounds that may arise during the initial research and development period, and any extension thereof. Upon execution of the option and license agreement, the Company paid Epi-Cure an upfront payment of $0.1 million for legal and consulting costs incurred by Epi-Cure in connection with the transaction. In July 2019, we extended the research and development period of the program until the first quarter of 2020, as permitted under the terms of the agreement.
Under the terms of the agreement, Epi-Cure will have primary responsibility for conducting research and development activities and Curis will be responsible for funding up to $0.5 million of the research and development program costs and expenses during the initial research and development period. After the end of the initial research and development period, Curis has sixty days to elect to exercise its option to license the program compounds. If the Company makes this election it will make a $2.0 million license fee payment and will be responsible for the development and commercialization of products that may result from the collaboration. Curis will also make cash payments to Epi-Cure subject to successful achievement of certain patent, development, regulatory, and commercial milestones, up to $63.0 million and will also pay Epi-Cure mid-single digit royalties on net product sales if product candidates derived from this collaboration are successfully developed.
Epi-Cure has retained the right to opt in to co-develop and share in profits upon initiation of a Phase 2 clinical study, in which event Curis will share in any development costs and profits on a 50/50 basis. Epi-Cure also has the right to opt out of co-development/co-profit in which case they will receive royalty payments in lieu of profit sharing.
Each party has the right to terminate the agreement for uncured material breach by the other party. Curis has the right to terminate the agreement for its convenience upon 60 days prior written notice. The agreement also sets forth customary terms regarding each party’s intellectual property ownership rights, representations and warranties, indemnification obligations, confidentiality rights and obligations, patent prosecution, and maintenance and defense rights and obligations.
For the nine months ended September 30, 2019, Curis paid and expensed $0.2 million of fees related to this agreement.
(b)
Agreement with David Tuck, M.D.
On May 24, 2018, the Company announced that David Tuck, M.D., its Chief Medical Officer, provided notice of his intention to retire from the Company, effective as of August 31, 2018. Dr. Tuck subsequently determined to retire on August 3, 2018. The Company and Dr. Tuck entered into a letter agreement on August 1, 2018 (“Letter Agreement”) pursuant to which Dr. Tuck agreed to provide the Company with specified advisory services commencing on August 4, 2018 and extending until May 3, 2019, subject to earlier termination (“Advisory Period”). In consideration for Dr. Tuck’s advisory services, the Company agreed to (i) pay him a monthly retainer of $35,000 during the Advisory Period and (ii) reimburse him for any pre-approved reasonable, documented out-of-pocket expenses relating to his advisory services. In addition, the Company and Dr. Tuck agreed to amend his stock option agreements such that his outstanding options ceased to vest as of his date of resignation on August 3, 2018. The Letter Agreement may be terminated (i) at any time upon the mutual written consent of the parties, (ii) at any time by the Company immediately upon Dr. Tuck’s breach or threatened breach of the terms of his Invention, Non-Disclosure and Non-Competition Agreement with the Company, or (iii) by the Company at any time upon Dr. Tuck’s material breach of the terms of the Letter Agreement and failure to cure such breach within five days after written notice from the Company. In the event of termination of the Letter Agreement, Dr. Tuck will be entitled to payment for services performed and expenses paid or incurred prior to the effective date of termination that have not previously been paid. The Letter Agreement also contains other customary terms and conditions relating to his advisory service.
While the Company may utilize Dr. Tuck's consulting services in the future, the Company deemed the services to be a reduced level of service and not substantive. Under ASC 450, Contingencies, when an employee terminates and enters into a consulting agreement and the services to be provided are not deemed substantive; the transaction should be accounted for as a severance arrangement with no future service requirement. Based on this guidance, the Company recognized $0.3 million of expense during 2018, which represented the total obligation under the Letter Agreement.

23

16.
New Accounting Pronouncements
Recently Issued and Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases. In addition, the FASB recently issued ASU No. 2018-10 and ASU No. 2018-11, both of which are further clarifying amendments to ASU No. 2016-02. The standard requires organizations that lease assets to recognize on the balance sheet assets or liabilities, as applicable, for the rights and obligations created by those leases. Additionally, the guidance modifies current guidance for lessor accounting and leveraged leases. This new standard was effective for the Company as of January 1, 2019.
The Company elected to adopt the new standard using the modified retrospective method and, accordingly, has not recast comparative periods presented in its unaudited Condensed Consolidated Financial Statements. The Company elected the package of transition practical expedients for its existing leases and therefore it did not reassess the following: lease classification for existing leases, whether any existing contracts contained leases, if any initial direct costs were incurred and whether any existing land easements should be accounted for as leases. As permitted by the new standard, the Company elected as accounting policy elections to not recognize assets and related lease liabilities for leases with terms of twelve months or less. The Company elected the available practical expedients and updated internal controls to enable the preparation of financial information on adoption.
The Company adopted this standard as of January 1, 2019, which had an impact on its Condensed Consolidated Balance Sheets as of January 1, 2019 and September 30, 2019, with the recognition of an operating lease right-of-use asset in the amount of $1.0 million and $0.4 million, respectively, and the recognition of operating lease liabilities of $1.1 million and $0.4 million, respectively. The new standard did not have a significant impact on the Company's Condensed Consolidated Statements of Operations for any period.
Recently Issued, Not Yet Adopted
In August 2018, the FASB issued ASU No.2018-13, Fair Value Measurement, which modified the disclosure requirements for fair value measurement under ASC 820. The ASU will be effective for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the effects of this ASU and does not expect that the adoption effective January 1, 2020 will have a material impact on its Condensed Consolidated Financial Statements.
Item 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes appearing elsewhere in this report. Some of the information contained in this discussion and analysis and set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. You should review the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, or Form 10-Q, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. As used throughout this report, the terms “the Company,” “we,” “us,” and “our” refer to the business of Curis, Inc. and its wholly owned subsidiaries, except where the context otherwise requires, and the term “Curis” refers to Curis, Inc.
Overview
We are a biotechnology company focused on the development of first-in-class and innovative therapeutics for the treatment of cancer. Our clinical stage drug candidates are:

•
Fimepinostat is currently being explored in clinical studies in patients with MYC-altered diffuse large B-cell lymphoma (“DLBCL”) and solid tumors and has been granted Orphan Drug Designation and Fast Track Designation for the treatment of DLBCL by the U.S. Food and Drug Administration, (“FDA”) in April 2015 and May 2018, respectively. We have begun enrollment in a Phase 1 combination study with venetoclax in DLBCL patients, including patients with translocations in both MYC and the BCL2 gene, also referred to as double-hit lymphoma, or high grade B-cell lymphoma (“HGBL”). We expect to report initial clinical data from this combination study in the fourth quarter of 2019.
•
CA-4948 is being tested in a dose escalating clinical trial in patients with non-Hodgkin lymphomas, including those with myeloid differentiation primary response 88, or MYD88, alterations. We are currently planning to initiate a separate Phase 1 trial for acute myeloid leukemia (“AML”) and myelodysplastic syndromes (“MDS”) patients. We expect to report further clinical data from the study in the fourth quarter of 2019.

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•
CA-170 is currently undergoing testing in a clinical study in patients with mesothelioma. We will announce initial data in conjunction with the Society for Immunotherapy of Cancer conference in November 2019. Based on this data, no further patients will be enrolled in the study. We are currently evaluating future studies for CA-170.
Our pipeline also includes CA-327, which is a pre-Investigational New Drug (“IND”), stage oncology drug candidate.
In addition, we are party to a collaboration with Genentech Inc. (“Genentech”), a member of the Roche Group, under which F. Hoffmann-La Roche Ltd (“Roche”) and Genentech are commercializing ErivedgeTM (vismodegib), a first-in-class orally administered small molecule Hedgehog signaling pathway inhibitor. Erivedge is approved for the treatment of advanced basal cell carcinoma (“BCC”).
Finally, on January 18, 2015, we entered into a collaboration agreement with Aurigene Discovery Technologies Limited (“Aurigene”), a specialized, discovery stage biotechnology company and wholly owned subsidiary of Dr. Reddy’s Laboratories for the discovery, development and commercialization of small molecule compounds in the areas of immuno-oncology and precision oncology, which we refer to as the Aurigene agreement, which was amended in September 2016. As of September 30, 2019, we have licensed four programs under the Aurigene collaboration.
1.
IRAK4 Program - a precision oncology program of small molecule inhibitors of IRAK4. The development candidate is CA-4948, an orally available small molecule inhibitor of IRAK4.
2.
PD1/VISTA Program - an immuno-oncology program of small molecule antagonists of PD1 and VISTA immune checkpoint pathways. The development candidate is CA-170, an orally available small molecule antagonist of VISTA and PDL1.
3.
PD1/TIM3 Program - an immuno-oncology program of small molecule antagonists of PD1 and TIM3 immune checkpoint pathways. The development candidate is CA-327, an orally available small molecule antagonist of PDL1 and TIM3.
4.
In March 2018, we exercised our option to license a fourth program, which is an immuno-oncology program.
Based on our clinical development plans for our pipeline, we intend to predominantly focus our available resources on the continued development of fimepinostat, as well as CA-4948 and CA-170 in collaboration with Aurigene in the near term.
As of September 30, 2019, we believe our $28.0 million of existing cash, cash equivalents and investments should enable us to maintain our planned operations into the second half of 2020. We have based this assessment on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. Based on our available cash resources, recurring losses and cash outflows from operations since inception, an expectation of continuing operating losses and cash outflows from operations for the foreseeable future and the need to raise additional capital to finance our future operations, we concluded we do not have sufficient cash on hand to support current operations within the next 12 months from the date of filing this Quarterly Report on Form 10-Q. These factors raise substantial doubt regarding our ability to continue as a going concern. We expect to finance our operations through our current at-the-market sale agreement with Cowen or other potential equity financings, debt financings or other capital sources. However, we may not be successful in securing additional financing on acceptable terms, or at all. If sufficient funds are not available, we may have to delay, reduce the scope of, or eliminate some of our research and development programs, including related clinical trials and operating expenses, potentially delaying the time to market for or preventing the marketing of any of our product candidates, which could adversely affect our business prospects and our ability to continue our operations, and would have a negative impact on our financial condition and ability to pursue our business strategies.
Our Collaborations and License Agreements
For information regarding our collaboration and license agreements, refer to Note 4, Research and Development Collaborations, in the accompanying Notes to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q and Items 7 and 8 of our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission, (“SEC”) on March 26, 2019.
Liquidity
Since our inception, we have funded our operations primarily through private and public placements of our equity securities, license fees, contingent cash payments, research and development funding from our corporate collaborators, debt financings and the monetization of certain royalty rights. We have never been profitable on an annual basis and have an accumulated deficit of $1.0 billion as of September 30, 2019. For the quarter ended September 30, 2019 we incurred a loss of $23.5 million and used $20.6 million of cash in operations. We expect that our cash, cash equivalents and short term investments as of September 30, 2019 should enable us to maintain our planned operations into the second half of 2020. We have based this assessment on assumptions that may prove to be wrong, and we could exhaust our available capital resources

25
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sooner than we expect. Based on our available cash resources, we do not have sufficient cash on hand to support current operations within the next 12 months from the date of filing this Quarterly Report on Form 10-Q. 
We will need to generate significant revenues to achieve profitability, and do not expect to achieve profitability in the foreseeable future, if at all. See “Funding Requirements” and Note 2 to the Condensed Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q for a further discussion of our liquidity and the conditions and events that raise substantial doubt regarding our ability to continue as a going concern.
Key Drivers
We believe that near term key drivers to our success will include:

•
our ability to successfully plan, finance and complete current and planned clinical trials for fimepinostat, CA-4948 and CA-170 as well as for such clinical trials to generate favorable data;
•
Aurigene’s ability to advance additional preclinical immuno-oncology, and precision oncology drug candidates, and our ability to license these programs from Aurigene and further progress them clinically;
•
Genentech and Roche’s ability to continue to successfully commercialize Erivedge in advanced BCC in the United States and in other global territories; and
•
our ability to raise the substantial additional financing required to fund our operations through our at-the-market sale facility with Cowen and Company, LLC (“Cowen”) or other potential financing.
In the longer term, a key driver to our success will be our ability, and the ability of any current or future collaborator or licensee, to successfully develop and commercialize additional drug candidates.
Financial Operations Overview

General.    Our future operating results will largely depend on the progress of drug candidates currently in our research and development pipeline. The results of our operations will vary significantly from year to year and quarter to quarter and depend on, among other factors, the cost and outcome of any preclinical development or clinical trials then being conducted. For a discussion of our liquidity and funding requirements, see Item 2 of Part I, “Liquidity” and “Liquidity and Capital Resources - Funding Requirements” of this Form 10-Q.
Debt.    In December 2012, our wholly owned subsidiary, Curis Royalty LLC (“Curis Royalty”), entered into a $30 million credit agreement with BioPharma Secured Debt Fund II Sub, S. à r. l., a Luxembourg limited liability company managed by Pharmakon Advisors (“BioPharma-II”), at an annual interest rate of 12.25% collateralized with certain future Erivedge royalty and royalty related payment streams.

In connection with the loan, we transferred to Curis Royalty our right to receive royalty and royalty related payments from Genentech. The loan and accrued interest was an obligation of Curis Royalty, with no recourse to us, to be repaid using the royalty and royalty related payments from Genentech. To secure repayment of the loan, Curis Royalty granted a first priority lien and security interest (subject only to permitted liens) to BioPharma-II in all of its assets and all real, intangible and personal property, including all of its right, title and interest in and to the royalty and royalty related payments. Under the terms of the credit agreement, quarterly royalty and royalty related payments received by Curis Royalty from Genentech were first applied to pay interest and second, principal on the loan from BioPharma-II. As a result of the loan received from BioPharma-II, we continued to record royalty revenue from Genentech but expected such revenues would have been used to pay down such loan until it was repaid in full. Curis Royalty retained the right to royalty payments related to sales of Erivedge following repayment of the loan.

In March 2017, we and Curis Royalty, entered into a new credit agreement, referred to as the credit agreement, with HealthCare Royalty Partners III L.P. (“HealthCare Royalty”), a Delaware limited partnership managed by Healthcare Royalty Management, LLC, for the purpose of refinancing the prior loan from BioPharma-II. On the effective date of the credit agreement with Healthcare Royalty, the prior loan was terminated in its entirety.

Pursuant to the credit agreement, HealthCare Royalty made a $45.0 million loan at an annual interest rate of 9.95% to Curis Royalty, which was used to pay off the approximate $18.4 million in remaining loan obligations to BioPharma-II under the prior loan. The remaining proceeds of the loan of $26.6 million were distributed to us as sole equity holder of Curis Royalty. On March 22, 2019, we terminated the credit agreement, and repaid in full all amounts outstanding under the loan with HealthCare Royalty.

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In connection with the termination and repayment in full of the loan with HealthCare Royalty, on March 22, 2019 we and Curis Royalty entered into a royalty interest purchase agreement (the “Oberland Purchase Agreement”) with TPC Investments I LP and TPC Investments II LP, referred to as the Purchasers, each of which is a Delaware limited partnership managed by Oberland Capital Management, LLC, and Lind SA LLC, referred to as the Agent, a Delaware limited liability company managed by Oberland Capital Management, LLC, as collateral agent for the Purchasers, pursuant to which we sold to the Purchasers a portion of our rights to receive royalties and royalty related payments from Genentech on potential net sales of Erivedge. Upon closing of the Oberland Purchase Agreement, Curis Royalty received an upfront purchase price of $65.0 million from the Purchasers, approximately $33.8 million of which was used to pay off the remaining loan principal to HealthCare Royalty, and $3.7 million of which was used to pay transaction costs, including $3.4 million to HealthCare Royalty in accrued and unpaid interest and prepayment fees under the loan, resulting in net proceeds of approximately $27.5 million. Curis Royalty will also be entitled to receive milestone payments of (i) $17.2 million if the Purchasers and Curis Royalty receive aggregate royalty payments pursuant to the Oberland Purchase Agreement in excess of $18.0 million during the calendar year 2021, subject to certain exceptions, and (ii) $53.5 million if the Purchasers receive payments pursuant to the Oberland Purchase Agreement in excess of $117.0 million on or prior to December 31, 2026, which milestone payments may each be paid, at the option of the Purchasers, in a lump sum in cash or out of the Purchaser’s portion of future payments under the Oberland Purchase Agreement. For further discussion please refer to Note 9, Liability Related to the Sale of Future Royalties, in the accompanying Notes to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.
Revenue.    We do not expect to generate any revenues from our direct sale of products for several years, if ever. Substantially all of our revenues to date have been derived from license fees, research and development payments, and other amounts that we have received from our strategic collaborators and licensees, including royalty payments. Since the first quarter of 2012, we have recognized royalty revenues related to Genentech’s sales of Erivedge and we expect to continue to recognize royalty revenue in future quarters from Genentech’s sales of Erivedge in the U.S. and Roche’s sales of Erivedge outside of the U.S. However, a portion of our royalty and royalty related revenues under our collaboration with Genentech will be paid to the Purchasers, pursuant to the Oberland Purchase Agreement. The Oberland Purchase Agreement will terminate upon the earlier to occur of (i) the date on which Curis Royalty’s rights to receive a portion of certain royalty and royalty related payments, excluding a portion of non U.S. royalties retained by Curis Royalty, referred to as the Purchased Receivables, owed by Genentech under the Genentech collaboration agreement have terminated in their entirety and (ii) the date on which payment in full of the Put/Call Price is received by the Purchasers pursuant to the Purchasers’ exercise of their put option or Curis Royalty’s exercise of its call right as described in Note 9, Liability Related to the Sale of Future Royalties, in the accompanying Notes to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.
We could receive additional milestone payments from Genentech, provided that contractually specified development and regulatory objectives are met. Also, we could receive milestone payments from the Purchasers, provided that contractually specified royalty payment amounts are met within applicable time periods. Our only source of revenues and/or cash flows from operations for the foreseeable future will be royalty payments that are contingent upon the continued commercialization of Erivedge under our existing collaboration with Genentech, and contingent cash payments for the achievement of clinical, development and regulatory objectives, if any, that are met under such collaboration. Our receipt of additional payments under our existing collaboration with Genentech cannot be assured, nor can we predict the timing of any such payments, as the case may be.
Cost of Royalty Revenues.    Cost of royalty revenues consists of all expenses incurred that are associated with royalty revenues that we record as revenues in our Condensed Consolidated Statements of Operations and Comprehensive Loss. These costs currently consist of payments we are obligated to make to university licensors on royalties that Curis Royalty receives from Genentech on net sales of Erivedge. In all territories other than Australia, our obligation is equal to 5% of the royalty payments that we receive from Genentech for a period of 10 years from the first commercial sale of Erivedge, which occurred in February 2012 in the U.S. In addition, for royalties that Curis Royalty receives from Roche’s sales of Erivedge in Australia, we were obligated to make payments to university licensors of 2% of Roche’s direct net sales in Australia until expiration of the patent in April 2019. Following April 2019, the amount we are obligated to pay has decreased to 5% of the royalty payments that Curis Royalty receives from Genentech.
Research and Development.    Research and development expense consists of costs incurred to develop our drug candidates. These expenses consist primarily of:

•
salaries and related expenses for personnel, including stock based compensation expense;
•
costs of conducting clinical trials, including amounts paid to clinical centers, clinical research organizations and consultants, among others;
•
other outside service costs, including costs of contract manufacturing;

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•
sublicense payments;
•
the costs of supplies and reagents;
•
occupancy and depreciation charges;
•
certain payments that we make to Aurigene under our collaboration agreement, including, for example, option exercise fees and milestone payments; and
•
payments that we are obligated to make to certain third party university licensors upon our receipt of payments from Genentech related to the achievement of clinical development and regulatory objectives under our collaboration agreement.
The following graphic outlines the current status of our programs:
PIPELINE20191001.JPG
We expense research and development costs as incurred. We are currently incurring research and development costs under our Hedgehog signaling pathway inhibitor collaboration with Genentech related to the maintenance of third party licenses to certain background technologies.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages, primarily due to the increased size and duration of later stage clinical trials. As a result, we expect that our research and development expenses will increase substantially over the next several years as we conduct our clinical trials of fimepinostat, CA-4948 and CA-170; prepare regulatory filings for our product candidates; continue to develop additional product candidates; and potentially advance our product candidates into later stages of clinical development.
The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

•
the scope, quality of data, rate of progress and cost of clinical trials and other research and development activities undertaken by us or our collaborators;

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•
the results of future preclinical studies and clinical trials;
•
the cost and timing of regulatory approvals and maintaining compliance with regulatory requirements;
•
the cost and timing of establishing sales, marketing and distribution capabilities;
•
the cost of establishing clinical and commercial supplies of our drug candidates and any products that we may develop;
•
the effect of competing technological and market developments; and
•
the cost and effectiveness of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
Any changes in the outcome of any of these variables with respect to the development of our product candidates could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time to complete clinical development of that product candidate. We may never obtain regulatory approval for any of our product candidates. Drug commercialization will take several years and millions of dollars in development costs.
A further discussion of some of the risks and uncertainties associated with completing our research and development programs on schedule, or at all, and some consequences of failing to do so, are set forth under “Part II, Item 1A. Risk Factors” of this Form 10-Q.
General and Administrative.    General and administrative expense consists primarily of salaries, stock based compensation expense and other related costs for personnel in executive, finance, accounting, business development, legal, information technology, corporate communications and human resource functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, patent and accounting services. Patent costs include certain patents covered under collaborations, a portion of which is reimbursed by collaborators and a portion of which is borne by us.
Critical Accounting Policies and Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the U.S. requires that we make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at our balance sheet date. Such estimates and judgments include the carrying value of property and equipment and intangible assets, revenue recognition, the value of certain liabilities, debt classification and stock based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We set forth our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 26, 2019.

