KALOBIOS PHARMACEUTICALS INC (Form: 10-Q, Received: 11/10/2016 16:19:29)

Item 2.

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

You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10‑Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. This Quarterly Report on Form 10-Q contains statements that discuss future events or expectations, projections of results of operations or financial condition, trends in our business, business prospects and strategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue” or the negative of those words and other comparable words. These statements may relate to, among other things, our expectations regarding the scope, progress, expansion, and costs of researching, developing and commercializing our product candidates; our intent to in-license or acquire additional product candidates; our opportunity to benefit from various regulatory incentives and the application of our Responsible Pricing Model; expectations for our financial results, revenue, operating expenses and other financial measures in future periods; and the adequacy of our sources of liquidity to satisfy our working capital needs, capital expenditures, and other liquidity requirements. Actual events or results may differ materially due to known and unknown risks, uncertainties and other factors such as:

our lack of profitability and the immediate need to raise additional capital to operate our business; and

the uncertainties inherent in the development and launch of any new pharmaceutical product;

our ability to successfully and timely complete clinical trials for our drug candidates in clinical development;

our ability to obtain the necessary U.S. and international regulatory approvals for our drug candidates and to qualify for or benefit from various regulatory incentives;

the scope and validity of intellectual property and other competitive protection for our drug candidates;

our ability to identify, in-license and acquire additional product candidates or to form partnerships for the sale, licensing, collaborative development or marketing of our existing product candidates;

our ability to maintain or engage third-party manufacturers to manufacture, supply, store and distribute supplies of our drug candidates for our clinical trials; and

the success of any product.

These are only some of the factors that may affect the forward-looking statements contained in this Form 10-Q. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. However, we operate in a competitive and rapidly changing environment and new risks and uncertainties emerge, are identified or become apparent from time to time. It is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Form 10-Q. You should be aware that the forward-looking statements contained in this Form 10-Q are based on our current views and assumptions. We undertake no obligation to revise or update any forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law. The forward-looking statements in this Form 10-Q are intended to be subject to protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 .

Overview

We are a biopharmaceutical company focused on developing medicines for patients with neglected and rare diseases, with an ancillary focus on pediatric conditions, and on executing our Responsible Pricing Model in the commercialization of our products that may be approved. Our lead product candidate is benznidazole for the treatment of Chagas disease, a parasitic illness that can lead to long-term heart, intestinal and neurological problems. We are developing one of our proprietary monoclonal antibodies, lenzilumab (formerly known as KB003), for the treatment of chronic myelomonocytic leukemia, or CMML, and potentially for the treatment of juvenile myelomonocytic leukemia, or JMML, both of which are rare hematologic cancers with high unmet medical need. We are exploring partnering or development of another of our proprietary monoclonal antibodies, ifabotuzumab (formerly known as KB004), for the treatment of certain solid and hematologic cancers. With a focus on neglected, rare and orphan diseases, we believe we have the opportunity to benefit from various regulatory incentives, such as orphan drug exclusivity, breakthrough therapy designation, fast track designation, accelerated approval, priority review and priority review vouchers, or PRVs, where available, that provide for certain periods of exclusivity, expedited review and/or other benefits.

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Upon regulatory approval of any of our products, we intend to apply our Responsible Pricing Model, which focuses on affordability for patients and payers, transparency for all stakeholders, and delivery of a reasonable return in recognition of the risks we are taking in our development efforts.

Benznidazole is an oral small molecule antiprotozoal for the treatment of Chagas disease, which is also known as American trypanosomiasis. Benznidazole has undergone numerous clinical trials and studies that show efficacy against Chagas disease. We believe it is the current preferred treatment for Chagas disease in the countries where it is approved. No treatments for Chagas disease are approved by the United States Food and Drug Administration, or FDA, for use in the United States. On June 30, 2016, we acquired certain worldwide rights relating to benznidazole for human use from Savant Neglected Diseases, LLC, or Savant, and we are focused on the development necessary to seek and obtain FDA approval of benznidazole. We believe benznidazole as a treatment for Chagas disease could qualify for priority review and potentially other FDA regulatory incentives, and to receive a PRV if FDA approves the drug for marketing.

Lenzilumab is a recombinant monoclonal antibody, or mAb, that neutralizes soluble granulocyte-macrophage colony-stimulating factor, or GM-CSF, a critical cytokine for the growth of certain hematologic malignancies and solid tumors. Consistent with our strategic focus on neglected and rare diseases, in July 2016, we initiated dosing in a Phase 1 clinical trial in patients with CMML to identify the maximum tolerated dose, or MTD, or recommended Phase 2 dose of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity. We also plan to assess interim data from the lenzilumab CMML Phase I study to determine the feasibility of rapidly commencing a Phase I study in JMML patients, where there is a very high unmet medical need and no FDA-approved therapies.

Ifabotuzumab is an anti-EphA3 mAb that has the potential to offer a novel approach to treating both solid tumors and hematologic malignancies. EphA3 is aberrantly expressed on the surface of tumor cells and stroma cells in certain cancers. We have completed the Phase 1 dose escalation portion of a Phase 1/2 clinical trial in ifabotuzumab in multiple hematologic malignancies and are evaluating whether to conduct further studies of ifabotuzumab in rare solid tumors such as glioblastoma, other brain cancers in children and rare hematologic cancer indications, or to partner it.