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Results of Operations
Three and Nine Months Ended September 30, 2019 and September 30, 2018

The following table summarizes our results of operations for the three and nine months ended September 30, 2019 and 2018:
 
For the Three Months Ended
September 30,
 
Percentage
Increase
(Decrease)
 
For the Nine Months Ended
September 30,
 
Percentage
Increase
(Decrease)
 
2019
 
2018
 
 
2019
 
2018
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues
$
2,856

 
$
2,847

 
—
 %
 
$
6,717

 
$
7,673

 
(12
)%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of royalty revenues
145

 
154

 
(6
)%
 
342

 
417

 
(18
)%
Research and development
5,147

 
4,983

 
3
 %
 
14,840

 
19,700

 
(25
)%
General and administrative
2,887

 
4,127

 
(30
)%
 
8,557

 
11,741

 
(27
)%
Other expense, net
1,113

 
806

 
38
 %
 
6,511

 
2,449

 
>100 %

Net loss
$
(6,436
)
 
$
(7,223
)
 
(11
)%
 
$
(23,533
)
 
$
(26,634
)
 
(12
)%
Revenues. Total revenues are summarized as follows:
 
For the Three Months Ended
September 30,
 
Percentage
Increase
(Decrease)
 
For the Nine Months Ended
September 30,
 
Percentage
Increase
(Decrease)
 
2019
 
2018
 
 
2019
 
2018
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Royalties
$
2,906

 
$
2,781

 
4
%
 
$
7,185

 
$
7,649

 
(6
)%
Contra revenue
(50
)
 
66

 
<(100)%

 
(468
)
 
24

 
>100 %

Total revenues
$
2,856

 
$
2,847

 
—
%
 
$
6,717

 
$
7,673

 
(12
)%
Total revenues increased to $2.9 million for the three months ended September 30, 2019 as compared to $2.8 million for the same period in 2018, primarily related to an increase in royalty revenues arising from Genentech and Roche’s net sales of Erivedge during the three months ended September 30, 2019 as compared to the prior year period.
Total revenues decreased by $1.0 million to $6.7 million for the nine months ended September 30, 2019 as compared to $7.7 million for the same period in 2018, primarily related to royalty reductions arising from Genentech and Roche’s net sales of Erivedge and the impact of competitor's products in additional markets during the nine months ended September 30, 2019 as compared to the prior year period.
Cost of Royalty Revenues. Cost of royalty revenues remained unchanged at approximately $0.1 million for the three months ended September 30, 2019 as compared to the same period in 2018. Cost of royalty revenues decreased to $0.3 million from $0.4 million for the nine months ended September 30, 2019 as compared to the same period in 2018. We are obligated to make payments to two university licensors on royalties that Curis Royalty earns from Genentech on net sales of Erivedge.
Research and Development Expenses. The following table summarizes our research and development expenses incurred during the periods indicated: 
 
For the Three Months Ended
September 30,
 
Percentage
Increase
(Decrease)
 
For the Nine Months Ended
September 30,
 
Percentage
Increase
(Decrease)
 
2019
 
2018
 
 
2019
 
2018
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Direct research and development expenses
$
3,313

 
$
2,057

 
61
 %
 
$
9,071

 
$
8,901

 
2
 %
Employee related expenses
1,426

 
2,439

 
(42
)%
 
4,493

 
9,150

 
(51
)%
Facilities, depreciation and other expenses
408

 
487

 
(16
)%
 
1,276

 
1,649

 
(23
)%
Total research and development expenses
$
5,147

 
$
4,983

 
3
 %
 
$
14,840

 
$
19,700

 
(25
)%


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Research and development expenses were $5.1 million for the three months ended September 30, 2019 as compared to $5.0 million in the same period in 2018, an increase of approximately $0.1 million, or 3%. Direct research and development expenses increased by $1.3 million for the three months ended September 30, 2019 as compared to the same period in 2018, primarily due to increased costs related to clinical activities for CA-4948 partially offset by lower costs related to CA-170. Employee related expenses decreased by approximately $1.0 million primarily related to lower personnel costs and stock based compensation expense.

Research and development expenses were $14.8 million for the nine months ended September 30, 2019, as compared to $19.7 million in the same period in 2018, a decrease of $4.9 million, or 25%. Direct research and development expenses increased by $0.2 million for the nine months ended September 30, 2019 as compared to the same period in 2018, primarily due to increased costs related to clinical activities for CA-4948. Employee related expenses decreased by approximately $4.7 million primarily related to lower personnel costs and stock based compensation expense.
We expect that a majority of our research and development expenses for the foreseeable future will be incurred in connection with our efforts to advance our programs, including clinical and preclinical development costs, option exercise fees, and potential milestone payments upon achievement of certain milestones.
General and Administrative Expenses. General and administrative expenses are summarized as follows:
 
For the Three Months Ended
September 30,
 
Percentage
Increase
(Decrease)
 
For the Nine Months Ended
September 30,
 
Percentage
Increase
(Decrease)
 
2019
 
2018
 
 
2019
 
2018
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Personnel
$
1,039

 
$
1,789

 
(42
)%
 
$
3,061

 
$
4,281

 
(28
)%
Legal services
262

 
773

 
(66
)%
 
1,239

 
2,234

 
(45
)%
Professional and consulting services
427

 
535

 
(20
)%
 
1,286

 
1,693

 
(24
)%
Insurance costs
134

 
102

 
31
 %
 
344

 
304

 
13
 %
Stock based compensation
554

 
600

 
(8
)%
 
1,536

 
2,166

 
(29
)%
Other general and administrative expenses
471

 
328

 
43
 %
 
1,091

 
1,063

 
3
 %
Total general and administrative expenses
$
2,887

 
$
4,127

 
(30
)%
 
$
8,557

 
$
11,741

 
(27
)%
General and administrative expenses were $2.9 million for the three months ended September 30, 2019, as compared to $4.1 million in the same period in 2018, a decrease of $1.2 million, or 30%. The decrease in general administrative expense was driven primarily by lower legal and consulting services and lower personnel expenses, partially offset by an increase in insurance and other administrative expenses.
General and administrative expenses were $8.6 million for the nine months ended September 30, 2019, as compared to $11.7 million in the same period in 2018, a decrease of $3.2 million, or 27%. The decrease in general administrative expense was driven primarily by lower legal and consulting services, lower personnel and stock based compensation expenses.
Other Expense. Interest income was consistent at $0.2 million for the three months ended September 30, 2019 and 2018, respectively. Imputed interest expense related to future royalty payments was $1.3 million for the three months ended September 30, 2019. For the three months ended September 30, 2018 interest expense was $1.0 million related to interest accrued on Curis Royalty’s debt obligations.
For the nine months ended September 30, 2019, loss on extinguishment of debt was $3.5 million with $3.4 million due to payment of a pre-payment fee due to HealthCare Royalty and $0.1 million related to the remaining deferred issuance costs. Interest income was $0.5 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively. Imputed interest expense related to the future royalty payments was $2.7 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2019 and 2018, interest expense was $0.8 million and $3.0 million, respectively, primarily related to interest accrued on Curis Royalty’s debt obligations.
Liquidity and Capital Resources
We have financed our operations primarily through private and public placements of our equity securities, license fees, contingent cash payments and research and development funding from our corporate collaborators, debt financings, and the monetization of certain royalty rights. See “Funding Requirements” and Note 2 to the Condensed Consolidated Financial

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Statements appearing in this Quarterly Report on Form 10-Q for a further discussion of our liquidity and the conditions and events that raise substantial doubt regarding our ability to continue as a going concern.
Placement of Equity Securities
On July 2, 2015, we entered into a sales agreement with Cowen and Company (“Cowen”), pursuant to which we may sell from time to time up to $30.0 million of our common stock through an “at-the-market” equity offering program, under which Cowen will act as sales agent. Subject to the terms and conditions of the sales agreement, Cowen may sell the common stock by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the Nasdaq Global Market, on any other existing trading market for the common stock, or to or through a market maker other than on an exchange. We are not obligated to sell any of the common stock under this sales agreement. Either Cowen or we may at any time suspend solicitations and offers under the sales agreement upon notice to the other party. The sales agreement may be terminated at any time by either party upon written notice to the other party, in the manner specified in the sales agreement. The aggregate compensation payable to Cowen will be 3% of the gross sales price of the common stock sold pursuant to the sales agreement. The shares sold under the sales agreement have been issued and sold pursuant to the universal shelf registration statement on Form S-3, filed with the Securities and Exchange Commission on July 2, 2015. The remaining shares that may be sold under the sales agreement are expected to be issued and sold, if at all, pursuant to the currently effective universal shelf registration statement on Form S-3, filed with the Securities and Exchange Commission on May 3, 2018. We did not sell shares of common stock under this sales agreement during the three and nine months ended September 30, 2019. As of September 30, 2019, we have sold an aggregate of 420,796 shares of common stock pursuant to this sales agreement, for net proceeds of $6.2 million.
Debt Financing
In December 2012, our wholly owned subsidiary, Curis Royalty, received a $30.0 million loan, at an annual interest rate of 12.25%, pursuant to a credit agreement with BioPharma-II. In connection with the loan, we transferred to Curis Royalty our right to receive certain future royalty and royalty related payments on the commercial sales of Erivedge that we may receive from Genentech. The loan and accrued interest was repaid by Curis Royalty using such royalty and royalty related payments. The loan constituted an obligation of Curis Royalty, and was non-recourse to us. The final maturity date of the loan was the earlier of such date that the principal was paid in full, or Curis Royalty’s right to receive royalties under the collaboration agreement with Genentech was terminated.
In March 2017, we and Curis Royalty entered into a credit agreement with HealthCare Royalty for the purpose of refinancing our and Curis Royalty’s existing credit agreement with BioPharma-II. On the effective date of the credit agreement with Healthcare Royalty, the prior loan was terminated in its entirety. Pursuant to the credit agreement, HealthCare Royalty made a $45.0 million loan at an annual interest rate of 9.95% to Curis Royalty, which was used to pay off the $18.4 million in remaining loan obligations to BioPharma-II under the prior loan. The residual proceeds of the loan were distributed to us as sole equity member of Curis Royalty. The final maturity date of the loan was the earlier of such date that the principal is paid in full, or Curis Royalty's right to receive royalties under the collaboration agreement with Genentech is terminated.
Payments to HealthCare Royalty for the nine months ended September 30, 2019 totaled $39.9 million, of which $35.6 million was applied to the principal, and the remainder satisfying interest obligations. On March 22, 2019, in connection with our and Curis Royalty’s entry into the Oberland Purchase Agreement, we terminated the credit agreement, and repaid all amounts outstanding under the loan with HealthCare Royalty.
In March 2019, we and Curis Royalty entered into the Oberland Purchase Agreement with the Purchasers and Lind SA, LLC, as collateral agent for the Purchasers, pursuant to which we sold to the Purchasers a portion of our rights to receive royalties from Genentech on potential net sales of Erivedge. As upfront consideration for the purchase of the royalty rights, at closing the Purchasers paid to Curis Royalty $65.0 million less certain transaction expenses. Curis Royalty is also entitled to receive up to approximately $70.7 million in milestone payments based on sales of Erivedge as follows: (i) $17.2 million if the Purchasers and Curis Royalty receive aggregate royalty payments pursuant to the Oberland Purchase Agreement in excess of $18.0 million during the calendar year 2021, subject to certain exceptions and (ii) $53.5 million if the Purchasers receive payments pursuant to the Oberland Purchase Agreement in excess of $117.0 million on or prior to December 31, 2026. We determined the fair value of the liability related to the sale of future royalties at the time of the agreement to be $65.0 million, with an effective annual non-cash interest rate of 7.9%. We incurred $0.6 million of transaction costs in connection with the agreement which will be amortized to imputed interest expense over the estimated term of the agreement.
Milestone Payments and Monetization of Royalty Rights
We have received aggregate milestone payments totaling $59.0 million under our collaboration with Genentech since 2012. In addition, we began receiving royalty revenues in 2012 in connection with Genentech’s sales of Erivedge in the U.S. and Roche’s sales of Erivedge outside of the U.S. Erivedge royalty revenues received after December 2012 were used to repay Curis Royalty’s outstanding principal and interest under the loans due to BioPharma-II and HealthCare Royalty. A portion of Erivedge royalty and royalty related revenue payments will be paid to the Purchasers pursuant to the Oberland Purchase

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Agreement. We also remain entitled to receive any contingent payments upon achievement of clinical development objectives and royalty payments related to sales of Erivedge pursuant to our collaboration agreement with Genentech and certain contingent payments upon achievement of contractually specified royalty revenue payment amounts related to sales of Erivedge pursuant to the Oberland Purchase Agreement. Upon receipt of any such payments, as well as on royalties received in any territory other than Australia, we are required to make payments to certain university licensors totaling 5% of these amounts. In addition, for royalties that Curis Royalty receives from Roche’s sales of Erivedge in Australia, we were obligated to make payments to university licensors of 2% of Roche’s direct net sales in Australia until the expiration of the patent in April 2019. Following April 2019, the amount we are obligated to pay has decreased to 5% of the royalty payments that Curis Royalty receives from Genentech.
At September 30, 2019, our principal sources of liquidity consisted of cash, cash equivalents, and investments of $28.0 million, excluding our restricted investments of $0.2 million. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase, and consist of investments in money market funds with commercial banks and financial institutions, as well as short term commercial paper and government obligations. We maintain cash balances with financial institutions in excess of insured limits.
Cash Flows
Cash flows for operations have primarily been used for salaries and wages for our employees, facility and facility related costs for our office and laboratory, fees paid in connection with preclinical and clinical studies, laboratory supplies, consulting fees and legal fees. We expect that costs associated with clinical studies will increase in future periods.
Net cash used in operating activities of $20.6 million during the nine months ended September 30, 2019 was primarily the result of our net loss for the period of $23.5 million, offset by non-cash charges consisting of stock based compensation, amortization of debt issuance costs, non-cash lease expense, depreciation, and non-cash imputed interest, totaling $3.0 million. Operating lease liability decreased $0.7 million. Accounts payable and accrued and other liabilities decreased $2.0 million, and accounts receivable remained consistent across both periods.
    
Net cash used in operating activities of $25.1 million during the nine months ended September 30, 2018 was primarily the result of our net loss for the period of $26.6 million, offset by non-cash charges consisting of stock based compensation, non-cash interest expense, amortization of debt issuance costs and depreciation totaling $3.3 million. In addition, accounts payable and accrued liabilities decreased $1.9 million, and accounts receivable decreased $0.2 million related to a decrease in Erivedge royalties.
We expect to continue to use cash in operations as we seek to advance our drug candidates and our programs under our collaboration agreement with Aurigene. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and other specified objectives.
Investing activities used cash of $6.0 million and provided cash of $16.7 million for the nine months ended September 30, 2019 and 2018, respectively, resulting primarily from net investment activity from purchases and sales or maturities of investments for the respective periods.
Financing activities provided cash of $24.3 million for the nine months ended September 30, 2019. We made principal payments on Curis Royalty's loan to HealthCare Royalty of $35.6 million, and received $65.0 million in proceeds from the sale of future royalties to the Purchasers.
Financing activities used cash of $4.3 million for the nine months ended September 30, 2018 as a result of principal payments on Curis Royalty's loan from HealthCare Royalty of $4.4 million.

Funding Requirements

We have incurred significant losses since our inception. As of September 30, 2019, we had an accumulated deficit of approximately $1.0 billion. We will require substantial funds to continue our research and development programs and to fulfill our planned operating goals. In particular, our currently planned operating and capital requirements include the need for working capital to support our research and development activities for fimepinostat, CA-4948, CA-170 and other programs under our collaboration with Aurigene, and to fund our general and administrative costs and expenses. Based on our available cash resources, recurring losses and cash outflows from operations since inception, an expectation of continuing operating losses and cash outflows from operations for the foreseeable future and the need to raise additional capital to finance our future operations, we concluded we do not have sufficient cash on hand to support current operations within the next 12 months from the date of filing this Quarterly Report on Form 10-Q. These factors raise substantial doubt regarding our ability to continue as a going concern.  We expect to finance our operations through our current at-the-market sale agreement with Cowen or other

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potential equity financings, debt financings or other capital sources. However, we may not be successful in securing additional financing on acceptable terms, or at all.
Factors that may affect our planning future capital requirements and accelerate our need for additional working capital, and that would have a negative impact on our financial condition and our ability to pursue our business strategies, include the following:

•
unanticipated costs in our research and development programs;
•
the timing and cost of obtaining regulatory approvals for our drug candidates and maintaining compliance with regulatory requirements;
•
the timing and amount of option exercise fees, milestone payments, royalties and other payments, including payments due to licensors, including Aurigene, for patent rights and technology used in our drug development programs;
•
the costs of commercialization activities for any of our drug candidates that receive marketing approval, to the extent such costs are our responsibility, including the costs and timing of establishing drug sales, marketing, distribution and manufacturing capabilities;
•
unplanned costs to prepare, file, prosecute, defend and enforce patent claims and other patent related costs, including litigation costs and technology license fees; and
•
unexpected losses in our cash investments or an inability to otherwise liquidate our cash investments due to unfavorable conditions in the capital markets.
Subject to specified exceptions, we and Aurigene agreed to collaborate exclusively with each other on the discovery, research, development and commercialization of programs and compounds within immuno-oncology for an initial period of approximately two years from the effective date of the collaboration agreement. At our option, and subject to specified conditions, we may extend such exclusivity for up to three additional one year periods by paying to Aurigene additional exclusivity option fees on an annual basis. We exercised the first one year exclusivity option in 2017. The fee for this exclusivity option exercise was $7.5 million, which we paid in two equal installments in 2017. We elected not to exercise our exclusivity option in 2018 and did not make the $10.0 million payment required for this additional exclusivity in 2018. As a result of this election to not further exercise our exclusivity option, we no longer operate under the broad immuno-oncology exclusivity with Aurigene. In 2019, we elected not to further exercise our exclusivity option related to the IRAK4 and PD1/VISTA programs and did not make the $2.0 million payment required for this continued exclusivity.
We have historically derived a portion of our operating cash flow from our receipt of milestone payments under collaboration agreements with third parties. However, we cannot predict whether we will receive additional milestone payments under existing or future collaborations.
To become and remain profitable, we, either alone or with collaborators, must develop and eventually commercialize one or more drug candidates with significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our drug candidates, obtaining marketing approval for these drug candidates, manufacturing, marketing and selling those drugs for which we may obtain marketing approval and satisfying any post marketing requirements. We may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability. Other than Erivedge, which is being commercialized by Genentech and Roche, our most advanced drug candidates are currently only in early clinical testing.
For the foreseeable future, we will need to spend significant capital in an effort to develop and commercialize products and we expect to incur substantial operating losses. Our failure to become and remain profitable would, among other things, depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our research and development programs or continue our operations.
New Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our Condensed Consolidated Financial Statements, see Note 16, “New Accounting Pronouncements,” in the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.
Contractual Obligations


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There have been no material changes to our contractual obligations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2018.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of September 30, 2019.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls & Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION 
Item 1A.
RISK FACTORS
You should carefully consider the following risk factors, in addition to other information included in this Form 10-Q and in other documents we file with the SEC, in evaluating Curis and our business. If any of the scenarios described in the following risk factors occur, our business, financial condition and operating results could be materially adversely affected. The following risk factors restate and supersede the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 26, 2019.
RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING
We have incurred substantial losses, expect to continue to incur substantial losses for the foreseeable future and may never generate significant revenue or achieve profitability.
We have incurred significant annual net operating losses in every year since our inception. We expect to continue to incur significant and increasing net operating losses for at least the next several years. Our net losses were $23.5 million and $26.6 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of approximately $1.0 billion. As noted below, we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. We have not completed the development of any drug candidate on our own. Other than Erivedge®, which is being commercialized and further developed by Genentech and Roche under our June 2003 collaboration with Genentech, we may never have a drug candidate approved for commercialization. We have financed our operations to date primarily through public offerings and private placements of our common stock, other debt financings, and amounts received through various licensing and collaboration agreements. We have devoted substantially all of our financial resources and efforts to research and development and general and administrative expense to support such research and development. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ (deficit) equity and working capital.
We anticipate that our expenses will increase substantially if and as we:
•
continue to develop and conduct clinical trials with respect to drug candidates;
•
seek to identify and develop additional drug candidates;
•
acquire or in-license other drug candidates or technologies;
•
seek regulatory and marketing approvals for our drug candidates that successfully complete clinical trials, if any;
•
establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various drugs for which we may obtain marketing approval, if any;
•
require the manufacture of larger quantities of drug candidates for clinical development and, potentially, commercialization;
•
maintain, expand, and protect our intellectual property portfolio;
•
hire and retain additional personnel, such as clinical, quality control and scientific personnel; and
•
add equipment and physical infrastructure as may be required to support our research and development programs.
Our ability to become and remain profitable depends on our ability to generate significant revenue. Our only current source of revenues comprises licensing and royalty revenues that we earn under our collaboration with Genentech related to the development and commercialization of Erivedge. In addition, a portion of our royalty and royalty related revenues under our collaboration with Genentech will be paid to TPC Investments I LP and TPC Investments II LP (“the Purchasers”), pursuant to the royalty interest purchase agreement we and Curis Royalty entered into with the Purchasers and Lind SA LLC (“Agent”), on March 22, 2019 (the “Oberland Purchase Agreement”).
We do not expect to generate significant revenues other than those related to Erivedge unless and until we are, or any collaborator is, able to obtain marketing approval for, and successfully commercialize, one or more of our drug candidates other than Erivedge. Successful commercialization will require achievement of key milestones, including initiating and successfully completing clinical trials of our drug candidates, obtaining marketing approval for these drug candidates, manufacturing, marketing, and selling those drugs for which we, or any of our collaborators, may obtain marketing approval, satisfying any post marketing requirements and obtaining reimbursement for our drugs from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of revenues and whether or when we might achieve profitability. We and any collaborators may never succeed in these activities