We also have an additional drug candidate, KB001-A, a recombinant, PEGylated, anti‑Pseudomonas PcrV high‑affinity Fab antibody that we are no longer developing, but which is being considered for partnering or out-licensing.

Lenzilumab, ifabotuzumab and KB001-A were each developed with our proprietary, patent-protected Humaneered® technology, which consists of methods for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use, typically for chronic conditions.

Our strategy also involves identifying, acquiring, developing and supporting the commercialization of additional treatments for neglected and rare diseases. We believe the treatment of neglected and rare diseases represents an opportunity to enter underserved patient populations and serve specialty markets. We also believe our focus on neglected and rare diseases provides us the opportunity to benefit from various regulatory incentives referenced above. The potential opportunities afforded by these regulatory programs provide an important incentive to support our efforts to develop medicines for patients with neglected and rare diseases and to apply our Responsible Pricing Model for any of our approved products.

We have incurred significant losses and had an accumulated deficit of $235.6 million as of September 30, 2016. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our development activities and seek regulatory approvals. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.

We will require substantial additional capital to support our business efforts, including obtaining regulatory approvals for benznidazole or other product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. We anticipate that in the future we will seek additional financing from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or on acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all.

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If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital will not be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern. T he Condensed Consolidated Financial Statements for the quarter ended September 30, 2016 were prepared on the basis of a going concern, which contemplates that we will be able to realize our assets and discharge liabilities in the normal course of business. Our ability to meet our liabilities and to continue as a going concern is dependent upon the availability of future funding. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

As a result of challenges facing us at the time, on December 29, 2015, we filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On June 30, 2016, our Second Amended Plan of Reorganization, dated May 9, 2016, as amended, or the Plan, became effective and we emerged from our Chapter 11 bankruptcy proceedings. For further information on our bankruptcy and emergence from bankruptcy, see Note 2 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, valuation of financing derivative, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There were no significant and material changes in our critical accounting policies and use of estimates during the three and nine months ended September 30, 2016, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our 2015 Annual Report on Form 10-K (File No. 001-35798), filed with the SEC on September 1, 2016.

Results of Operations

General

We have not generated net income from operations, except for the year ended December 31, 2007 during which we recognized a one-time license payment from Novartis. At September 30, 2016 we had an accumulated deficit of $235.6 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates may never be successfully developed or commercialized and we may therefore never realize revenue from any product sales, particularly because most of our product candidates are at an early stage of development. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

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Our operations during the six months ended June 30, 2016 primarily related to our status as a debtor in possession and other matters in connection with our Chapter 11 bankruptcy proceedings, in addition to our efforts to obtain certain rights related to our lead product candidate benznidazole. In addition, our operations during the three months ended September 30, 2016 included further reorganization expenses and our development programs have changed substantially from the same period in 2015. Accordingly, comparisons of our operations and results for the three and nine months ended September 30, 2016 to our operations and results in the prior year periods may only provide a limited benefit, and similarly should not be relied on as an indicator of our future operations or results.

Research and Development Expenses

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We track external research and development costs incurred by project for each of our clinical programs. We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. Our external research and development costs consist primarily of:

expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;

the cost of acquiring and manufacturing clinical trial and other materials; and

other costs associated with development activities, including additional studies.

Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock‑based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project.

The following table shows our total research and development expenses for the three and nine months ended September 30, 2016 and 2015:

	For the						For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2016			2015			2016			2015
External Costs
KB001		$	5		$	47		$	10		$	1,262
Lenzilumab			99			68			215			318
Ifabotuzumab			30			2,131			176			5,611
Benznidazole			829			-			5,024			-
Internal costs			778			1,599			2,380			5,891
Total research and development		$	1,741		$	3,845		$	7,805		$	13,082

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development.

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Comparison of Three Months Ended September 30, 2016 and 2015

	Three Months Ended September 30,						Increase/ (Decrease)
(in thousands)	2016			2015			in thousands			%
Operating expenses:
Research and development	$	1,741		$	3,845		$	(2,104	)		(55	)
General and administrative		2,453			2,359			94			4
Loss from operations		(4,194	)		(6,204	)		(2,010	)		(32	)
Interest expense		(30	)		(223	)		(193	)		(87	)
Interest income		-			3			(3	)		(100	)
Other income (expense), net		128			(176	)		(304	)		(173	)
Reorganization items, net		(427	)		-			427			100
Net loss	$	(4,523	)	$	(6,600	)	$	(2,077	)		(31	)

Research and development expenses decreased $2.1 million, from $3.8 million for the three months ended September 30, 2015 to $1.7 million for the three months ended September 30, 2016. The decrease is primarily due to the cessation of development work for ifabotuzumab, a reduction in internal costs related to the restructuring program in the fourth quarter of 2015, offset partially by an increase in costs related to the development of benznidazole.