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and, even if we do, or any collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of drug candidates, or continue our operations and cause a decline in the value of our common stock.
We will require substantial additional capital, which may be difficult to obtain, and if we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our drug development programs or commercialization efforts.
We will require substantial funds to continue our research and development programs and to fulfill our planned operating goals. Our planned operating and capital requirements currently include the support of our current and future research and development activities for fimepinostat, CA-170, and CA-4948 as well as development candidates we have and may continue to license under our collaboration with Aurigene. We will require substantial additional capital to fund the further development of these programs, as well as to fund our general and administrative costs and expenses. Moreover, under our collaboration, license and option agreement with Aurigene, we are required to make milestone, royalty and option fee payments for discovery, research and preclinical development programs that will be performed by Aurigene, which impose significant potential financial obligations on us. The collaboration includes multiple programs, and we have the option to exclusively license compounds once a development candidate is nominated within each respective program.
Based upon our current operating plan, we believe that our existing cash, cash equivalents and short term investments of $28.0 million as of September 30, 2019 should enable us to fund our operating expenses and capital expenditure requirements into the second half of 2020. Based on our available cash resources, we do not have sufficient cash on hand to support current operations within the next 12 months from the date of filing this Quarterly Report on Form 10-Q. Our ability to raise additional funds will depend on financial, economic and market conditions, many of which are outside of our control, and we may be unable to raise financing when needed, or on terms favorable to us. We may be unable to obtain additional funding on acceptable terms, or at all.
Furthermore, there are a number of factors that may affect our future capital requirements and further accelerate our need for additional working capital, many of which are outside our control, including the following:
•
unanticipated costs in our research and development programs;
•
the timing and cost of obtaining regulatory approvals for our drug candidates and maintaining compliance with regulatory requirements;
•
the timing and amount of option exercise fees, milestone payments, royalties and other payments, including payments due to licensors, including Aurigene, for patent rights and technology used in our drug development programs;
•
the costs of commercialization activities for any of our drug candidates that receive marketing approval, to the extent such costs are our responsibility, including the costs and timing of establishing drug sales, marketing, distribution and manufacturing capabilities;
•
unplanned costs to prepare, file, prosecute, defend and enforce patent claims and other patent related costs, including litigation costs and technology license fees; and
•
unexpected losses in our cash investments or an inability to otherwise liquidate our cash investments due to unfavorable conditions in the capital markets; and
•
our ability to continue as a going concern.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.
As of September 30, 2019, we had $28.0 million in existing cash, cash equivalents and short-term investments. We expect these available cash resources to fund our operating expenses and capital expenditure requirements into the second half of 2020. We have based this assessment on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. Based on our available cash resources, we do not have sufficient cash on hand to support current operations within the next 12 months from the date of filing this Quarterly Report on Form 10-Q. If we are unable to obtain sufficient funding, we may be forced to delay, reduce in scope or eliminate some of our research and development programs, including related clinical trials and operating expenses, potentially delaying the time to market for, or preventing the marketing of, any of our product candidates, which could adversely affect our business prospects and our ability to continue operations, and would have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which

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those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. Future reports from our independent registered public accounting firm may contain statements expressing substantial doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide funding to us on commercially reasonable terms, if at all.

In connection with the Oberland Purchase Agreement, we transferred and encumbered certain royalty and royalty related payments on commercial sales of Erivedge, Curis Royalty granted a first priority lien and security interest in all of its assets, including its rights to the Erivedge royalty payments, and we granted the Purchasers a first priority lien and security interest in our equity interest in Curis Royalty. As a result, in the event of a default by us or Curis Royalty we could lose all retained rights to future royalty and royalty related payments, we could be required to repurchase the Purchased Receivables at a price that is a multiple of the payments we have received, and our ability to enter into future arrangements may be inhibited, all of which could have a material adverse effect on our business, financial condition and stock price.

Pursuant to the Oberland Purchase Agreement, the Purchasers acquired the rights to a portion of certain royalty and royalty related payments excluding a portion of non U.S. royalties retained by Curis Royalty, referred to as the Purchased Receivables, owed by Genentech under our collaboration agreement with Genentech. In connection with entering into the Oberland Purchase Agreement, Curis Royalty and the Agent entered into a security agreement and Curis and the Purchasers entered into a pledge agreement.

Following an event of default under the security agreement entered into between Curis Royalty and the Agent in connection with the transaction, the Agent has the right to stop all allocations of payments that would have otherwise been allocated to Curis Royalty pursuant to the Oberland Purchase Agreement and instead retain all such payments. In addition, the Oberland Purchase Agreement provides that after the occurrence of an event of default by Curis Royalty under the security agreement, as described below, the Purchasers shall have the option, for a period of 180 days, to require Curis Royalty to repurchase the Purchased Receivables at a price, referred to as the Put/Call Price, equal to a percentage, beginning at a low triple digit percentage and increasing over time up to a low-mid triple digit percentage, of the sum of the upfront purchase price and any portion of the milestone payments paid in a lump sum by the Purchasers, if any, minus certain payments previously received by the Purchasers with respect to the Purchased Receivables.

Pursuant to the security agreement, Curis Royalty granted to the Agent a first priority lien and security interest in all of its assets and all real, intangible and personal property, including all of its right, title and interest in and to the Erivedge royalty payments. The security interest secures the obligations of Curis Royalty arising under the Oberland Purchase Agreement, the security agreement or otherwise with respect to the due and prompt payment of (i) an amount equal to the Put/Call Price and (ii) all fees, costs, expenses, indemnities and other payments of Curis Royalty under or in respect of the Oberland Purchase Agreement and the security agreement.

The obligations of Curis Royalty under the Oberland Purchase Agreement may be accelerated upon the occurrence of an event of default under the security agreement (subject to certain cure periods), which events of default include:

•
any royalty and royalty related payments to be remitted into a certain Curis Royalty designated account controlled by the Agent pursuant to a control agreement, referred to as the royalty account, into which all royalty and royalty related payments must be paid by Curis or Curis Royalty are not so remitted in accordance with the Oberland Purchase Agreement;
•
any representation or warranty made by Curis or Curis Royalty in the Oberland Purchase Agreement or any other transaction document proves to be incorrect or misleading in any material respect when made;
•
a default by Curis or Curis Royalty in the performance of affirmative and negative covenants set forth in the Oberland Purchase Agreement or any other transaction document;
•
a default by Curis in the performance or observance of its indemnity obligations under the Oberland Purchase Agreement;
•
the failure by Genentech to pay material amounts owed under the Genentech collaboration agreement because of an actual breach or default by Curis under the Genentech collaboration agreement;
•
the failure of the security agreement to create a valid and perfected first priority security interest in any of the collateral;

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•
a material breach or default by Curis under our agreement with Curis Royalty pursuant to which we transferred our rights to the royalty revenues under the Genentech collaboration agreement to Curis Royalty;
•
the voluntary or involuntary commencement of bankruptcy proceedings by either Curis or Curis Royalty and other insolvency related events;
•
any materially adverse effect on the binding nature of any of the Oberland Purchase Agreement, Security Agreement, Pledge Agreement or other transaction documents, the Genentech collaboration agreement or our agreement with Curis Royalty;
•
any person shall be designated as an independent director of Curis Royalty other than in accordance with Curis Royalty’s limited liability company operating agreement; or
•
Curis shall at any time cease to own, of record and beneficially, 100% of the equity interests in Curis Royalty.
Upon the occurrence and continuance of an event of default under the security agreement, the Agent may exercise its rights and remedies under the security agreement with respect to Curis Royalty and to the collateral pledged thereunder, including, among other things, acceleration of the obligations under the security agreement, the sale or other realization of the collateral and performance of Curis Royalty’s obligations under the purchase and sale agreement. Additionally, Curis granted to the Agent a first priority lien and security interest of Curis’ equity interest in Curis Royalty pursuant to a pledge agreement. Upon the occurrence and continuance of an event of default under the security agreement, the Agent may exercise its rights and remedies under the pledge agreement with respect to the equity interests, including, among other things, the rights to receive distributions and exercise voting rights with respect to the equity interests and to sell or otherwise realize upon the collateral in satisfaction of the obligations. The exercise by the Agent of the foregoing rights shall be deemed to constitute an exercise by the Purchasers of their put option under the Oberland Purchase Agreement.

If any of the above events of default were to occur, Curis Royalty may not have sufficient funds to pay the Put/Call price and the Agent could foreclose on the secured royalty and royalty related payment stream and/or our equity interests in Curis Royalty. In such an event, we could lose our right to royalty and royalty related payments not transferred to the Purchasers pursuant to the Oberland Purchase Agreement and we could lose our rights in Curis Royalty. In addition, in the event Genentech exercises its set off rights against royalty payments to Curis Royalty pursuant to our collaboration agreement with Genentech, we may be required to satisfy our royalty sharing obligations to the Purchasers with amounts from our working capital.  The Oberland Purchase Agreement also contains exculpation and indemnification obligations of Curis and Curis Royalty on behalf of the Agent and the Purchasers. Further, the encumbrance of all of Curis Royalty’s assets, including the right to royalties from sales of Erivedge, and our equity interests in Curis Royalty pursuant to the security agreement and pledge agreement, respectively, may inhibit us from raising additional funds or entering into other strategic arrangements. Any of these consequence of an event of default could have a material adverse effect on our business, financial condition and stock price.
The amount of royalty revenue we received from sales of Erivedge has been adversely affected by a competing drug, and may further be affected in the future.
Pursuant to the terms of our collaboration agreement with Genentech, our subsidiary Curis Royalty is entitled to receive royalties on net sales of Erivedge that range from 5% to 7.5% based upon global Erivedge sales by Roche and Genentech. The royalty rate applicable to Erivedge may be decreased in certain specified circumstances, including when a competing drug product that binds to the same molecular target as Erivedge is approved by the applicable country’s regulatory authority and is being sold in such country by a third party for use in the same indication as Erivedge, or when there is no issued intellectual property covering Erivedge in a territory in which sales are recorded. During the third quarter of 2015, the U.S. Food and Drug Administration, (“FDA”) and the Committee for Medicinal Products for Human Use (“CHMP”), approved an additional Hedgehog signaling pathway inhibitor marketed by Sun Pharmaceutical Industries Ltd., (“Sun Pharmaceutical”), sonidegib (Odomzo®), for the treatment of adults with locally advanced basal cell carcinoma (“BCC”).
Sales of sonidegib (Odomzo®) were first recorded in the U.S. during the fourth quarter of 2015 and, accordingly, Genentech has reduced royalties on its net sales in the U.S. of Erivedge from 5-7.5% to 3-5.5%. Furthermore, we anticipate that Genentech will reduce by 2% royalties on net sales of Erivedge outside of the United States on a country-by-country basis to the extent that sonidegib is approved by the applicable country's regulatory authority and is being sold in such country. We also believe that sales of sonidegib have, and are likely to continue to, adversely affect sales of Erivedge, including those in the U.S. and ex-U.S. countries, which would adversely affect the resulting revenue we may receive from Genentech. A decrease in sales of Erivedge, or in the royalty rate that we receive for sales of Erivedge could adversely affect our operating results.

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Fluctuations in our quarterly and annual operating results could adversely affect the price of our common stock.
Our quarterly and annual operating results may fluctuate significantly. Some of the factors that may cause our operating results to fluctuate on a period-to-period basis include:
•
payments we may be required to make to collaborators such as Aurigene to exercise license rights and satisfy milestones and royalty obligations;
•
the status of, and level of expenses incurred in connection with, our programs, including development costs relating to fimepinostat, CA-4948 and CA-170, as well as funding programs that we have licensed or may in the future license and develop under our collaboration with Aurigene;
•
fluctuations in sales of Erivedge and related royalty and milestone payments, including fluctuations resulting from the sales of competing drug products such as sonidegib, which is approved in the U.S. and Europe for the treatment of locally advanced BCC and is now being marketed and sold by Sun Pharmaceutical;
•
any intellectual property infringement lawsuit or other litigation in which we may become involved;
•
the implementation of restructuring and cost savings strategies;
•
the occurrence of an event of default under the Oberland Purchase Agreement;
•
the implementation or termination of collaboration, licensing, manufacturing or other material agreements with third parties, and non-recurring revenue or expenses under any such agreement; and
•
compliance with regulatory requirements.
If the estimates we make and the assumptions on which we rely in preparing our financial statements prove inaccurate, our actual results may vary significantly.
Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges taken by us, and disclosures related thereto. Such estimates and judgments include the carrying value of our property, the value of equipment and intangible assets, revenue recognition, and the value of certain liabilities, the repayment term of our loan from HealthCare Royalty, for periods prior to its termination, and stock based compensation expense. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. However, these estimates and judgments, and their underlying assumptions, may change over time. Accordingly, our actual financial results may vary significantly from the estimates contained in our financial statements.
For a further discussion of the estimates and judgments that we make and the critical accounting policies that affect these estimates and judgments, see Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” set forth in this report.
RISKS RELATING TO THE DEVELOPMENT AND COMMERCIALIZATION OF OUR DRUGS
The therapeutic efficacy of our drug candidates is unproven in humans, and we may not be able to successfully develop and commercialize drug candidates pursuant to these programs.
Our drug candidates, including fimepinostat, CA-4948 and CA-170, are novel chemical entities and their potential benefit as therapeutic cancer drugs is unproven. Our ability to generate revenues from these drug candidates, which we do not expect will occur in the short term, if ever, will depend heavily on their successful development and commercialization, which is subject to many potential risks. For example, our drug candidates may not prove to be effective inhibitors of the molecular targets they are being designed to act against, and may not demonstrate in patients any or all of the pharmacological benefits that may have been demonstrated in preclinical studies. These drug candidates may interact with human biological systems in unforeseen, ineffective or harmful ways. If the FDA determines that any of our drug candidates are associated with significant side effects or have characteristics that are unexpected, we may need to delay or abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk benefit perspective.
Moreover, many drug candidates that initially showed promise in early stage testing for treating cancer have later been found to cause side effects that prevented further development of the compound or resulted in their removal from the market. As a result of these and other risks described herein that are inherent in the development and commercialization of novel therapeutic agents, we may not successfully maintain third party licensing or collaboration transactions with respect to, or

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successfully commercialize, our drug candidates, in which case we will not achieve profitability and the value of our stock may decline.
We depend heavily on the success of our most advanced drug candidates. All of our drug candidates are still in early clinical or preclinical development. Preclinical studies and clinical trials of our drug candidates may not be successful. If we are unable to commercialize our drug candidates or experience significant delays in doing so, our business will be materially harmed.
Our ability to generate drug candidate(s) and/or drug product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our most advanced drug candidates, including fimepinostat, CA-4948 and CA-170. The success of our drug candidates will depend on many factors, including the following:
•
successful enrollment in, and completion of, ongoing and future clinical trials of fimepinostat, CA-4948, CA-170 and other compounds that we may develop under our collaboration agreement with Aurigene;
•
Aurigene’s ability to successfully discover and preclinically develop other drug candidates under the collaboration agreement;
•
a safety, tolerability and efficacy profile that is satisfactory to the FDA or any comparable foreign regulatory authority for marketing approval;
•
receipt of requisite marketing approvals from applicable regulatory authorities;
•
the extent of any required post marketing approval commitments to applicable regulatory authorities;
•
establishment of supply arrangements with third party raw materials suppliers and manufacturers;
•
establishment of arrangements with third party manufacturers to obtain finished drug products that is appropriately packaged for sale;
•
adequate ongoing availability of raw materials and drug products for clinical development and any commercial sales;
•
obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the U.S. and internationally;
•
protection of the rights in our intellectual property portfolio;
•
successful launch of commercial sales following any marketing approval;
•
a continued acceptable safety profile following any marketing approval;
•
commercial acceptance by patients, the medical community and third party payors; and
•
our ability to compete with other therapies.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully market, commercialize, or distribute our most advanced drug candidate, which would materially harm our business.
If clinical trials of any future drug candidates that we, or any collaborators, may develop fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or any collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these drug candidates.
We, and any collaborators, are not permitted to commercialize, market, promote or sell any drug candidate in the U.S. without obtaining marketing approval from the FDA. Foreign regulatory authorities, such as the European Medicines Agency (“EMA”), impose similar requirements. We, and any collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our drug candidates in humans before we will be able to obtain these approvals.
Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. The clinical development of our drug candidates is susceptible to the risk of failure inherent at any stage of drug development, including failure to demonstrate a favorable pharmacodynamic and pharmacokinetic profile, efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events or undesirable side effects that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and

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determination by the FDA or any comparable foreign regulatory authority that a drug candidate may not continue development or is not approvable. It is possible that even if one or more of our drug candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a drug candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials we may fail to detect toxicity of or intolerability caused by our drug candidates, or we may mistakenly believe that our drug candidates are toxic or not well tolerated when that is not in fact the case.
Any inability to successfully complete preclinical and clinical development could result in additional costs to us, or any collaborators, and impair our ability to generate revenues from drug sales, regulatory and commercialization milestones and royalties. Moreover, if we, or any collaborators, are required to conduct additional clinical trials or other testing of our drug candidates beyond the trials and testing that we or they contemplate, if we, or they, are unable to successfully complete clinical trials of our drug candidates or other testing, or the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or there are unacceptable safety concerns associated with our drug candidates, we, or any future collaborators, may:
•
incur additional unplanned costs;
•
be delayed in obtaining marketing approval for our drug candidates;
•
not obtain marketing approval at all;
•
obtain approval for indications or patient populations that are not as broad as intended or desired;
•
obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;
•
be subject to additional post marketing testing or other requirements; or
•
be required to remove the drug from the market after obtaining marketing approval.
Our failure to successfully initiate and complete clinical trials of our drug candidates and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market any of our drug candidates would significantly harm our business.
Adverse events or undesirable side effects caused by, or other unexpected properties of, drug candidates that we develop may be identified during development and could delay or prevent their marketing approval or limit their use.
Adverse events or undesirable side effects caused by, or other unexpected properties of, any drug candidates that we may develop could cause us, any collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our drug candidates and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. If any of our drug candidates is associated with adverse events or undesirable side effects or has properties that are unexpected, we, or any collaborators, may need to abandon development or limit development of that drug candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound.
If we, or any collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our drug candidates, potential clinical development, marketing approval or commercialization of our drug candidates could be delayed or prevented.
We, or any collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent clinical development, marketing approval or commercialization of our current drug candidates or any future drug candidates that we, or any collaborators, may develop, including:
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regulators or institutional review boards may not authorize us, any collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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we, or any collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
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clinical trials of our drug candidates may produce unfavorable or inconclusive results, including with respect to the safety, tolerability, efficacy, or pharmacodynamic and pharmacokinetic profile of the drug candidate;
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we, or any collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon drug development programs;

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the number of patients required for clinical trials of our drug candidates may be larger than we, or any collaborators, anticipate, patient enrollment in these clinical trials may be slower than we, or any collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or any collaborators, anticipate;
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our estimates of the patient populations available for study may be higher than actual patient numbers and result in our inability to sufficiently enroll our trials;
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the cost of planned clinical trials of our drug candidates may be greater than we anticipate;
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our third party contractors or those of any collaborators, including those manufacturing our drug candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of any collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or any collaborators in a timely manner or at all;
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patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial’s duration;
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we, or any collaborators, may have to delay, suspend or terminate clinical trials of our drug candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the drug candidate such as an unfavorable pharmacodynamic or pharmacokinetic profile;
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regulators or institutional review boards may require that we, or any collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the drug candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;
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the FDA or comparable foreign regulatory authorities may disagree with our, or any collaborators’, clinical trial designs or our or their interpretation of data from preclinical studies and clinical trials;
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the FDA or comparable foreign regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third party manufacturers with which we, or any collaborators, enter into agreements for clinical and commercial supplies;
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the supply or quality of raw materials or manufactured drug candidates or other materials necessary to conduct clinical trials of our drug candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; and
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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient to obtain marketing approval.
Drug development costs for us, or any collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our drug candidates. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured, or will be completed on schedule or at all. Significant preclinical study or clinical trial delays also could shorten any periods during which we, or any collaborators, may have the exclusive right to commercialize our drug candidates or allow our competitors, or the competitors of any collaborators, to bring drugs to market before we, or any collaborators, do and impair our ability, or the ability of any collaborators, to successfully commercialize our drug candidates and may harm our business and results of operations. In addition, many of the factors that lead to clinical trial delays may ultimately lead to the denial of marketing approval of any of our drug candidates.
If we experience delays in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.
We may not be able to initiate or continue clinical trials for our drug candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:
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the size and nature of the patient population;
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the severity of the disease under investigation;
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the availability of approved therapeutics for the relevant disease;

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the proximity of patients to clinical sites;
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the eligibility criteria and design for the trial;
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efforts to facilitate timely enrollment;
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competing clinical trials; and
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clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.
In addition, many of our competitors have ongoing clinical trials for drug candidates that could be competitive with our drug candidates. Patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ drug candidates or rely upon treatment with existing therapies that may preclude them from eligibility for our clinical trials.
Our inability, or the inability of any future collaborators, to enroll a sufficient number of patients for our, or their, clinical trials could result in significant delays or may require us or them to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials, including for clinical trials of fimepinostat, CA-4948 and CA-170, may result in increased development costs for our drug candidates, which could cause the value of our stock price to decline.
Results of preclinical studies and early clinical trials may not be predictive of results of future late stage clinical trials.
We cannot assure you that we will be able to replicate in human clinical trials the results we observed in animal models. Moreover, the outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of clinical trials do not necessarily predict success in future clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials after achieving positive results in earlier development, and we could face similar setbacks. The design of a clinical trial can determine whether its results will support approval of a drug and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their drug candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the drug candidates. Even if we, or any collaborators, believe that the results of clinical trials for our drug candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our drug candidates.
In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same drug candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. If we fail to receive positive results in clinical trials of our drug candidates, the development timeline and regulatory approval and commercialization prospects for our most advanced drug candidates, and, correspondingly, our business and financial prospects would be negatively impacted.
Interim, “top-line,” initial, and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available or as additional analyses are conducted, and audit and verification procedures could result in material changes to the final data.
From time to time, we publish interim, “top-line,” initial, or preliminary data from our clinical studies. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Initial, preliminary or “top-line” data also remain subject to audit and verification procedures that may result in the final data being materially different from the data we previously published. As a result, interim, “top-line,” initial, and preliminary data should be viewed with caution until the final data are available. Material adverse changes between such data and final published data could significantly harm our business prospects.
We have never obtained marketing approval for a drug candidate and we may be unable to obtain, or may be delayed in obtaining, marketing approval for any of our current drug candidates or any future drug candidates that we, or any future collaborators, may develop.
We have never obtained marketing approval for a drug candidate. It is possible that the FDA may refuse to accept for substantive review any new drug applications (“NDAs”), that we submit for our drug candidates or may conclude after review of our data that our application is insufficient to obtain marketing approval of our drug candidates. If the FDA does not accept or approve our NDAs for any of our drug candidates, it may require that we conduct additional clinical trials, preclinical studies

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or manufacturing validation studies and submit that data before it will reconsider our applications. Depending on the extent of these or any other FDA-required trials or studies, approval of any NDA or application that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional trials or studies, if performed and completed, may not be considered sufficient by the FDA to approve our NDAs. Any delay in obtaining, or an inability to obtain, marketing approvals would prevent us from commercializing our drug candidates or any companion diagnostics, generating revenues and achieving and sustaining profitability. If any of these outcomes occur, we may be forced to abandon our development efforts for our drug candidates, which could significantly harm our business.
Even if any drug candidates that we, or any collaborators, may develop receive marketing approval, we or others may later discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, which could compromise our ability, or that of any collaborators, to market the drug.
Clinical trials of any drug candidates we may develop will be conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials, or those of any collaborator, may indicate an apparent positive effect of a drug candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If, following approval of a drug candidate, we, or others, discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:
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regulatory authorities may withdraw their approval of the drug or seize the drug;
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we, or any future collaborators, may be required to recall the drug, change the way the drug is administered or conduct additional clinical trials;
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additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular drug;
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we may be subject to fines, injunctions or the imposition of civil or criminal penalties;
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regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;
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we, or any future collaborators, may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for distribution to patients;
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we, or any future collaborators, could be sued and held liable for harm caused to patients;
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the drug may become less competitive; and
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our reputation may suffer.
Any of these events could harm our business and operations, and could negatively impact our stock price.
Even if our drug candidates receive marketing approval, they may fail to achieve the degree of market acceptance by physicians, patients, third party payors and others in the medical community necessary for commercial success, in which case we may not generate significant revenues or become profitable.
We have never commercialized a drug, and even if one of our drug candidates is approved by the appropriate regulatory authorities for marketing and sale, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third party payors and others in the medical community. Physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching drugs or they are required to switch therapies due to lack of reimbursement for existing therapies.
Efforts to educate the medical community and third party payors on the benefits of our drug candidates may require significant resources and may not be successful. If any of our drug candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of our drug candidates, if approved for commercial sale, will depend on a number of factors, including:
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the efficacy and safety of the drug;
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the potential advantages of the drug compared to competitive therapies;
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the prevalence and severity of any side effects;
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whether the drug is designated under physician treatment guidelines as a first, second, or third line therapy;
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our ability, or the ability of any future collaborators, to offer the drug for sale at competitive prices;

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the drug’s convenience and ease of administration compared to alternative treatments;
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the willingness of the target patient population to try, and of physicians to prescribe, the drug and patient adherence to the drug’s dosing regimen once prescribed;
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limitations or warnings, including distribution or use restrictions, contained in the drug’s approved labeling;
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the strength of sales, marketing and distribution support;
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changes in the standard of care for the targeted indications for the drug; and
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availability and amount of coverage and reimbursement from government payors, managed care plans and other third party payors.
We may expend our limited resources to pursue a particular drug candidate or indication and fail to capitalize on drug candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on research programs and drug candidates that we believe may have the best potential in certain specific indications. As a result, we may delay or forgo pursuit of certain opportunities with our other drug candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. Our spending on current and future proprietary research and development programs and drug candidates for specific indications may not yield any commercially viable drug candidates. If we do not accurately evaluate the commercial potential or target market for a particular drug candidate, we may relinquish valuable rights to that drug candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such drug candidate.
We have no sales, marketing, or distribution experience and, as such, plan to rely primarily on third parties who may not successfully market or sell any drugs we develop.
We have no sales, marketing, or drug distribution experience or capabilities. If we receive required regulatory approvals to commercialize any of our drug candidates, we plan to rely primarily on sales, marketing and distribution arrangements with third parties, including our collaborative partners. For example, as part of our agreements with Genentech, we have granted Genentech the exclusive rights to distribute drugs resulting from such collaboration, and Genentech is currently commercializing Erivedge. We may have to enter into additional marketing and/or sales arrangements in the future and we may not be able to enter into these additional arrangements on terms that are favorable to us, if at all. In addition, we may have limited or no control over the sales, marketing, and distribution activities of these third parties, and sales through these third parties could be less profitable for us than direct sales. These third parties could sell competing drugs and may devote insufficient sales efforts or resources to our drugs. Our future revenues will be materially dependent upon the successful efforts of these third parties.
We may seek to independently market and sell drugs that are not already subject to agreements with other parties. If we undertake to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including:
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we may not be able to attract and build a significant and skilled marketing staff or sales force;
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the cost of establishing a marketing staff or sales force may not be justifiable in light of the revenues generated by any particular drug; and
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our direct sales and marketing efforts may not be successful.
We face substantial competition, and our competitors may discover, develop or commercialize drugs before or more successfully than we do.
Our drug candidates face competition from existing and new technologies and drugs being developed by biotechnology, medical device, and pharmaceutical companies, as well as universities and other research institutions. For example, there are several companies developing drug candidates that target the same molecular targets that we are targeting or that are testing drug candidates in the same cancer indications that we are testing. For example, while we are not aware of other molecules in clinical testing that are designed as one chemical entity to target both PI3K and HDAC, there are commercially available drugs that individually target PI3K or HDAC and there are multiple companies testing PI3K or HDAC inhibitors that are in various stages of clinical development.
We are aware of multiple other companies in pre-clinical development of IRAK4 inhibitors for oncology indications, including: Nimbus Discovery, Inc./Genentech, TG Therapeutics, Inc., Ligand Pharmaceuticals, Inc., AstraZeneca plc, Rigel

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Pharmaceuticals, Inc., SignalChem Life Sciences Corporation, Noxopharm Ltd., Kymera Therapeutics Inc., and Bayer AG. In addition, there are multiple approved products on the market that inhibit PD1/PDL1, including Bristol-Myers Squibb Company’s Opdivo™, Merck & Co., Inc.'s Keytruda™, Roche Holding AG's Tecentriq™, Merck & Co., Inc., KGaA/Pfizer Inc.'s Bavencio™, AstraZeneca plc’s Imfinzi™, Regeneron Pharmaceuticals, Inc./Sanofi S.A.'s Libtayo™, and a number of drug candidates in various stages of development (by Novartis AG, TESARO Inc., and others). We are also aware of multiple other companies developing drugs to target TIM3, including Novartis AG, Incyte Corporation, TESARO, Inc., Bristol-Myers Squibb Company, Eli Lilly and Company, and others.
We are aware of several companies that have clinical development programs relating to compounds that modulate the Hedgehog signaling pathway and may compete with Erivedge, including : Pfizer Inc. (glasdegib/PF-04449913), Eli Lilly and Company/Igynta (taladegib/LY2940680), Exelixis, Inc./Bristol-Myers Squibb Company (BMS-833923/XL139), PellePharm, Inc. (patidegib), Novartis International AG/Sun Pharmaceutical (LEQ-506) and Cyclone Pharmaceuticals Inc./Senhwa Biosciences Inc. (silmitasertib/CX-4945). Furthermore, sonidegib (Odomzo™) is marketed by Sun Pharmaceutical, for the treatment of adults with locally advanced BCC. Under the terms of our collaboration agreement with Genentech, our royalty on sales of Erivedge has been reduced as a result of sales of sonidegib.
Many of our competitors have substantially greater capital resources, research and development staffs and facilities, and more extensive experience than we have. As a result, efforts by other biotechnology, medical device and pharmaceutical companies could render our programs or drugs uneconomical or result in therapies superior to those that we develop alone or with a collaborator. For those programs that we have selected for internal development, we face competition from companies that are more experienced in drug development and commercialization, obtaining regulatory approvals and drug manufacturing. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Other smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. As a result, any of these companies may be more successful in obtaining collaboration agreements or other monetary support, approval and commercialization of their drugs and/or may develop competing drugs more rapidly and/or at a lower cost.
If we are not able to compete effectively, then we may not be able, either alone or with others, to advance the development and commercialization of our drug candidates, which would adversely affect our ability to grow our business and become profitable.
Even if we, or any collaborators, are able to commercialize any drug candidate that we, or they, develop, the drug may become subject to unfavorable pricing regulations, third party payor reimbursement practices or healthcare reform initiatives, any of which could harm our business.
The commercial success of our drug candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our drug candidates will be paid by third party payors, including government health care programs and private health insurers. If coverage is not available, or reimbursement is limited, we, or any collaborators, may not be able to successfully commercialize our drug candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or any collaborators, to establish or maintain pricing sufficient to realize a sufficient return on our or their investments. In the U.S., no uniform policy of coverage and reimbursement for drugs exists among third party payors and coverage and reimbursement levels for drugs can differ significantly from payor to payor. As a result, the coverage determination process is often a time consuming and costly process that may require us to provide scientific and clinical support for the use of our drugs to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.
There is significant uncertainty related to third party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or drug licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we, or any future collaborators, might obtain marketing approval for a drug in a particular country, but then be subject to price regulations that delay commercial launch of the drug, possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the drug in that country. Adverse pricing limitations may hinder our ability or the ability of any future collaborators to recoup our or their investment in one or more drug candidates, even if our drug candidates obtain marketing approval.
Patients who are provided medical treatment for their conditions generally rely on third party payors to reimburse all or part of the costs associated with their treatment. Therefore, our ability, and the ability of any future collaborators, to commercialize successfully any of our drug candidates will depend in part on the extent to which coverage and adequate

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reimbursement for these drugs and related treatments will be available from third party payors. Third party payors decide which medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the U.S. and elsewhere. Government authorities and other third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability or that of any future collaborators to sell our drug candidates profitably. These payors may not view our drugs, if any, as cost effective, and coverage and reimbursement may not be available to our customers, or those of any future collaborators, or may not be sufficient to allow our drugs, if any, to be marketed on a competitive basis. Cost control initiatives could cause us, or any future collaborators, to decrease the price we, or they, might establish for drugs, which could result in lower than anticipated drug revenues. If the prices for our drugs, if any, decrease or if governmental and other third party payors do not provide coverage or adequate reimbursement, our prospects for revenue and profitability will suffer.
There may also be delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the indications for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.
In addition, increasingly, third party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are challenging the prices charged. Further, the net reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the U.S. An inability to promptly obtain coverage and adequate payment rates from both government funded and private payors for any of our drug candidates for which we, or any future collaborator, obtain marketing approval could significantly harm our operating results, our ability to raise capital needed to commercialize drugs and our overall financial condition.
Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any drugs that we may develop.
Product liability claims are inherent in the process of researching, developing and commercializing human healthcare drugs and could expose us to significant liabilities and prevent or interfere with the development or commercialization of our drug candidates. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the drug, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our drug candidates. Regardless of their merit or eventual outcome, such liability claims would require us to spend significant time, money and other resources to defend such claims, and could result in:

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decreased demand for our drug candidates or drugs that we may develop;
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injury to our reputation and significant negative media attention;
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withdrawal of clinical trial participants;
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significant costs to defend resulting litigation;
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substantial monetary awards to trial participants or patients;
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loss of revenue;
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reduced resources of our management to pursue our business strategy; and
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the reduced ability or inability to commercialize any drugs that we may develop.
Although we currently have product liability insurance for our clinical trials, this insurance is subject to deductibles and coverage limitations and may not be adequate in scope to protect us in the event of a successful drug liability claim. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we commercialize any drug that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our drug candidates, which could harm our business, financial condition, results of operations and prospects.

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RISKS RELATING TO OUR DEPENDENCE ON THIRD PARTIES
We are reliant on Genentech and Roche for the successful development and commercialization of Erivedge. If Genentech and Roche do not successfully commercialize Erivedge for advanced BCC or develop Erivedge for other indications, our future prospects may be substantially harmed.
Erivedge is FDA-approved for people with advanced BCC in the U.S. Erivedge is also approved in over 60 foreign countries. Genentech and/or Roche have filed regulatory submissions seeking approval to commercialize Erivedge for this same indication. Our levels of revenue in each period and our near term prospects substantially depend upon Genentech’s ability to successfully continue to commercialize Erivedge for patients with advanced BCC and to demonstrate its superiority over existing therapies and standards of care. The further development and commercialization of Erivedge could be unsuccessful if:
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Erivedge becomes no longer accepted as safe, efficacious, cost effective and preferable for the treatment of advanced BCC to current therapies in the medical community and by third party payors;
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Genentech and/or Roche fail to continue to apply the necessary financial resources and expertise to manufacturing, marketing and selling Erivedge for advanced BCC, and to regulatory approvals for this indication outside of the U.S.;
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Genentech and/or Roche do not continue to develop and implement effective marketing, sales and distribution strategies and operations for development and commercialization of Erivedge for advanced BCC;
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Genentech and/or Roche do not continue to develop, validate and maintain a commercially viable manufacturing process for Erivedge that is compliant with current good manufacturing practices;
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Genentech and/or Roche do not successfully obtain third party reimbursement and generate commercial demand that results in sales of Erivedge for advanced BCC in any geographic areas where requisite approvals have been, or may be, obtained;
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we, Genentech, or Roche encounter third party patent interference, derivation, inter partes review, post grant review, reexamination or patent infringement claims with respect to Erivedge;
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Genentech and/or Roche do not comply with regulatory and legal requirements applicable to the sale of Erivedge for advanced BCC;
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competing drug products are approved for the same indications as Erivedge, such as is the case with sonidegib, which is being marketed and sold by Sun Pharmaceutical, both in the U.S. and abroad for the treatment of adults with locally advanced BCC;
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new safety risks are identified;
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Erivedge does not demonstrate acceptable safety and efficacy in current or future clinical trials, or otherwise does not meet applicable regulatory standards for approval in indications other than advanced BCC;
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Genentech and/or Roche determine to reprioritize Genentech’s commercial or development programs and reduce or terminate Genentech’s efforts on the development or commercialization of Erivedge; or
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Genentech does not exercise its first right to maintain or defend intellectual property rights associated with Erivedge.
In addition, pursuant to the terms of the Oberland Purchase Agreement, a portion of our royalty and royalty related revenues under our collaboration with Genentech will be paid to the Purchasers.
We depend on third parties for the research and, as applicable, development and commercialization of certain programs. If one or more of our collaborators fails or delays in developing or, as applicable, commercializing drug candidates based upon our technologies, our business prospects and operating results would suffer and our stock price would likely decline.
Pursuant to our collaboration with Genentech, we have granted to Genentech exclusive rights to develop and commercialize drugs based upon our Hedgehog signaling pathway technologies. Collaborations involving our drug candidates, including our collaborations with Aurigene and Genentech, pose the following risks to us:
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Our collaborators each have significant discretion in determining the efforts and resources that they will apply to their respective collaboration with us. If a collaborator fails to allocate sufficient time, attention and resources to our collaboration, the successful development and commercialization of drug candidates under such collaboration is likely to be adversely affected. For example, we are dependent on Aurigene to successfully discover and advance preclinical programs from which we may exercise our option to license drug candidates for future development.

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Our collaborators may develop and commercialize, either alone or with others, drugs that are similar to or competitive with the drug candidates that are the subject of our respective collaborations. For example, Genentech and Roche are involved in the commercialization of many cancer medicines and are seeking to develop several other cancer drug therapies, and Aurigene has other active cancer focused discovery programs and has also entered into license agreements with other companies that focus on cancer therapies.
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Our collaborators may change the focus of their development and commercialization efforts or pursue higher priority programs.
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Our collaborators may enter into one or more transactions with third parties, including a merger, consolidation, reorganization, sale of substantial assets, sale of substantial stock or change of control. Any such transaction could divert the attention of our collaborative partner’s management and adversely affect its ability to retain and motivate key personnel who are important to the continued development of the programs under such collaboration. In addition, an acquirer could determine to reprioritize our collaborator’s development programs such that our collaborator ceases to diligently pursue the development of our programs, and/or terminates our collaboration.
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Our collaborators may, under specified circumstances, terminate their collaborations with us on short notice and for circumstances outside of our control, which could make it difficult for us to attract new collaborators or adversely affect how we are perceived in the scientific, biotech, pharma and financial communities.
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Our collaborators may utilize our intellectual property rights in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights, or expose us to potential liability.
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Disputes may arise between collaborators and us regarding ownership of or other rights in the intellectual property generated in the course of the collaborations.
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If any of our collaborators were to breach or terminate its arrangement with us, the development and commercialization of the affected drug candidate or program could be delayed, curtailed or terminated.
If Genentech and other third parties are not successful in commercializing products that reach successful development, our revenues and business will suffer.
As development of certain of our drug candidates advance, we must begin to plan for their launch and commercial distribution. Potential competitors may have substantially greater financial and other resources and may be able to expend more funds and effort than Genentech or other third parties engaged by us in marketing competing products. There can be no assurance that Genentech or other third parties will succeed in commercializing our products, or that the pricing of our products will allow us to generate significant revenues. There can be no assurance that Genentech or other third parties engaged to commercialize our products will devote sufficient resources to marketing and commercialization of our products. Genentech’s or other third party’s failure to successfully commercialize our products will have a material adverse effect on our business and financial condition.
We may not be successful in establishing additional strategic collaborations, which could adversely affect our ability to develop and commercialize drug candidates.
We intend to seek corporate collaborators or licensees for the further development and commercialization of one or more of our drug candidates in one or more geographic territories, particularly in territories outside of the U.S. We do not currently have the resources or capacity to advance these programs into later stage clinical development (i.e., Phase 3) or commercialization on our own, but we are seeking to build such a capacity to enable us to retain development and certain commercial rights to most of our programs in at least the U.S., should we elect to do so. Our success will depend, in part, on either our ability to build such capacity, or our ability to enter into one or more collaborations for our drug candidates. We face significant competition in seeking appropriate collaborators and a number of recent business combinations in the biotechnology and pharmaceutical industry may result in a reduced number of potential future collaborators. In addition, collaborations are complex and time consuming to negotiate and document. We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. Moreover, we may not be successful in our efforts to establish a collaboration or other alternative arrangements because our research and development pipeline may be insufficient, our programs may be deemed to be at too early of a stage of development for collaborative effort and/or third parties may not view our drug candidates and programs as having the requisite potential to demonstrate safety and efficacy or as sufficiently differentiated compared to existing or emerging treatments. We are also restricted under the terms of certain of our existing collaboration agreements from entering into collaborations regarding or otherwise developing drug candidates that are similar to the drug candidates that are subject to those agreements, such as developing drug candidates that inhibit the same

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molecular target. In addition, collaboration agreements that we enter into in the future may contain further restrictions on our ability to enter into potential collaborations or to otherwise develop specified drug candidates. Even if we are successful in our efforts to establish new collaborations, the terms that we agree upon may not be favorable to us and such collaboration agreements may not lead to development or commercialization of drug candidates in the most efficient manner, or at all.
Moreover, if we fail to establish and maintain additional collaborations related to our drug candidates:
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the development of certain of our current or future drug candidates may be terminated or delayed;
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our cash expenditures related to development of certain of our current or future drug candidates would increase significantly and we may need to seek additional financing;
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we may be required to hire additional employees or otherwise develop additional expertise, such as clinical, regulatory, sales and marketing expertise, for which we have not budgeted;
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we will have to bear all of the risk related to the development of any such drug candidates; and
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our future prospects may be adversely affected and our stock price could decline.
We rely in part on third parties to conduct clinical trials of our internally developed drug candidates, and if such third parties perform inadequately, including failing to meet deadlines for the completion of such trials, research or testing, then we will not be able to successfully develop and commercialize drug candidates and grow our business.
We rely heavily on third parties such as consultants, clinical investigators, contract research organizations and other similar entities to complete certain aspects of our preclinical testing and clinical trials and provide services in connection with such clinical trials, and expect to continue to do so for the foreseeable future. Despite having contractual remedies available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our ongoing development programs. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. These third parties may not complete activities on schedule, or at all, or may not conduct our clinical trials in accordance with the established clinical trial protocol or design. In addition, the FDA and its foreign equivalents require us to comply with certain standards, referred to as “good clinical practices,” and applicable regulatory requirements, for conducting, recording and reporting the results of clinical trials. These requirements assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties does not relieve us of these responsibilities and requirements. If any of our third party contractors do not comply with good clinical practices or other applicable regulatory requirements, we may not be able to use the data and reported results from the applicable trial. Any failure by a third party to conduct our clinical trials as planned or in accordance with regulatory requirements could delay or otherwise adversely affect our efforts to obtain regulatory approvals for and commercialize our drug candidates.
We depend on third parties to produce our drug candidates, and if these third parties do not successfully formulate or manufacture these drug candidates, our business will be harmed.
We have no internal manufacturing experience or capabilities, and therefore cannot manufacture any of our drug candidates on either a clinical or commercial scale. In order to continue to develop drug candidates, apply for regulatory approvals, and commercialize drugs, we or any collaborators must be able to manufacture drug candidates in adequate clinical and commercial quantities, in compliance with regulatory requirements, including those related to quality control and quality assurance, at acceptable costs and in a timely manner. The manufacture of our drug candidates may be complex, difficult to accomplish and difficult to scale up when large scale production is required. Manufacture may be subject to delays, inefficiencies and low yields of quality drugs. The cost of manufacturing some of our drug candidates may make them prohibitively expensive.
To the extent that we or any collaborators seek to enter into manufacturing arrangements with third parties, we and such collaborators will depend upon these third parties to perform their obligations in a timely and effective manner and in accordance with government regulations. We may be unable to establish any agreements with contract manufacturers or to
do so on acceptable terms. Contract manufacturers may breach their manufacturing agreements because of factors beyond our and our collaborators’ control or may terminate or fail to renew a manufacturing agreement based on their own business priorities, becoming costly and/or inconvenient for us and our collaborators. Even if we are able to establish agreements with
contract manufacturers, reliance on contract manufacturers entails additional risks, including:

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manufacturing delays if our third party contractors give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform according to the terms of the agreements between us and them, or if unforeseen events in the manufacturing process arise;

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the failure of third party contractors to comply with applicable regulatory requirements;
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the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being properly identified;
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the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being distributed to commercial vendors in a timely manner, resulting in lost sales; and
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the possible misappropriation of our proprietary information, including our trade secrets and know how.
Any manufacturing problem, the loss of a contract manufacturer or any loss of storage could be disruptive to our operations, delay our clinical trials and, if our products are approved for sale, result in lost sales.
Any contract manufacturers with whom we or our collaborators enter into manufacturing arrangements will be subject to ongoing periodic, unannounced inspection by the FDA and state and foreign agencies or their designees to ensure strict compliance with current good manufacturing practices and other governmental regulations and corresponding foreign standards. Any failure by contract manufacturers, collaborators, or us to comply with applicable regulations could result in sanctions being imposed, including fines, injunctions, civil penalties, denial by regulatory authorities of marketing approval for drug candidates, delays, suspension or withdrawal of approvals, imposition of clinical holds, seizures or recalls of drug candidates, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. If we or a collaborator need to change manufacturers, the FDA and corresponding foreign regulatory agencies must approve any new manufacturers in advance. This would involve testing and pre-approval inspections to ensure compliance with FDA and foreign regulations and standards.
If third party manufacturers fail to perform their obligations, our competitive position and ability to generate revenue may be adversely affected in a number of ways, including;
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we, and any collaborators, may not be able to initiate or continue certain preclinical and/or clinical trials of our drug candidates under development;
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we, and any collaborators, may be delayed in submitting applications for regulatory approvals for our drug candidates; and
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we, and any collaborators, may not be able to meet commercial demand for any approved drug products.
Because we rely on a limited number of suppliers for the raw materials used in our drug candidates, any delay or interruption in the supply of such raw materials could lead to delays in the manufacture and supply of our drug candidates.
We rely on third parties to supply certain raw materials necessary to produce our drug candidates for preclinical studies and clinical trials. There are a small number of suppliers for certain raw materials that we use to manufacture our drug candidates. We purchase these materials from our suppliers on a purchase order basis and do not have long term supply agreements in place. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to our contract manufacturing caused by problems at suppliers could delay shipment of our product candidates, increase our cost of goods sold and result in lost sales with respect to any approved products. Although we generally do not begin a preclinical study or clinical trial unless we believe we have a sufficient supply of a drug candidate to complete such study or trial, any significant delay in the supply of raw materials for our drug candidates for a preclinical study or an ongoing clinical trial due to the need to replace a third party supplier could considerably delay completion of certain preclinical studies and/or clinical trials. Moreover, if we are unable to purchase sufficient raw materials after regulatory approval for our drug candidates, the commercial launch of our drug candidates could be delayed, or there could be a supply shortage, each of which would impair our ability to generate revenues from their sale.
Any contamination in our manufacturing process, shortages of raw materials or failure of any of our key suppliers to deliver necessary components could result in delays in our clinical development or marketing schedules.
Any contamination could materially adversely affect our ability to produce drug candidates on schedule and could, therefore, harm our results of operations and cause reputational damage. A material shortage, contamination, recall or restriction on the use of substances in the manufacture of our drug candidates, or the failure of any of our key suppliers to deliver necessary components required for the manufacture of our drug candidates, could adversely impact or disrupt the commercial manufacture or the production of clinical material, which could materially and adversely affect our development timelines and our business, financial condition, results of operations, and future prospects.

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RISKS RELATING TO EMPLOYEE MATTERS AND MANAGING GROWTH
If we are not able to attract and retain key management and scientific personnel and advisors, we may not successfully develop our drug candidates or achieve our other business objectives.
We depend upon our senior management team. The loss of the service of any of the key members of our senior management may significantly delay or prevent the achievement of drug development and other business objectives. Our officers all serve pursuant to “at will” employment arrangements and can terminate their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. In the future, we may be dependent on other members of our management, scientific and development team.
Our ability to compete in the biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. Our industry has experienced a high rate of turnover of management personnel in recent years. If we lose one or more of our executive officers or other key employees, our ability to successfully implement our business strategy could be seriously harmed. Furthermore, replacing executive officers or other key employees may be difficult and take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, market and commercialize drugs successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key employees on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similarly qualified personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions.
We rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by other entities and may have commitments under consulting or advisory contracts with those entities that may limit their availability to us. If we are unable to continue to attract and retain highly qualified personnel, our ability to develop and commercialize our drug candidates will be limited.
We may seek to acquire complementary businesses and technologies or otherwise seek to expand our operations and grow our business, which may divert management resources and adversely affect our financial condition and operating results.
We may seek to expand our operations, including through internal growth and/or the acquisition of businesses and technologies that we believe are a strategic complement to our business model. We may not be able to identify suitable acquisition candidates or expansion strategies and successfully complete such acquisitions or successfully execute any such other expansion strategies. We may never realize the anticipated benefits of any efforts to expand our business. Furthermore, the expansion of our business, either through internal growth or through acquisitions, poses significant risks to our existing operations, financial condition and operating results, including:
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a diversion of management attention from our existing operations;
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increased operating complexity of our business, requiring greater personnel and resources;
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significant additional cash expenditures to expand our operations and acquire and integrate new businesses and technologies;
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unanticipated expenses and potential delays related to integration of the operations, technology and other resources of any acquired companies;
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uncertainty related to the value, benefits or legitimacy of intellectual property or technologies acquired;
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retaining and assimilating key personnel and the potential impairment of relationships with our employees;
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incurrence of debt, other liabilities and contingent liabilities, including potentially unknown contingent liabilities; and
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dilutive stock issuances.

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RISKS RELATING TO OUR INTELLECTUAL PROPERTY
We may not be able to obtain and maintain patent protection for our technologies and drugs, our licensors may not be able to obtain and maintain patent protection for the technology or drugs that we license from them, and the patent protection we or they do obtain may not be sufficient to stop our competitors from using similar technology.
The long term success of our business depends in significant part on our ability to:
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obtain patents to protect our technologies and discoveries;
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protect trade secrets from disclosure to competitors;
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operate without infringing upon the proprietary rights of others; and
•
prevent others from infringing on our proprietary rights.
The patent positions of pharmaceutical and life science companies, including ours, are generally uncertain and involve complex legal, scientific and factual questions. The laws, procedures and standards that the U.S. Patent and Trademark Office and various foreign intellectual property offices use to grant and maintain patents, and the standards that courts use to interpret patents, are not always applied predictably or uniformly and have changed in significant ways and are expected to continue to change. In addition, the laws of foreign countries may not protect our rights to the same extent or in the same manner as the laws of the U.S. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. Consequently, the level of protection, if any, that will be obtained and provided by our patents if we attempt to enforce them, and they are challenged, is uncertain.
Patents may not issue from any of the patent applications that we own or license. If patents do issue, the type and extent of patent claims issued to us may not be sufficient to protect our technology from exploitation by our competitors. Our patents also may not afford us protection against competitors with similar technology. Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the patent. Prior to March 16, 2013, in the U.S., patent applications were subject to a “first to invent” rule of law. Applications filed on or after March 16, 2013 (with the exception of certain applications claiming priority to applications filed prior to March 16, 2013, such as continuations and divisionals) are subject to new laws including a “first to file” rule of law. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Additionally, how the U.S. Patent & Trademark Office and U.S. courts will interpret the new laws remains significantly uncertain at this time. We cannot be certain that any existing or future application will be subject to the “first to file” or “first to invent” rule of law, that we were the first to make the inventions claimed in our existing patents or pending patent applications subject to the prior laws, or that we were the first to file for patent protection of such inventions subject to the new laws.
We may not have rights under patents that may cover one or more of our drug candidates. Patents of others may overlap with our own patents regarding one or more of our drug candidates. In some cases, these patents may be owned or controlled by third party competitors and may prevent or impair our ability to exploit our technology. As a result, we or our current or potential future collaborative partners may be required to obtain licenses under third party patents to develop and commercialize some of our drug candidates. If we are unable to secure licenses to such patented technology on acceptable terms, we or our collaborative partners may not be able to develop and commercialize the affected drug candidate or candidates.
It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or drugs that we license from third parties and are reliant on our licensors. For example, while under our collaboration with Aurigene we have established a joint patent team to coordinate efforts on patent filing, prosecution, maintenance and other patent matters, we do not control the patent process until we have exercised our option to obtain an exclusive license on a program-by-program basis. If we do not control the filing, prosecution of certain patent rights, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business.
The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in courts or patent offices in the U.S. and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and drugs, or limit the duration of the patent protection of our technology and drugs. Given the amount of time required for the development, testing, and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a

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result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing drugs similar or identical to ours.
We may become involved in expensive and unpredictable patent litigation or other contentious intellectual property proceedings, which could result in liability for damages or require us to cease our development and commercialization efforts.
There are substantial threats of litigation and other adversarial opposition proceedings regarding patent and other intellectual property rights in the pharmaceutical and life science industries. We may become a party to patent litigation or other proceedings regarding intellectual property rights.
Situations that may give rise to patent litigation or other disputes over the use of our intellectual property include:
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initiation of litigation or other proceedings against third parties to enforce our patent rights, to seek to invalidate the patents held by third parties or to obtain a judgment that our drug candidates do not infringe such third parties’ patents;
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participation in interference and/or derivation proceedings to determine the priority of invention if our competitors file U.S. patent applications that claim technology also claimed by us;
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initiation of opposition, reexamination, post grant review or inter partes review proceedings by third parties that seek to limit or eliminate the scope of our patent protection;
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initiation of litigation by third parties claiming that our processes or drug candidates or the intended use of our drug candidates infringes their patent or other intellectual property rights; and
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initiation of litigation by us or third parties seeking to enforce contract rights relating to intellectual property that may be important to our business.
Any patent litigation or other proceeding, even if resolved favorably, will likely require us to incur substantial costs and be a distraction to management. Some of our competitors may be able to sustain the cost of such litigation or other proceedings more effectively than we can because of their substantially greater financial resources. In addition, our collaborators and licensors may have rights to file and prosecute claims of infringement of certain of our intellectual property, and we are reliant on them. If a patent litigation or other intellectual property proceeding is resolved unfavorably, we or any collaborative partners may be enjoined from manufacturing or selling our future drugs without a license from the other party and be held liable for significant damages. Moreover, we may not be able to obtain required licenses on commercially acceptable terms or any terms at all. In addition, we could be held liable for lost profits if we are found to have infringed a valid patent, or liable for treble damages if we are found to have willfully infringed a valid patent. Litigation results are highly unpredictable, and we or any collaborative partner may not prevail in any patent litigation or other proceeding in which we may become involved. Any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could damage our ability to compete in the marketplace.
We face risks relating to the enforcement of our intellectual property rights in China and India that could adversely affect our business.
We have conducted chemical development work through contract research agreements with contract research organizations (“CROs”), in China and India. We seek to protect our intellectual property rights under this arrangement through, among other things, non-disclosure and assignment of invention covenants. Enforcement of intellectual property rights and confidentiality protections in China may not be as effective as in the U.S. or other countries. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. The experience and capabilities of Chinese courts in handling intellectual property litigation vary, and outcomes are unpredictable. Further, such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation.
In addition, we collaborate with Aurigene, an Indian company, in the development of new therapeutic compounds. Some or all of the intellectual property arising from this collaboration may be developed by Aurigene’s employees, consultants, and third party contractors, and we have an option right under the collaboration agreement to obtain exclusive licenses to Aurigene’s rights in this intellectual property. Accordingly, our rights depend in part on Aurigene’s contracts with its employees and contractors and Aurigene’s ability to protect its trade secrets and other confidential information in India, both before and after we exercise our option to obtain exclusive license rights on a program-by-program basis. Enforcement of intellectual

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property rights and confidentiality protections in India may not be as effective as in the U.S. or other countries. Policing unauthorized use of proprietary technology is difficult and expensive, and we or Aurigene might need to resort to litigation to protect our trade secrets and confidential information. The experience and capabilities of Indian courts in handling intellectual property litigation vary, and outcomes are unpredictable. Further, such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations. An adverse determination in any such litigation would impair our intellectual property rights and may harm our business, prospects and reputation.
If we are unable to keep our trade secrets confidential, our technology and proprietary information may be used by competitors.
We rely heavily on trade secrets, including unpatented know how, technology and other proprietary information, to maintain our competitive position. We seek to protect this information through confidentiality and intellectual property license or assignment provisions in agreements with our employees, consultants and other third party contractors, including our contract research agreements with CROs in China and India, as well as through other security measures. Similarly, our agreement with Aurigene requires Aurigene to enter into such agreements with its employees, consultants, and other third party contractors. The confidentiality and intellectual property provisions of our agreements and security measures may be breached, and we or they may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.
If we fail to comply with our obligations in the agreements under which we license rights to technology from third parties, we could lose license rights that are important to our business.
We are party to agreements that provide us licenses of intellectual property or sharing of rights to intellectual property that is important to our business, and we may enter into additional agreements in the future that provide us licenses to valuable technology. These licenses, including our agreement with Aurigene, impose, and future licenses may impose, various commercialization, milestone and other obligations on us, including the obligation to terminate our use of licensed subject matter under certain contingencies. If a licensor becomes entitled to, and exercises, termination rights under a license, we would lose valuable rights and could lose our ability to develop our drugs. We may need to license other intellectual property to commercialize future drugs. Our business may suffer if any current or future licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid, or if we are unable to enter into necessary licenses on acceptable terms.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our current and potential competitors. Although no claims against us are currently pending, we may be subject to claims that such employees, or as a result, we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
RISKS RELATING TO REGULATORY APPROVAL AND MARKETING OF OUR DRUG CANDIDATES AND OTHER LEGAL COMPLIANCE MATTERS
Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive, time consuming and uncertain and may prevent us or any future collaborators from obtaining approvals for the commercialization of some or all of our drug candidates. As a result, we cannot predict when or if, and in which territories, we, or any future collaborators, will obtain marketing approval to commercialize a drug candidate.
The research, testing, manufacturing, labeling, approval, selling, marketing, promotion and distribution of drugs are subject to extensive regulation by the FDA and comparable foreign regulatory authorities. We, and any future collaborators, are not permitted to market our drug candidates in the U.S. or in other countries until we, or they, receive approval of an NDA from the FDA or marketing approval from applicable regulatory authorities outside the U.S. Our drug candidates are in various stages of development and are subject to the risks of failure inherent in drug development. We have not submitted an application for or received marketing approval for any of our drug candidates in the U.S. or in any other jurisdiction. We have limited experience in conducting and managing the clinical trials necessary to obtain marketing approvals, including FDA approval of an NDA.
The process of obtaining marketing approvals, both in the U.S. and abroad, is lengthy, expensive and uncertain. It may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type,

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complexity and novelty of the drug candidates involved. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the drug candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the drug manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. The FDA or other regulatory authorities may determine that our drug candidates are not safe and effective, only moderately effective or have undesirable or unintended side effects, toxicities or other characteristics that preclude our obtaining marketing approval or prevent or limit commercial use. Moreover, the FDA or other regulatory authorities may fail to approve the companion diagnostics we contemplate developing with partners. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post approval commitments that render the approved drug not commercially viable.
In addition, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted drug application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a drug candidate. Any marketing approval we, or any future collaborators, ultimately obtain may be limited or subject to restrictions or post approval commitments that render the approved drug not commercially viable.
Any delay in obtaining or failure to obtain required approvals could negatively affect our ability or that of any future collaborator to generate revenue from the particular drug candidate, which likely would result in significant harm to our financial position and adversely impact our stock price.
Failure to obtain marketing approval in foreign jurisdictions would prevent our drug candidates from being marketed abroad. Any approval we are granted for our drug candidates in the U.S. would not assure approval of our drug candidates in foreign jurisdictions.
In order to market and sell our drugs in the European Union and other foreign jurisdictions, we, and any future collaborators, must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The marketing approval process outside the U.S. generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the U.S., a drug must be approved for reimbursement before the drug can be approved for sale in that country. We, and any future collaborators, may not obtain approvals from regulatory authorities outside the U.S. on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the U.S. does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may file for marketing approvals but not receive the necessary approvals to commercialize our drugs in any market.
Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as Brexit. On March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The United Kingdom has a period of a maximum of two years from the date of its formal notification to negotiate the terms of its withdrawal from, and future relationship with, the European Union. If no formal withdrawal agreement is reached between the United Kingdom and the European Union, then it is expected the United Kingdom's membership of the European Union will automatically terminate on the deadline, which was initially March 29, 2019 (two years after the submission of the notification of the United Kingdom's intention to withdraw from the European Union) and has been extended to January 31, 2020. Discussions between the United Kingdom and the European Union focused on finalizing withdrawal issues and transition agreements are ongoing, but have been extremely difficult to date. Limited progress to date in these negotiations and ongoing uncertainty within the UK Government and Parliament sustains the possibility of the United Kingdom leaving the European Union on the given deadline without a withdrawal agreement and associated transition period in place, which is likely to cause significant market and economic disruption.
Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, the referendum could materially impact the regulatory regime with respect to the approval of our product candidates in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing our product candidates in the United Kingdom and/or the European Union and restrict our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or European Union for our product candidates, which could significantly and materially harm our business.

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We, or any future collaborators, may not be able to obtain orphan drug designation or orphan drug exclusivity for our drug candidates and, even if we do, that exclusivity may not prevent the FDA or the EMA from approving competing drugs.
Regulatory authorities in some jurisdictions, including the U.S. and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, the FDA may designate a drug as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the U.S. We, or any future collaborators, may seek orphan drug designations for drug candidates and may be unable to obtain such designations.
Even if we, or any future collaborators, obtain orphan drug designation for a drug candidate, we, or they, may not be able to obtain orphan drug exclusivity for that drug candidate. Generally, a drug with orphan drug designation only becomes entitled to orphan drug exclusivity if it receives the first marketing approval for the indication for which it has such designation, in which case the FDA or the EMA will be precluded from approving another marketing application for the same drug for that indication for the applicable exclusivity period. The applicable exclusivity period is seven years in the U.S. and ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or the EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Even if we, or any future collaborators, obtain orphan drug exclusivity for a drug, that exclusivity may not effectively protect the drug from competition because different drugs can be approved for the same condition and the same drug can be approved for different conditions. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.
On August 3, 2017, Congress passed the FDA Reauthorization Act of 2017 (“FDARA”). FDARA, among other things, codified the FDA’s pre-existing regulatory interpretation, to require that a drug sponsor demonstrate the clinical superiority of an orphan drug that is otherwise the same as a previously approved drug for the same rare disease in order to receive orphan drug exclusivity. The new legislation reverses prior precedent holding that the Orphan Drug Act unambiguously requires that the FDA recognize the orphan exclusivity period regardless of a showing of clinical superiority. The FDA may further reevaluate the Orphan Drug Act and its regulations and policies. We do not know if, when, or how the FDA may change the orphan drug regulations and policies in the future, and it is uncertain how any changes might affect our business. Depending on what changes the FDA may make to its orphan drug regulations and policies, our business could be adversely impacted.
Even if we, or any future collaborators, obtain marketing approvals for our drug candidates, the terms of approvals and ongoing regulation of our drugs may limit how we manufacture and market our drugs, which could impair our ability to generate revenue.
Once marketing approval has been granted, an approved drug and its manufacturer and marketer are subject to ongoing review and extensive regulation. We, and any future collaborators, must therefore comply with requirements concerning advertising and promotion for any of our drug candidates for which we or they obtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the drug’s approved labeling. Thus, we and any future collaborators will not be able to promote any drugs we develop for indications or uses for which they are not approved.
In addition, manufacturers of approved drugs and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We, our contract manufacturers, any future collaborators and their contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.
Accordingly, assuming we, or any future collaborators, receive marketing approval for one or more of our drug candidates, we, and any future collaborators, and our and their contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, drug surveillance and quality control.
If we, and any future collaborators, are not able to comply with post approval regulatory requirements, we, and any future collaborators, could have the marketing approvals for our drugs withdrawn by regulatory authorities and our, or any future collaborators’, ability to market any future drugs could be limited, which could adversely affect our ability to achieve or sustain

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profitability. Further, the cost of compliance with post approval regulations may have a negative effect on our operating results and financial condition.
Any of our drug candidates for which we, or any future collaborators, obtain marketing approval in the future could be subject to post marketing restrictions or withdrawal from the market and we, or any future collaborators, may be subject to substantial penalties if we, or they, fail to comply with regulatory requirements or if we, or they, experience unanticipated problems with our drugs following approval.
Any of our drug candidates for which we, or any future collaborators, obtain marketing approval, as well as the manufacturing processes, post approval studies and measures, labeling, advertising and promotional activities for such drug, among other things, will be subject to ongoing requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post marketing information and reports, registration and listing requirements, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a drug candidate is granted, the approval may be subject to limitations on the indicated uses for which the drug may be marketed or to the conditions of approval, including the requirement to implement an FDA-sanctioned Risk Evaluation and Mitigation Strategy.
The FDA may also impose requirements for costly post marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a drug. The FDA and other agencies, including the Department of Justice, closely regulate and monitor the post approval marketing and promotion of drugs to ensure that they are manufactured, marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off label use and if we, or any future collaborators, do not market any of our drug candidates for which we, or they, receive marketing approval for only their approved indications, we, or they, may be subject to warnings or enforcement action for off label marketing. Violation of the U.S. Federal Food, Drug, and Cosmetic Act and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations or allegations of violations of federal and state healthcare fraud and abuse laws and state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our drugs or their manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
•
restrictions on such drugs, manufacturers or manufacturing processes;
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restrictions on the labeling or marketing of a drug;
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restrictions on drug distribution or use;
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requirements to conduct post marketing studies or clinical trials;
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warning letters or untitled letters;
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withdrawal of the drugs from the market;
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refusal to approve pending applications or supplements to approved applications that we submit;
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recall of drugs;
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restrictions on coverage by third party payors;
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fines, restitution or disgorgement of profits or revenues;
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suspension or withdrawal of marketing approvals;
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refusal to permit the import or export of drugs;
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drug seizure; or
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injunctions or the imposition of civil or criminal penalties.
We may seek a Breakthrough Therapy designation for one or more of our drug candidates, but we might not receive such designation, and even if we do, such designation may not lead to a faster development or regulatory review or approval process.
We may seek a Breakthrough Therapy designation for one or more of our drug candidates. A Breakthrough Therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious condition, and

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preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drug candidates that have been designated Breakthrough Therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drugs designated Breakthrough Therapies by the FDA may also be eligible for priority review if supported by clinical data at the time the NDA is submitted to the FDA.
Designation as a Breakthrough Therapy is within the discretion of the FDA. Accordingly, even if we believe that one of our drug candidates meets the criteria for designation as a Breakthrough Therapy, the FDA may disagree and instead determine not to make such designation. Even if we receive Breakthrough Therapy designation, the receipt of such designation for a drug candidate may not result in a faster development or regulatory review or approval process compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our drug candidates qualify as Breakthrough Therapies, the FDA may later decide that the drug candidates no longer meet the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
Receipt of Fast Track designation for one or more of our drug candidates, such as fimepinostat, may not actually lead to a faster development or regulatory review or approval process.
If a drug is intended for the treatment of a serious condition and nonclinical or clinical data demonstrate the potential to address unmet medical need for this condition, a drug sponsor may apply for FDA Fast Track designation. We have received Fast Track designation for the development of fimepinostat in adult patients with relapsed or refractory (“R/R”) diffuse large B-cell lymphoma (“DLBCL”) after two or more lines of systemic therapy. However, Fast Track designation does not ensure that we will receive marketing approval or that approval will be granted within any particular timeframe for fimepinostat or any other product candidate that may receive Fast Track designation. We may not experience a faster development or regulatory review or approval process with Fast Track designation compared to conventional FDA procedures. The FDA may withdraw Fast Track designation for fimepinostat or any other product candidate that may receive Fast Track designation if it believes that the designation is no longer supported by data from our clinical development program. Fast Track designation alone for fimepinostat or any other product candidate does not guarantee qualification for the FDA’s priority review procedures.
Under the CURES Act and the Trump Administration’s regulatory reform initiatives, the FDA’s policies, regulations and guidance may be revised or revoked and that could prevent, limit or delay regulatory approval of our product candidates, which would impact our ability to generate revenue.
In December 2016, the 21st Century Cures Act (“Cures Act”), was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and spur innovation, but its ultimate implementation is unclear. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the U.S. or abroad. For example, certain policies of the Trump Administration may impact our business and industry. Namely, the Trump Administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. An under staffed FDA could result in delays in the FDA’s responsiveness or in its ability to review submissions or applications, issue regulations or guidance, or implement or enforce regulatory requirements in a timely fashion or at all. Moreover, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including the FDA, which requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within the Office of Management and Budget on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. In addition, on February 24, 2017, President Trump issued an executive order directing each affected agency to designate an agency official as a “Regulatory Reform Officer” and establish a “Regulatory Reform Task Force” to implement the two-for-one provisions and other previously issued executive orders relating to the review of federal regulations. However, it is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise

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its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

Inadequate funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain
key leadership and other personnel, prevent new products and services from being developed or commercialized in a
timely manner or otherwise prevent those agencies from performing normal business functions on which the
operation of our business may rely, which could negatively impact our business

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely, including those that fund research and development activities, is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including the 35-day period between December 22, 2018 and January 25, 2019, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown occurs again, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Further, in our operations as a public company, future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.
Current and future legislation may increase the difficulty and cost for us and any future collaborators to obtain marketing approval and commercialize our drug candidates and affect the prices we, or they, may obtain.
In the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our drug candidates, restrict or regulate post approval activities and affect our ability, or the ability of any future collaborators, to profitably sell any drugs for which we, or they, obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any future collaborators, may receive for any approved drugs.
Among the provisions of the Patient Protection and Affordable Care Act (“ACA”), of potential importance to our business and our drug candidates are the following:
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an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;
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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
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expansion of healthcare fraud and abuse laws, including the civil False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;
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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer’s outpatient drugs to be covered under Medicare Part D;
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extension of manufacturers’ Medicaid rebate liability;
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expansion of eligibility criteria for Medicaid programs;
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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
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new requirements to report certain financial arrangements with physicians and teaching hospitals;
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a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions to Medicare payments to providers of up to 2% per fiscal year that started in 2013 and will stay in effect through 2024 unless additional Congressional action is taken, and the

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American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used. Further, there have been several recent U.S. congressional inquiries and proposed state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products.
We will continue to evaluate the effect that the ACA and its possible repeal and replacement could have on our business. It is possible that repeal and replacement initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits. While the timing and scope of any potential future legislation to repeal and replace ACA provisions is uncertain in many respects, it is also possible that some of the ACA provisions that generally are not favorable for the research based pharmaceutical industry could also be repealed along with ACA coverage expansion provisions. Accordingly, such reforms, if enacted, could have an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which we may obtain marketing approval and may affect our overall financial condition and ability to develop commercialize product candidates.
Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by the President on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, will become effective in 2019. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise.
The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order terminates the cost sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, the Centers for Medicare & Medicaid Services (“CMS”), has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. Further, on June 14, 2018, the U.S. Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in ACA risk corridor payments to third party payors who argued were owed to them. The effects of this gap in reimbursement on third party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known.
In addition, CMS has proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. On November 30, 2018, CMS announced a proposed rule that would amend the Medicare Advantage and Medicare Part D prescription drug benefit regulations to reduce out of pocket costs for plan enrollees and allow Medicare plans to negotiate lower rates for certain drugs. Among other things, the proposed rule changes would allow Medicare Advantage plans to use pre authorization (“PA”) and step therapy (“ST”) for six protected classes of drugs, with certain exceptions, permit plans to implement PA and ST in Medicare Part B drugs; and change the definition of “negotiated prices” while a definition of “price concession” in the regulations. It is unclear whether these proposed changes we be accepted, and if so, what effect such changes will have on our business. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.
Further, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. The Trump administration and CMS have both stated that the ruling will have no immediate effect, and on December 30, 2018 the same judge issued an order staying the judgment pending appeal. The Trump Administration has recently represented to the Court of Appeals considering this judgment that it does not oppose the lower court’s ruling. It is unclear how this decision and any subsequent appeals and other efforts to repeal and replace the ACA will impact the ACA and our business. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.

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The costs of prescription pharmaceuticals in the U.S. has also been the subject of considerable discussion in the U.S., and members of Congress and the Administration have stated that they will address such costs through new legislative and administrative measures. The pricing of prescription pharmaceuticals is also subject to governmental control outside the U.S. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidates to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our ability to generate revenues and become profitable could be impaired. In the European Union, similar political, economic and regulatory developments may affect our ability to profitably commercialize our products. In addition to continuing pressure on prices and cost containment measures, legislative developments at the European Union or member state level may result in significant additional requirements or obstacles that may increase our operating costs.
Specifically, there have been several recent U.S. congressional inquiries and proposed federal and proposed and enacted state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. For example, on May 11, 2018, the Administration issued a plan to lower drug prices. Under this blueprint for action, the Administration indicated that the Department of Health and Human Services (“HHS”) will: take steps to end the gaming of regulatory and patent processes by drug makers to unfairly protect monopolies; advance biosimilars and generics to boost price competition; evaluate the inclusion of prices in drug makers’ ads to enhance price competition; speed access to and lower the cost of new drugs by clarifying policies for sharing information between insurers and drug makers; avoid excessive pricing by relying more on value based pricing by expanding outcome based payments in Medicare and Medicaid; work to give Part D plan sponsors more negotiation power with drug makers; examine which Medicare Part B drugs could be negotiated for a lower price by Part D plans, and improving the design of the Part B Competitive Acquisition Program; update Medicare’s drug pricing dashboard to increase transparency; prohibit Part D contracts that include “gag rules” that prevent pharmacists from informing patients when they could pay less out-of-pocket by not using insurance; and require that Part D plan members be provided with an annual statement of plan payments, out-of-pocket spending, and drug price increases. More recently, on January 31, 2019, the HHS Office of Inspector General proposed modifications to the federal anti-kickback statute discount safe harbor for the purpose of reducing the cost of drug products to consumers which, among other things, if finalized, will affect discounts paid by manufacturers to Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit managers working with these organizations.
At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
Moreover, legislative and regulatory proposals have also been made to expand post approval requirements and restrict sales and promotional activities for pharmaceutical drugs. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our drug candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and any future collaborators to more stringent drug labeling and post marketing testing and other requirements.
Governments outside the U.S. tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, such as the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug. To obtain reimbursement or pricing approval in some countries, we, or any future collaborators, may be required to conduct a clinical trial that compares the cost effectiveness of our drug to other available therapies. If reimbursement of our drugs is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed.

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We may be subject to certain healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, fines, disgorgement, exclusion from participation in government healthcare programs, curtailment or restricting of our operations, and diminished profits and future earnings.
Healthcare providers, third party payors and others will play a primary role in the recommendation and prescription of any drugs for which we obtain marketing approval. Our future arrangements with healthcare providers and third party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any drugs for which we obtain marketing approval. Potentially applicable U.S. federal and state healthcare laws and regulations include the following:
Anti-Kickback Statute. The federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid;
False Claims Laws. The federal false claims laws, including the civil False Claims Act, impose criminal and civil penalties, including those from civil whistleblower or qui tam actions against individuals or entities for knowingly presenting, or causing to be presented to the federal government claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
HIPAA. The federal Health Insurance Portability and Accountability Act of 1996 (“HIPPA”), imposes criminal and civil liability for executing or attempting to execute a scheme to defraud any healthcare benefit program;
HIPAA and HITECH. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”) Act, also imposes obligations on certain types of individuals and entities, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
False Statements Statute. The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;
Transparency Requirements. The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to report annually to the U.S. Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and
Analogous State and Foreign Laws. Analogous state laws and regulations, such as state anti-kickback and false claims laws, and transparency laws, may apply to sales or marketing arrangements, and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures. Many state laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. Foreign laws also govern the privacy and security of health information in many circumstances.
Efforts to ensure that our business arrangements with third parties, and our business generally, will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of drugs from government funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, and reputational harm, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is also prohibited in the European Union. The provision of benefits or advantages to physicians is governed by the national anti-bribery laws of European Union Member States, such as the U.K. Bribery Act 2010 (“Bribery Act”). Infringement of these laws could result in substantial fines and imprisonment.

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Payments made to physicians in certain European Union Member States must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional organization and/or the regulatory authorities of the individual European Union Member States. These requirements are provided in the national laws, industry codes or professional codes of conduct, applicable in the European Union Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment.
Compliance with global privacy and data security requirements could result in additional costs and liabilities to us or inhibit our ability to collect and process data globally, and the failure to comply with such requirements could have a material adverse effect on our business, financial condition or results of operations.
The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Globally, virtually every jurisdiction in which we operate has established its own data security and privacy frameworks with which we must comply. For example, the collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the EU, including personal health data, is subject to the EU General Data Protection Regulation or GDPR, which became effective on May 25, 2018. The GDPR is wide ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside the EU, including the U.S., and permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to €20 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR.
Given the breadth and depth of changes in data protection obligations, preparing for and complying with the GDPR’s requirements has required and will continue to require significant time, resources and a review of our technologies, systems and practices, as well as those of any third party collaborators, service providers, contractors or consultants that process or transfer personal data collected in the European Union. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other personal information from our clinical trials, could require us to change our business practices or lead to government enforcement actions, private litigation or significant penalties against us and could have a material adverse effect on our business, financial condition or results of operations.
We are subject to U.S. and foreign anti-corruption and anti-money laundering laws with respect to our operations and non-compliance with such laws can subject us to criminal and/or civil liability and harm our business.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA”), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and possibly other state and national anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, third party intermediaries, joint venture partners and collaborators from authorizing, promising, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. We may have direct or indirect interactions with officials and employees of government agencies or government affiliated hospitals, universities, and other organizations. In addition, we may engage third party intermediaries to promote our clinical research activities abroad and/or to obtain necessary permits, licenses, and other regulatory approvals. We can be held liable for the corrupt or other illegal activities of these third party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize or have actual knowledge of such activities.
We have adopted a Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics mandates compliance with the FCPA and other anti-corruption laws applicable to our business throughout the world. However, we cannot assure you that our employees and third party intermediaries will comply with this code or such anti-corruption laws. Noncompliance with anti-corruption and anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas, investigations, or other enforcement actions are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense and compliance costs and other professional fees. In certain cases, enforcement

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authorities may even cause us to appoint an independent compliance monitor which can result in added costs and administrative burdens.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.
Our drug products and other materials are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our drugs and solutions outside of the U.S. must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers, and, in extreme cases, the incarceration of responsible employees or managers.
In addition, changes in our drugs or solutions or changes in applicable export or import laws and regulations may create delays in the introduction, provision, or sale of our drugs and solutions in international markets, prevent customers from using our drugs and solutions or, in some cases, prevent the export or import of our drugs and solutions to certain countries, governments or persons altogether. Any limitation on our ability to export, provide, or sell our drugs and solutions could adversely affect our business, financial condition and results of operations.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could harm our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of contamination or injury resulting from the use or disposal of our hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.
We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, but this insurance may not provide adequate coverage against potential liabilities. However, we do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.
Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The most recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the most recent global financial crisis, could result in a variety of risks to our business, including weakened demand for our drug candidate and our ability to raise additional capital when needed on acceptable terms, if at all. This is particularly true in the European Union, which is undergoing a continued severe economic crisis. A weak or declining economy could strain our suppliers, possibly resulting in supply disruption, or cause delays in payments for our services by third party payors or our collaborators. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
Our internal computer systems and information technology, or those of our collaborators or other contractors or consultants, may fail, suffer interruptions or suffer security breaches, which could result in a material disruption of our drug development programs and harm to our business.
Our internal computer systems and those of our current and any future collaborators and other contractors or consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures.

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In addition, we, and our collaborators, contractors or consultants, rely on information technology networks and systems, including the Internet, to process, transmit and store clinical trial data and other electronic information, and manage or support a variety of business processes, including operational and financial transactions and records, personal identifying information, payroll data and workforce scheduling information. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of company and customer information. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, no such measures can eliminate the possibility of the systems' improper functioning or the improper access or disclosure of confidential or personally identifiable information such as in the event of cyber-attacks. Security breaches, whether through physical or electronic break-ins, computer viruses, ransomware, impersonation of authorized users, attacks by hackers or other means, can create system disruptions or shutdowns or the unauthorized disclosure of confidential information. Additionally, outside parties may attempt to fraudulently induce employees, collaborators, or other contractors or consultants to disclose sensitive information or take other actions, including making fraudulent payments or downloading malware, by using “spoofing” and “phishing” emails or other types of attacks. Our employees may be targeted by such fraudulent activities. Outside parties may also subject us to distributed denial of services attacks or introduce viruses or other malware through “trojan horse” programs to our users’ computers in order to gain access to our systems and the data stored therein. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and continuously become more sophisticated, often are not recognized until launched against a target and may be difficult to detect for a long time, we may be unable to anticipate these techniques or to implement adequate preventive or detective measures.
If company, clinical, personal or otherwise protected information is improperly accessed, tampered with or distributed, we may face significant financial exposure, including incurring significant costs to remediate possible injury to the affected parties. We may also be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under federal, state, or international laws protecting confidential information. While we have not experienced any such material system failure, accident, service interruption or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Any failure to maintain proper functionality and security of our internal computer and information systems could result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, interrupt our operations, damage our reputation, subject us to liability, claims or regulatory penalties, harm our competitive position and delay the further development and commercialization of our drug candidates.
Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.
We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, provide accurate information to the FDA or comparable foreign regulatory authorities, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws, standards or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.
RISKS RELATING TO OUR COMMON STOCK
If we fail to meet the requirements for continued listing on the Nasdaq Global Market, our common stock could be delisted from trading, which would decrease the liquidity of our common stock and our ability to raise additional capital.
Our common stock is currently listed on the Nasdaq Global Market. We are required to meet specified requirements to maintain our listing on the Nasdaq Global Market, including a minimum market value of listed securities of $50,000,000, a minimum total assets and total revenues of $50,000,000, a minimum bid price of $1.00 per share for our common stock, and other continued listing requirements.

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In the past we have, from time to time, received deficiency letters from Nasdaq as a consequence of our failure to satisfy such requirements. Although in each case we have been able to regain compliance with the listing requirements within the manner and time periods prescribed by Nasdaq, there can be no assurance that in the future, we will be able to maintain compliance with the Nasdaq continued listing requirements. If we fail to satisfy the Nasdaq Global Market’s continued listing requirements, we may transfer to the Nasdaq Capital Market, which generally has lower financial requirements for initial listing, to avoid delisting, or, if we fail to meet its listing requirements, the OTC Bulletin Board. However, we may not be able to satisfy the initial listing requirements for the Nasdaq Capital Market. A transfer of our listing to the Nasdaq Capital Market or having our common stock trade on the OTC Bulletin Board could adversely affect the liquidity of our common stock. Any such event could make it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock, and there also would likely be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. We may also face other material adverse consequences in such event, such as negative publicity, a decreased ability to obtain additional financing, diminished investor and/or employee confidence, and the loss of business development opportunities, some or all of which may contribute to a further decline in our stock price.
Our stock price may fluctuate significantly and the market price of our common stock could drop below the price paid by our investors.
The trading price of our common stock has been volatile and is likely to continue to be volatile in the future. For example, our stock traded within a range of a high price of $23.70 and a low price of $0.60 per share for the period January 1, 2013 through October 29, 2019. The stock market, particularly in recent years, has experienced significant volatility with respect to pharmaceutical and biotechnology company stocks. Prices for our stock will be determined in the marketplace and may be influenced by many factors, including:
•
the timing and result of clinical trials of our drug candidates;
•
the success of, and announcements regarding, existing and new technologies and/or drug candidates by us or our competitors;
•
regulatory actions with respect to our product candidates or our competitors’ products and product candidates;
•
market conditions in the biotechnology and pharmaceutical sectors;
•
rumors relating to us or our collaborators or competitors;
•
commencement or termination of collaborations for our development programs;
•
litigation or public concern about the safety of our drug candidates;
•
actual or anticipated variations in our quarterly operating results and any subsequent restatement of such results;
•
the amount and timing of any royalty revenue we receive from Genentech related to Erivedge;
•
actual or anticipated changes to our research and development plans;
•
deviations in our operating results from the estimates of securities analysts;
•
entering into new collaboration agreements or termination of existing collaboration agreements;
•
adverse results or delays in clinical trials being conducted by us or any collaborators;
•
any intellectual property disputes or other lawsuits involving us;
•
third party sales of large blocks of our common stock;
•
sales of our common stock by our executive officers, directors or significant stockholders;
•
equity sales by us of our common stock to fund our operations;
•
the loss of any of our key scientific or management personnel;
•
FDA or international regulatory actions;
•
limited trading volume in our common stock;
•
general economic and market conditions, including recent adverse changes in the domestic and international financial markets; and
•
the other factors described in this “Risk Factors” section.

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While we cannot predict the individual effect that these factors may have on the price of our common stock, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.
We and our collaborators may not achieve projected research, development, commercialization and marketing goals in the time frames that we or they announce, which could have an adverse impact on our business and could cause our stock price to decline.
We set goals for, and make public statements regarding, the timing of certain accomplishments, such as the commencement and completion of preclinical studies, and clinical trials, and other developments and milestones relating to our business and our collaboration agreements. Our collaborators may also make public statements regarding their goals and expectations for their collaborations with us. The actual timing of any such events can vary dramatically due to a number of factors including delays or failures in our and our current and potential future collaborators’ preclinical studies or clinical trials, the amount of time, effort and resources committed to our programs by all parties, and the inherent uncertainties in the regulatory approval and commercialization process. As a result:
•
our or our collaborators’ preclinical studies and clinical trials may not advance or be completed in the time frames we or they announce or expect;
•
we or our collaborators may not make regulatory submissions, receive regulatory approvals or commercialize approved drugs as predicted; and
•
we or our collaborators may not be able to adhere to our or their current schedule for the achievement of key milestones under any programs.
If we or any collaborators fail to achieve research, development and commercialization goals as planned, our business could be materially adversely affected and the price of our common stock could decline.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a company undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post change taxable income or taxes may be limited. Changes in our stock ownership, some such changes being out of our control, may have resulted or could in the future result in an ownership change. The changes of ownership will result in net operating loss and research and development credit carryforwards that we expect to expire unutilized. If additional limitations were to apply, utilization of a portion of our net operating loss and tax credit carryforwards could be further limited in future periods and a portion of the carryforwards could expire before being available to reduce future income tax liabilities.
Comprehensive changes to the U.S. tax code made by 2017's tax reform law could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law legislation, commonly referred to as the Tax Cuts and Jobs Act (“TCJA”), that significantly revised the Internal Revenue Code of 1986, as amended. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA remains uncertain and our business and financial condition could be adversely affected. In addition, how various states will respond to the TCJA continues to be uncertain. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.
We are subject to taxation in numerous U.S. states and territories. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the

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amount of tax that will become payable in each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including as a result of applying the provisions of the TCJA (as such provisions may be elaborated on or further developed in guidance, regulations and technical corrections pertaining to the TCJA), changes in the mix of our profitability from state to state, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial statements.
Future sales of shares of our common stock, including by employees and large stockholders or pursuant to our sales agreement with Cowen or our universal shelf registration statement could result in dilution to our stockholders and negatively affect our stock price.
Most of our outstanding common stock can be traded without restriction at any time. As such, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell such shares, could reduce the market price of our common stock.
As of September 30, 2019, Aurigene beneficially owned approximately 16.5% of our outstanding common stock. Subject to certain restrictions, Aurigene is able to sell its common shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by Rule 144 under the Securities Act of 1933, as amended. Pursuant to our registration rights agreement with Aurigene, Aurigene has the right, subject to certain conditions and with certain exceptions, to require us to file registration statements covering the common shares it owns or to include those common shares in registration statements that we may file. Following their registration and sale under the applicable registration statement, those shares would become freely tradable. By exercising its registration rights and selling a large number of shares common stock, Aurigene could cause the price of our common stock to decline. In addition, the perception in the public markets that sales by Aurigene might occur could also adversely affect the market price of our common stock.
We have a significant number of shares that are subject to outstanding options and in the future we may issue additional options, warrants or other derivative securities convertible into our common stock. The exercise of any such options, warrants or other derivative securities, and the subsequent sale of the underlying common stock, could cause a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
We currently have on file with the SEC a “universal” shelf registration statement which allows us to offer and sell registered common stock, preferred stock, and warrants from time to time pursuant to one or more offerings at prices and terms to be determined at the time of sale. In July 2015, we entered into a sales agreement with Cowen, pursuant to which, from time to time, we may offer and sell through Cowen up to $30.0 million of the common stock registered under the shelf registration statement pursuant to one or more “at the market” offerings. In addition, with our prior written approval, Cowen may sell these shares of common stock by any other method permitted by law, including in privately negotiated transactions.
Sales of substantial amounts of shares of our common stock or other securities by our employees and other stockholders, by Cowen pursuant to our sales agreement, under our universal shelf registration statement or otherwise could dilute our stockholders, lower the market price of our common stock and impair our ability to raise capital through the sale of equity securities.
If we are not able to maintain effective internal controls under Section 404 of the Sarbanes-Oxley Act, our business and stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us, on an annual basis, to review and evaluate our internal controls, and requires our independent registered accounting firm to attest to the effectiveness of our internal controls. Any failure by us to maintain the effectiveness of our internal controls in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act, as such requirements exist today or may be modified, supplemented or amended in the future, could have a material adverse effect on our business, operating results and stock price.
We do not intend to pay dividends on our common stock, and any return to investors will come, if at all, only from potential increases in the price of our common stock.
We have never declared nor paid cash dividends on our common stock. We currently plan to retain all of our future earnings, if any, to finance the operation, development and growth of our business. In addition, the terms of any future debt or

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credit agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Insiders have substantial influence over us and could cause us to take actions that may not be, or refrain from taking actions that may be, in our best interest or in the best interest of our stockholders.
As of September 30, 2019, we believe that our directors, executive officers and principal stockholders, together with their affiliates, owned, in the aggregate, approximately 17.1% of our outstanding common stock including approximately 16.5% of our outstanding common stock owned by Aurigene. As a result, if these stockholders were to choose to act together, they may be able to affect the outcome of matters submitted to our stockholders for approval, as well as our management and affairs, such as:
•
the composition of our board of directors;
•
the adoption of amendments to our certificate of incorporation and bylaws;
•
the approval of mergers or sales of substantially all of our assets;
•
our capital structure and financing; and
•
the approval of contracts between us and these stockholders or their affiliates, which could involve conflicts of interest.

This concentration of ownership could harm the market price of our common stock by:
•
delaying, deferring or preventing a change in control of our company and making some transactions more difficult or impossible without the support of these stockholders, even if such transactions are beneficial to other stockholders;
•
impeding a merger, consolidation, takeover or other business combination involving our company; or
•
entrenching our management or the board of directors.
Moreover, the interests of these stockholders may conflict with the interests of other stockholders, and we may be required to engage in transactions that may not be agreeable to or in the best interest of us or other stockholders.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our common stock may depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that existing analysts will continue to cover us or that new analysts will begin to cover us. There is also no assurance that any covering analyst will provide favorable coverage. A lack of research coverage or adverse coverage may negatively impact the market price of our common stock. In addition, if one or more of our current or potential future analysts downgrade our stock or change their opinion of our stock, our share price would likely decline. In addition, if one or more of our current or potential future analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
A decline in our stock price may affect future fundraising efforts.
We currently have no drug revenues, and depend entirely on funds raised through other sources. One source of such funding is future debt and/or equity offerings. Our ability to raise funds in this manner depends upon, among other things, our stock price, which may be affected by numerous factors including without limitation capital market conditions, evaluation of our stock by securities analysts, numerous factors including without limitation development programs, and the overall status of our business, finances and operations.
We have anti-takeover defenses that could delay or prevent an acquisition that our stockholders may consider favorable, or prevent attempts by our stockholders to replace or remove current management, which could result in a decline in the price of our common stock.
Provisions of our certificate of incorporation, our bylaws, and Delaware law may deter unsolicited takeovers or delay or prevent changes in control of our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest. For example, we have divided our board of directors into

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three classes that serve staggered three year terms, we may issue shares of our authorized “blank check” preferred stock, and our stockholders are limited in their ability to call special stockholder meetings.
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who together with his, her, or its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. These provisions could discourage, delay or prevent a change in control.
Item 6.
Exhibits
Exhibit
Number
Description
 
 
10.1
31.1
31.2
32.1
32.2
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 





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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
CURIS, INC.
 
 
 
 
Dated:
November 5, 2019
By:
/S/ JAMES E. DENTZER
 
 
 
James E. Dentzer
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
 
CURIS, INC.
 
 
 
 
 
 
By:
/S/ WILLIAM STEINKRAUSS
 
 
 
William Steinkrauss
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)


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EXHIBIT 10.1
EMPLOYMENT AGREEMENT - STEINKRAUSS

THIS EMPLOYMENT AGREEMENT (the “Agreement”), made as of September 11, 2019, is entered into by and between Curis, Inc., a Delaware corporation (the “Company”), and William E. Steinkrauss (the “Employee”).
WHEREAS, the Company desires to continue to employ the Employee, and the Employee desires to continue to be employed by the Company on the revised terms set forth in this Agreement. In consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.Term of Employment. The Company hereby agrees to continue to employ the Employee, and the Employee hereby accepts continued employment with the Company, upon the terms set forth in this Agreement, for the period commencing on September 11, 2019 (the “Commencement Date”) and continuing until terminated in accordance with the provisions of Section 4 (the “Employment Period”). During the Employment Period, the Employee shall be an at-will employee of the Company and the Employee’s employment and the Employment Period shall be freely terminable by either party, for any reason, at any time, with or without cause or notice, subject to the provisions set forth in Section 4 below.

2.Position.

(a)The Employee shall serve as Chief Financial Officer, Treasurer and Assistant Secretary of the Company. The Employee shall have such duties and authority consistent with his position as may be assigned from time to time by the President and Chief Executive Officer of the Company. The Employee shall report to, and be subject to the supervision of, the President and Chief Executive Officer. The Employee agrees to devote his entire business time to the business and interests of the Company during the Employment Period, provided, however, that the Employee may serve on up to two Boards of Directors (whether for-profit or not-for-profit) as long as such activities do not, alone or in the aggregate, materially interfere with the performance of the Employee’s duties under this Agreement, as determined in good faith by the President and Chief Executive Officer of the Company and do not otherwise violate any restrictive covenants applicable to the Employee or any other written agreement between the Company and the Employee.

(b)The Employee agrees to abide by the rules, regulations, instructions, personnel practices and policies of the Company and any changes therein which may be adopted from time to time by the Company.



3.Compensation and Benefits.

3.1Salary. During the Employment Period, the Company shall pay the Employee, in periodic installments in accordance with the Company’s customary payroll practices, a base salary of $11,730.77 per bi-weekly pay period (based upon 26 bi-weekly pay periods per annum, equal to $305,000 per annum). Such salary shall be subject to annual review by the Board of Directors of the Company (the “Board”) and/or the Compensation Committee of the Board (the “Compensation Committee”).

3.2Equity Compensation. The Board or the Compensation Committee may award stock options or other equity compensation to the Employee from time to time in their sole discretion. The Employee may be eligible for an annual performance equity-based award in connection with the Company’s annual performance equity award cycle.

3.3Bonus; Cash Incentives.

(a)The Compensation Committee has the authority to award discretionary annual cash bonuses to the executive officers of the Company, including the Employee. Any bonus awarded shall be based on the achievement of specific objectives and other factors established by the Board or the Compensation Committee. Such bonus (if any) will be paid in the form of cash or capital stock, as determined by the Compensation Committee. Upon the determination of the Compensation Committee, acting in its sole discretion, the Employee may be entitled to receive an annual bonus. The target bonus amount for which the Employee shall be eligible is forty percent (40%) of his base salary.

(b)Any bonus or cash incentive awarded to Employee will be paid on or before March 15 of the calendar year immediately following the year for which the bonus or cash incentive was earned.

3.4Fringe Benefits. The Employee shall be entitled to participate in all medical and other benefit programs that the Company establishes and makes available to its employees, if any, to the extent that the Employee’s position, tenure, salary, age, health and other qualifications make him eligible to participate. This comprehensive program currently covers medical and dental benefits, life and disability insurances, and a Section 125 Plan. The Employee will also be eligible to participate in the Company’s 401(k) Plan. The Employee shall be entitled to three weeks’ paid vacation per year subject to the Company’s policies for accrual and use.

3.5Reimbursement of Expenses. The Company shall reimburse the Employee for all reasonable travel, entertainment and other expenses incurred or paid by the Employee in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement, upon presentation by the Employee of documentation, expense statements, receipts, vouchers and/or such other supporting information as the Company may request, provided, however, that the maximum amount available for such travel, entertainment and other expenses may be fixed in advance by the Company.

2


3.6Tax Services Fees.

(a)The Company shall reimburse the Employee for reasonable documented tax and professional services expenses, up to a maximum of seven thousand five hundred ($7,500) dollars per year, incurred by the Employee in connection with the preparation of the Employee’s personal income tax returns and estate planning (the “Professional Services Fees”).

(b)The Company shall pay the Employee a gross up payment equal to the sum of any Federal and State Income Taxes and Social Security and Medicare Employment Taxes (collectively, the “Taxes”) payable with respect to the Professional Services Fees, plus such additional Taxes as may be imposed on the Employee attributable to the receipt of such gross up payment. Any such payment for Taxes shall be made no later than 60 days following the end of the year in which the Employee remits the Taxes.

3.7Withholding. All salary, bonus, severance, and other compensation payable to the Employee shall be subject to applicable withholdings.

4.Termination of Employment.

(a)The Company has the right to terminate the Employee’s employment under this Agreement, by notice to the Employee in writing (i) for Cause (as defined below), (ii) without Cause for any or no reason, or (iii) due to the Disability (as defined below) of the Employee. Any such termination shall be effective upon the date of such notice to the Employee, or such other date as may be specified in such notice, in the case of termination for Cause or termination due to Disability, and upon 30 days’ prior written notice to the Employee in the case of termination without Cause for any or no reason.

(b)Employee’s employment under this Agreement shall terminate immediately upon the Employee’s death.

(c)The Employee shall have the right to terminate his employment under this Agreement (i) for any reason or no reason upon 30 days’ prior written notice to the Company or (ii) for Good Reason (as defined below).

(d)As used in this Agreement, the terms below shall have the following meanings:
(i)“Cause” means (a) a good faith finding by the Company of the Employee’s failure or refusal to substantially perform his duties or the Employee’s continued neglect to perform such duties to the full extent of his abilities for reasons other than death, physical or mental incapacity, (b) a good faith finding by the Company of the Employee’s failure to perform his duties as assigned to him by the Board, or the President and Chief Executive Officer of the Company, (c) a good faith finding by the Company of dishonesty, gross

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negligence, or misconduct, (d) conviction or the entry of a pleading of guilty or nolo contendere to any crime or felony, or (e) any breach or threatened breach of any confidentiality, non-solicitation, or inventions agreement with the Company. For purposes of determining “Cause” during the 12 months following the consummation of a Change in Control Event, “Cause” shall instead be determined as provided in Section 10(c)(1)(C) of the Company’s Third Amended and Restated 2010 Stock Incentive Plan, as amended or replaced from time to time, provided that this Agreement’s definition shall apply if no such definition appears in the then current equity plan.

(ii)“Good Reason” shall mean (a) any material diminution in the Employee’s authority, duties or responsibilities, or a requirement that he be required to report to someone other than the Chief Executive Officer or the Board of Directors; (b) any material reduction in his annual base salary; (c) any material breach by the Company of this Agreement; or (d) any requirement by the Company or of any person in control of the Company that the location at which the Employee performs his principal duties for the Company be changed to a new location that is more than 40 miles from the current principal location of the Company, provided that (i) the Employee provides the Company with notice of the condition described above within 90 days after the initial existence of the condition; (ii) such condition is not remedied by the Company within 30 days after receiving the notice and (iii) the Employee separates from service with the Company no later than 30 days following the last day of the cure period in clause (ii).

(iii)“Change in Control Event” shall mean:

(A)The acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 50% or more of either (x) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control Event: (1) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (2) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by

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the Company or any corporation controlled by the Company, or (3) any acquisition by any entity pursuant to a Business Combination (as defined below) which complies with clauses (x) and (y) of subsection (C) of this definition; or

(B)Such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor to the Company), where the term “Continuing Director” means at any date a member of the Board (x) who was a member of the Board on the date of the initial adoption of this Agreement by the Board or (y) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; or

(C)The consummation of a merger, consolidation, reorganization, recapitalization or share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (x) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock or other common equity and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation or other form of entity in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company’s assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation or entity is referred to herein as the “Acquiring Corporation”) in substantially the same proportions as their ownership of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively, immediately prior to such Business Combination and (y) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 50% or more of the then-outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination).


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Notwithstanding the foregoing, where required to avoid extra taxation under Section 409A, a Change in Control must also satisfy the requirements of Treas. Reg. Section 1.409A-3(a)(5).

(iv)“Disability” shall be deemed to have occurred when the Employee shall have been unable to perform his duties by reason of illness or incapacity for a period of 120 consecutive days in any period of 52 consecutive weeks, as determined in good faith by the Board in accordance with applicable law.

5.Compensation upon Termination.

(a)In the event the Employee’s employment is terminated by the Company for Cause, by the Employee without Good Reason or due to the death or Disability of the Employee, the Company shall pay to the Employee (i) any earned but unpaid base salary and, to the extent consistent with general Company policy or applicable law, accrued but unused vacation/paid time off through and including the date the Employee’s employment with the Company ends, to be paid in accordance with the Company’s regular payroll practices and with applicable law but no later than the next regularly scheduled pay period, (ii) unreimbursed business expenses in accordance with the Company’s policies for which expenses the Employee has provided appropriate documentation, to be paid in accordance with Section 14.2, and (iii) any amounts or benefits to which the Employee is then entitled under the terms of the benefit plans (other than severance) then sponsored by the Company in accordance with their terms (and not accelerated to the extent acceleration does not satisfy Section 409A as defined below)). Medical/dental insurance as an Employee of the Company will cease upon the date employment ends (or such later date as the insurance policies provide), and the Employee will be eligible for continuation of such coverage pursuant to COBRA at his expense except as provided below (or prohibited under COBRA).

(b)In the event the Employee’s employment terminates as a result of a termination by the Employee for Good Reason, or a termination by the Company without Cause (except for a termination covered by 5(c)), in addition to the compensation and benefits described in Section 5(a), (i) the Employee shall receive payments equal to nine months of the Employee’s then base salary ratably over a period of nine months in accordance with the Company’s then current payroll policies and practices, and a payment equal in amount to his target bonus for the year of termination, pro-rated to reflect days elapsed from the beginning of the bonus year to the date of termination over 365 and paid on or around the date of the first installment of the salary-based severance, and (ii) the Company will pay any difference between the COBRA premium and the amount the Employee would otherwise be responsible for with respect to the medical and dental coverage elected for a period of nine months from the date such termination or as long as the Employee is eligible for and elects to be covered by COBRA, whichever period is shorter. At the end of this period, the Employee is eligible to continue coverage for the balance of the statutory period under COBRA, provided that the Employee pays

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the COBRA premium. Notwithstanding the foregoing, the Company may end the payment of premiums earlier (but not the Employee’s eligibility for COBRA) if it reasonably determines that applicable laws or regulations are reasonably likely to cause the payment of these premiums to trigger taxes or penalties on the Company or other participants or, to the extent the Employee would be taxed on more than the amount of the premiums, to the Employee.

(c)In the event that, within 12 months following a Change in Control Event, the Employee’s employment terminates as a result of a termination by the Employee for Good Reason, or a termination by the Company or its successor without Cause, in addition to the compensation and benefits described in Section 5(a), the Employee shall receive (i) one times the sum of (x) the Employee’s then base salary (or if the base salary was reduced within 12 months following a Change in Control Event from the level in effect immediately before the consummation of that event, the level before such reduction) and (y) an amount equal to the full target bonus for the year of termination, such sum to paid ratably over a period of 12 months in accordance with the Company’s then current payroll policies and practices and (ii) an amount equal to a portion of the same year’s target bonus, pro-rated to reflect days elapsed from the beginning of the bonus year to the date of termination over 365, with the payment in clause (ii) to be made on or around the date of the first installment of the payments under clause (i). If severance is due under the proceeding sentence, the Company will also pay any difference between the COBRA premium and the amount the Employee would otherwise be responsible for with respect to the medical and dental coverage elected for a period of 12 months from the date of such termination or as long as the Employee is eligible for and elects to be covered by COBRA, whichever period is shorter. At the end of this period, the Employee is eligible to continue coverage for the balance of the statutory period under COBRA, provided that the Employee pays the COBRA premium. Notwithstanding the foregoing, the Company may end the payment of premiums earlier (but not the Employee’s eligibility for COBRA) if it reasonably determines that applicable laws or regulations are reasonably likely to cause the payment of these premiums to trigger taxes or penalties on the Company or other participants or, to the extent the Employee would be taxed on more than the amount of the premiums, to the Employee. The benefits provided under this Section 5(c) shall be in lieu of any benefits to which the Employee would have otherwise been entitled pursuant to Section 5(b) of this Agreement.

(d)The receipt of any severance benefits provided for under this Agreement or otherwise shall be dependent upon the Employee’s delivery to the Company of an effective general release of claims in a form provided by the Company. Such release must be delivered and become irrevocable within 60 days (or such shorter period as the Company may specify at the time) of the date of the Employee’s termination of employment. Payment of the benefits shall be made or commence no later than the first payroll period following the date on which the release becomes irrevocable. Notwithstanding the foregoing, if the 60th day following the termination of employment occurs in the calendar year following the year of the Employee’s termination of

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employment then the severance payments shall not be made or commence prior to January 1 of the year following such termination of employment, and in any event, payment of benefits under this subparagraph shall be subject to the provisions of Section 14 to the extent applicable.

(e)The benefits provided for the Employee under this Agreement shall be the sole payments and benefits for which the Employee shall be eligible at the conclusion of his employment with the Company for any reason (other than as provided under the terms of any equity compensation plans or awards) and shall supersede any and all prior agreements or arrangements for post-termination benefits or severance.

6.Notices. All notices, instructions, demands, claims, requests and other communications given hereunder or in connection herewith shall be in writing. Any such communication shall be sent either (a) by registered or certified mail, return receipt requested, postage prepaid, or (b) via a reputable nationwide overnight courier service, in each case to the address set forth below. Any such communication shall be deemed to have been delivered two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service.
To the Company:
Curis, Inc.
4 Maguire Road
Lexington, MA 02421
Facsimile: (617) 503-6501
Attention: Chief Executive Officer
 
 
To the Employee:
The Employee’s home address as reflected on the Company’s personnel records
 
 
Either party hereto may give any notice, instruction, demand, claim, request or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail or electronic mail), but no such communication shall be deemed to have been duly given unless and until it actually is received by the party for which it is intended. Either party hereto may change the address to which notices, instructions, demands, claims, requests and other communications hereunder are to be delivered by giving the other party hereto notice in the manner set forth in this Section 6.
7.Entire Agreement. This Agreement supersedes all prior agreements, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled (other than the Non-disclosure and Assignment of Inventions Agreement dated July 25, 2016 by and between Employee and the Company).


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8.Amendment. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Employee.

9.Governing Law. Except as set forth in Section 13.14, the Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts without giving effect to principles of conflicts of laws. Except as set forth in Section 13.16, any action, suit, or other legal proceeding which is commenced to resolve any matter arising under or relating to any provision of the Agreement shall be commenced only in a court of the Commonwealth of Massachusetts (or, if appropriate, a federal court located within Massachusetts), and the Company and the Employee each consents to the jurisdiction of such a court.

10.Successors and Assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform the Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. As used in the Agreement, “Company” shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform the Agreement, by operation of law or otherwise.

11.Miscellaneous.

11.1No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion.

11.2The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement.

11.3In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby.

12.No Duty to Seek Employment. The Employee and the Company acknowledge and agree that nothing contained in this Agreement shall be construed as requiring the Employee to seek or accept alternative or replacement employment in the event of his termination of employment by the Company for any reason, and no payment or benefit payable hereunder shall be conditioned on the Employee’s seeking or accepting such alternative or replacement employment.

13.Indemnification. Until the later of (1) six years after the date that the Employee shall have ceased to serve as an employee or officer of the Company or, at the request of the Company, as a director, officer, partner, trustee, member, employee or agent of another

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corporation, partnership, joint venture, trust, limited liability company or other enterprise or (2) the final termination of all Proceedings (as defined below) pending on the date set forth in clause (1) in respect of which the Employee is granted rights of indemnification or advancement of Expenses (as defined below) hereunder and of any proceeding commenced by the Employee pursuant to Section 13.8 of this Agreement relating thereto, the Company shall provide indemnification to the Employee as follows:

13.1Indemnification in Third-Party Proceedings. The Company shall indemnify the Employee in accordance with the provisions of this Section 13.1 if the Employee was or is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Company to procure a judgment in its favor) by reason of the Employee’s Corporate Status or by reason of any action alleged to have been taken or omitted in connection therewith, against all Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by or on behalf of the Employee in connection with such Proceeding, if the Employee acted in good faith and in a manner which the Employee reasonably believed to be in, or not opposed to, the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe that his conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of guilty or nolo contendere or its equivalent, shall not, of itself, create a presumption that the Employee did not act in good faith and in a manner which the Employee reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal Proceeding, had reasonable cause to believe that his conduct was unlawful.

13.2Indemnification in Proceedings by or in the Right of the Company. The Company shall indemnify the Employee in accordance with the provisions of this Section 13.2 if the Employee was or is a party to or threatened to be made a party to or otherwise involved in any Proceeding by or in the right of the Company to procure a judgment in its favor by reason of the Employee’s Corporate Status (as defined below) or by reason of any action alleged to have been taken or omitted in connection therewith, against all Expenses and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred by or on behalf of the Employee in connection with such Proceeding, if the Employee acted in good faith and in a manner which the Employee reasonably believed to be in, or not opposed to, the best interests of the Company, except that no indemnification shall be made under this Section 13.2 in respect of any claim, issue, or matter as to which the Employee shall have been adjudged to be liable to the Company, unless, and only to the extent, that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, the Employee is fairly and reasonably entitled to indemnity for such Expenses as the Court of Chancery or such other court shall deem proper.

13.3Exceptions to Right of Indemnification. Notwithstanding anything to the contrary in this Agreement, except as set forth in Section 13.8, the Company shall not indemnify the Employee in connection with a Proceeding (or part thereof) initiated by the Employee unless the initiation thereof was approved by the Board. Notwithstanding anything to the contrary in this Agreement, the Company shall not indemnify the Employee to the extent the Employee is

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reimbursed from the proceeds of insurance, and in the event the Company makes any indemnification payments to the Employee and the Employee is subsequently reimbursed from the proceeds of insurance, the Employee shall promptly refund such indemnification payments to the Company to the extent of such insurance reimbursement.

13.4Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that the Employee has been successful, on the merits or otherwise, in defense of any Proceeding or in defense of any claim, issue or matter therein, the Employee shall be indemnified against all Expenses incurred by or on behalf of Employee in connection therewith. Without limiting the foregoing, if any Proceeding or any claim, issue or matter therein is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to the Employee, (ii) an adjudication that the Employee was liable to the Company, (iii) a plea of guilty or nolo contendere by the Employee, (iv) an adjudication that Employee did not act in good faith and in a manner the Employee reasonably believed to be in or not opposed to the best interests of the Company, and (v) with respect to any criminal proceeding, an adjudication that the Employee had reasonable cause to believe his conduct was unlawful, the Employee shall be considered for the purposes hereof to have been wholly successful with respect thereto.

13.5Notification and Defense of Claim. As a condition precedent to the Employee’s right to be indemnified, the Employee must notify the Company in writing as soon as practicable of any Proceeding for which indemnity will or could be sought. With respect to any Proceeding of which the Company is so notified, the Company will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Employee. After notice from the Company to the Employee of its election so to assume such defense, the Company shall not be liable to the Employee for any legal or other expenses subsequently incurred by the Employee in connection with such Proceeding, other than as provided below in this Section 13.5. The Employee shall have the right to employ his own counsel in connection with such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of the Employee unless (i) the employment of counsel by the Employee has been authorized by the Company, (ii) counsel to the Employee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Company and the Employee in the conduct of the defense of such Proceeding or (iii) the Company shall not in fact have employed counsel to assume the defense of such Proceeding, in each of which cases the fees and expenses of counsel for the Employee shall be at the expense of the Company, except as otherwise expressly provided by this Agreement. The Company shall not be entitled, without the consent of the Employee, to assume the defense of any claim brought by or in the right of the Company or as to which counsel for the Employee shall have reasonably made the conclusion provided for in clause (ii) above. The Company shall not be required to indemnify the Employee under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Employee without the Employee’s written consent. Neither the Company nor the Employee will unreasonably withhold or delay their consent to any proposed settlement.

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13.6Advancement of Expenses. Subject to the provisions of Section 13.7 of this Agreement, in the event that the Company does not assume the defense pursuant to Section 13.5 of this Agreement of any Proceeding of which the Company receives notice under this Agreement, any Expenses incurred by or on behalf of the Employee in defending such Proceeding shall be paid by the Company in advance of the final disposition of such Proceeding; provided, however, that the payment of such Expenses incurred by or on behalf of the Employee in advance of the final disposition of such Proceeding shall be made only upon receipt of an undertaking by or on behalf of the Employee to repay all amounts so advanced in the event that it shall ultimately be determined that the Employee is not entitled to be indemnified by the Company as authorized in this Agreement. Such undertaking shall be accepted without reference to the financial ability of the Employee to make repayment.

13.7Procedure for Indemnification. In order to obtain indemnification or advancement of Expenses pursuant to Sections 13.1, 13.2, 13.4 or 13.6 of this Agreement, the Employee shall submit to the Company a written request. Any such indemnification or advancement of Expenses shall be made promptly, and in any event within 30 days after receipt by the Company of the written request of the Employee, unless with respect to requests under Sections 13.1, 13.2 or 13.6 the Company determines within such 30-day period that the Employee did not meet the applicable standard of conduct set forth in Section 13.1 or 13.2, as the case may be. Such determination, and any determination that advanced Expenses must be repaid to the Company, shall be made in each instance (i) by a majority vote of the directors of the Company consisting of persons who are not at that time parties to the Proceeding (“disinterested directors”), whether or not a quorum, (ii) by a committee of disinterested directors designated by a majority vote of disinterested directors, whether or not a quorum, (iii) if there are no disinterested directors, or if the disinterested directors so direct, by independent legal counsel (who may, to the extent permitted by applicable law, be regular legal counsel to the Company) in a written opinion, or (iv) by the stockholders of the Company.

13.8Remedies. The right to indemnification or advancement of Expenses as provided by this Agreement shall be enforceable by the Employee in any court of competent jurisdiction. Unless otherwise required by law, the burden of proving that indemnification is not appropriate shall be on the Company. Neither the failure of the Company to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because the Employee has met the applicable standard of conduct, nor an actual determination by the Company pursuant to Section 13.7 that the Employee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Employee has not met the applicable standard of conduct. The Employee’s expenses (of the type described in the definition of “Expenses” below) reasonably incurred in connection with successfully establishing the Employee’s right to indemnification, in whole or in part, in any such Proceeding shall also be indemnified by the Company.

13.9Partial Indemnification. If the Employee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties or amounts paid in settlement actually and reasonably incurred by or on behalf of the Employee in connection with any Proceeding but not, however, for the total

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amount thereof, the Company shall nevertheless indemnify the Employee for the portion of such Expenses, judgments, fines, penalties or amounts paid in settlement to which the Employee is entitled.

13.10Subrogation. In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Employee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

13.11Indemnification Hereunder Not Exclusive. The indemnification and advancement of Expenses provided by this Agreement shall not be deemed exclusive of any other rights to which the Employee may be entitled under the Company’s Certification of Incorporation, the By-Laws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of Delaware, any other law (common or statutory), or otherwise, both as to action in the Employee’s official capacity and as to action in another capacity while holding office for the Company. Nothing contained in this Agreement shall be deemed to prohibit the Company from purchasing and maintaining insurance, at its expense, to protect itself or the Employee against any expense, liability or loss incurred by it or the Employee in any such capacity, or arising out of the Employee’s status as such, whether or not the Employee would be indemnified against such expense, liability or loss under this Agreement; provided that the Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that the Employee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

13.12Definitions. As used in this Section 13:

(a)The term “Proceeding” shall include any threatened, pending or completed action, suit, arbitration, alternative dispute resolution proceeding, administrative hearing or other proceeding, whether brought by or in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, and any appeal therefrom.

(b)The term “Corporate Status” shall mean the status of a person who is or was a director or officer of the Company, or is or was serving, or has agreed to serve, at the request of the Company, as a director, officer, partner, trustee, member, employee or agent of another corporation, partnership, joint venture, trust, limited liability company or other enterprise.

(c)The term “Expenses” shall include, without limitation, attorneys’ fees, retainers, court costs, transcript costs, fees and expenses of experts, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and other disbursements or expenses of the types customarily incurred in connection with investigations, judicial or administrative proceedings or appeals, but shall not include the amount of judgments, fines or penalties against the Employee or amounts paid in settlement in connection with such matters.

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(d)References to “other enterprise” shall include employee benefit plans; references to “fines” shall include any excise tax assessed with respect to any employee benefit plan; references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.

13.13Savings Clause. If this Section 13 or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify the Employee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Section 13 that shall not have been invalidated and to the fullest extent permitted by applicable law.

13.14Applicable Law. Notwithstanding anything herein to the contrary, this Section 13 shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. The Employee may elect to have the right to indemnification or reimbursement or advancement of Expenses interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable Proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or reimbursement or advancement of Expenses is sought. Such election shall be made, by a notice in writing to the Company, at the time indemnification or reimbursement or advancement of Expenses is sought; provided, however, that if no such notice is given, and if the General Corporation Law of Delaware is amended, or other Delaware law is enacted, to permit further indemnification of the directors and officers, then the Employee shall be indemnified to the fullest extent permitted under the General Corporation Law, as so amended, or by such other Delaware law, as so enacted.

13.15Enforcement. The Company expressly confirms and agrees that it has entered into this Agreement in order to induce the Employee to continue to serve as an officer of the Company, among other things, and acknowledges that the Employee is relying upon this Agreement in continuing in such capacity.

13.16Consent to Suit. In the case of any dispute under or in connection with this Section 13, the Employee may only bring suit against the Company in the Court of Chancery of the State of Delaware. The Employee hereby consents to the exclusive jurisdiction and venue of the courts of the State of Delaware, and the Employee hereby waives any claim the Employee may have at any time as to forum non conveniens with respect to such venue. The Company shall have the right to institute any legal action arising out of or relating to this Section 13 in any court of competent jurisdiction. Any judgment entered against either of the parties in any proceeding hereunder may be entered and enforced by any court of competent jurisdiction.


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14.Section 409A of the Internal Revenue Code.

14.1The following rules shall apply with respect to distribution of the payments and benefits, if any, to be provided to the Employee under Section 5:

(a)It is intended that each installment of the payments and benefits provided under Section 5 shall be treated as a separate “payment” for purposes of Section 409A. Neither the Company nor the Employee shall have the right to accelerate or defer the delivery of any such payments or benefits except to the extent specifically permitted or required by Section 409A;

(b)If, as of the date of the “separation from service” of the Employee from the Company, the Employee is not a “specified employee” (each within the meaning of Section 409A), then each installment of the payments and benefits shall be made on the dates and terms set forth in Section 5; and

(c)If, as of the date of the “separation from service” of the Employee from the Company, the Employee is a “specified employee” (each, for purposes of this Agreement, within the meaning of Section 409A), as determined by the Company in accordance with its procedures, by which determination the Employee hereby agrees that he is bound, then:

(i)Each installment of the payments and benefits due under Section 5 that are paid within the Short-Term Deferral Period (as hereinafter defined) shall be treated as a short-term deferral within the meaning of Treasury Regulation Section 1.409A-1(b)(4) to the maximum extent permissible under Section 409A. For purposes of this Agreement, the “Short-Term Deferral Period” means the period ending on the later of the 15th day of the third month following the end of the Employee’s tax year in which the Employee’s separation from service occurs and the 15th day of the third month following the end of the Company’s tax year in which the Employee’s separation from service occurs;

(ii)Each installment of the payments and benefits due under Section 5 that is not paid within the Short-Term Deferral Period and that would, absent this subsection, be paid within the six-month period following the “separation from service” of the Employee of the Company shall not be paid until the date that is six months and one day after such separation from service (or, if earlier, 10 days following the death of the Employee), with any such installments that are required to be delayed being accumulated during the six-month period and paid in a lump sum on the date that is six months and one day following the Employee’s separation from service (or, with respect to payment after death, as soon as reasonably practicable and within the time limits permitted by Section 409A), and any remaining payments will be paid on their original schedule and any subsequent installments, if any, being paid in accordance with the dates and terms set forth herein; provided, however, that the preceding provisions of this

15


sentence shall not apply to any installment of payments and benefits if and to the maximum extent that that such installment is deemed to be paid under a separation pay plan that does not provide for a deferral of compensation by reason of the application of Treasury Regulation 1.409A-1(b)(9)(iii) (relating to separation pay upon an involuntary separation from service) or Treasury Regulation 1.409A-1(b)(9)(iv) (relating to reimbursements and certain other separation payments). Any installments that qualify for the exception under Treasury Regulation Section 1.409A-1(b)(9)(iii) must be paid no later than the last day of the second taxable year of the Employee following the taxable year of the Employee in which the separation from service occurs. A comparable six month delay will apply to any other payments and benefits received by Employee under other compensatory arrangements if and to the extent required for compliance with Section 409A.

(d)The determination of whether and when the Employee’s separation from service from the Company has occurred shall be made and in a manner consistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-1(h). Solely for purposes of this subsection (d), “Company” shall include all persons with whom the Company would be considered a single employer under Section 414(b) and 414(c) of the Code.

14.2All payments and benefits provided under this Agreement are intended to either comply with or be exempt from Section 409A and this Agreement shall be administered and construed accordingly. The Company makes no representations or warranty and shall have no liability to the Employee or any other person if any payments made under this Agreement are determined to constitute deferred compensation subject to Section 409A but not to satisfy the conditions of that section. All reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A to the extent that such reimbursements or in-kind benefits are subject to Section 409A, including, where applicable, the requirements that (i) any reimbursement is for expenses incurred during the Employee’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the calendar year following the year in which the expense is incurred and (iv) the right to reimbursement is not subject to set off or liquidation or exchange for any other benefit.

15.Parachute Treatment. Notwithstanding any other provision of this Agreement to the contrary, if payments made hereunder or otherwise are considered “excess parachute payments” under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), then such excess parachute payments plus any other payments made by the Company and its affiliates that the Employee is entitled to receive that are considered excess parachute payments shall be limited to the greatest amount that may be paid to the Employee under Section 280G of the Code without causing any loss of deduction to the Company under such Code Section, but only if, by reason of such reduction, the “Net After Tax Benefit” (as defined below) to the

16


Employee shall exceed the net after tax benefit if such reduction was not made. “Net After Tax Benefit” for purposes of this Agreement shall mean the sum of (i) the total amounts payable to the Employee that would constitute an “excess parachute payment” within the meaning of Section 280G of the Code less (ii) the amount of federal, state and other income taxes payable with respect to the foregoing calculated at the maximum marginal tax rate for each year in which the foregoing shall be paid to the Employee (based upon the rate in effect for such year as set forth in the Code at the time of termination of employment or the applicable change in control), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described above by Section 4999 of the Code. The determination of whether payments would be considered excess parachute payments and the calculation of all the amounts referred to in this section shall be made reasonably and in good faith by the parties, provided, that if the parties cannot agree, then such determination (and supporting calculations) shall be made by attorneys, accountants, or an executive compensation consulting firm each as selected by the Company at the expense of the Company (the “280G Service Providers”). Any determination by the 280G Service Providers made in good faith shall be binding upon the Company and the Employee.

16.Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of September 11, 2019.
Signatures on Following Page

17


 
CURIS, INC.
 
 
 
By: /s/ James E. Dentzer
Name: James E. Dentzer
Title: President and Chief Executive Officer
 
EMPLOYEE
 
 
 
By: /s/ William E. Steinkrauss
William E. Steinkrauss



18


EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE EXCHANGE ACT
I, James E. Dentzer, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Curis, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 5, 2019
/S/ JAMES E. DENTZER
 
 
James E. Dentzer
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)





EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) OF THE EXCHANGE ACT
I, William Steinkrauss, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Curis, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 5, 2019
/S/ WILLIAM STEINKRAUSS
 
 
William Steinkrauss
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)






EXHIBIT 32.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(b) OF THE EXCHANGE ACT AND 18 U.S.C. SECTION 1350
In connection with the Quarterly Report on Form 10-Q of Curis, Inc. (the “Company”) for the period ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, James E. Dentzer, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
November 5, 2019
/S/ JAMES E. DENTZER
 
 
James E. Dentzer
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)







EXHIBIT 32.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(b) OF THE EXCHANGE ACT AND 18 U.S.C. SECTION 1350
In connection with the Quarterly Report on Form 10-Q of Curis, Inc. (the “Company”) for the period ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, William Steinkrauss, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
November 5, 2019
/S/ WILLIAM STEINKRAUSS
 
 
William Steinkrauss
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)