General and administrative expenses increased $94,000. The increase is primarily due to an increase in legal, accounting and audit fees associated with the work related to becoming current with our SEC filings, offset by a decrease in personnel expenses related to the restructuring activities that took place primarily in the last quarter of 2015 resulting in a decrease of approximately 70% of our workforce and a reduction in facilities expense due to the move from the old office and laboratory space to the new offices.

Reorganization items, net, were $0.4 million for the three months ended September 30, 2016 compared to none for the three months ended September 30, 2015. Reorganization items, net relate to amounts incurred during the quarter related to the Plan, including legal fees of $0.2 million and $0.2 million in other professional fees.

Interest expense of $0.2 million recognized for the three months ended September 30, 2015 was related to the Loan and Security Agreement with MidCap Financial SBIC LP that was entered into by the Company in September 2012. The loan was paid off in the fourth quarter of 2015. Interest expense of $30,000 for the three months ended September 30, 2016 relates to the promissory notes issued to certain vendors in accordance with the Plan.

Other income (expense), net for the three months ended September 30, 2016 primarily consisted of foreign currency gains related to the payment of bankruptcy liabilities in foreign currencies. Other income (expense), net for the three months ended September 30, 2015 primarily consisted of foreign currency losses and realized gains and losses on the sale of investments.

Comparison of Nine Months Ended September 30, 2016 and 2015

	Nine Months Ended September 30,						Increase/ (Decrease)
(in thousands)	2016			2015			in thousands			%
Operating expenses:
Research and development	$	7,805		$	13,082		$	(5,277	)		(40	)
General and administrative		6,169			8,095			(1,926	)		(24	)
Loss from operations		(13,974	)		(21,177	)		(7,203	)		(34	)
Interest expense		(76	)		(755	)		(679	)		(90	)
Interest income		-			29			(29	)		(100	)
Other income (expense), net		128			(359	)		(487	)		(136	)
Reorganization items, net		(8,039	)		-			8,039			100
Net loss	$	(21,961	)	$	(22,262	)	$	(301	)		(1	)

Research and development expenses decreased $5.3 million, from $13.1 million for the nine months ended September 30, 2015 to $7.8 million for the nine months ended September 30, 2016. The decrease is due to the suspension of essentially all development projects until after our emergence from bankruptcy on June 30, 2016. The decrease is partially offset by the amounts paid to Savant for certain rights relating to benznidazole, as well as the fair value of the warrant issued to Savant, all of which has been expensed as research and development expense.

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General and administrative expenses decreased $1.9 million, from $8.1 million for the nine months ended September 30, 2015 to $6.2 million for the nine months ended September 30, 2016, primarily due to the restructuring activities that took place mostly in the last quarter of 2015 resulting in a decrease of approximately 70% of our workforce, partially offset by the expense recorded related to the fair value of common stock issued to our CEO and two directors of $0.7 million and an increase in legal, accounting and audit fees associated with the work related to becoming current with our SEC filings.

Reorganization items, net increased $8.0 million, from zero for the nine months ended September 30, 2015 to $8.0 million for the nine months ended September 30, 2016 due to the amounts incurred related to the Plan, including legal fees of $4.8 million, $1.1 million in other professional fees, $0.7 million related to the fair value of common shares issue to our CEO and two directors for their service in bankruptcy, $1.1 million in legal and other costs related to the debtor-in-possession financing, $0.5 million related to the beneficial conversion expense recognized in connection with the debtor-in-possession financing, offset by a net gain on the termination of the South San Francisco lease of $0.2 million.

Interest expense of $0.8 million recognized for the nine months ended September 30, 2015 was related to the Loan and Security Agreement with MidCap Financial SBIC LP that was entered into by the Company in September 2012. The loan was paid off in the fourth quarter of 2015. Interest expense of $76,000 recognized for the nine months ended September 30, 2016 is comprised of $46,000 related to the debtor-in-possession financing entered into on April 1, 2016 and $30,000 related to the promissory notes issued to certain vendors in accordance with the Plan.

Other income (expense), net for the nine months ended September 30, 2016 primarily consisted of foreign currency gains related to the payment of bankruptcy liabilities in foreign currencies. Other income (expense), net for the nine months ended September 30, 2015 primarily consisted of foreign currency gains and losses and realized gains and losses on the sale of investments.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through proceeds from the public offerings of our common stock, private placements of our preferred stock, debt financings, interest income earned on cash, and cash equivalents, and marketable securities, borrowings against lines of credit, and receipts from agreements with Sanofi and Novartis. At September 30, 2016, we had cash and cash equivalents of $2.9 million.

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

	Nine Months Ended
	September 30,
(in thousands)	2016			2015
Net cash used in operating activities	$	(17,948	)	$	(21,069	)
Net cash provided by investing activities		92			29,540
Net cash provided by (used in) financing activities		12,330			(11,774	)
Net decrease in cash and cash equivalents	$	(5,526	)	$	(3,273	)

Net cash used in operating activities was $17.9 million and $21.1 million for the nine months ended September 30, 2016 and 2015, respectively. The primary use of cash in 2015 was to fund our operations related to the development of our product candidates, whereas the primary use of cash in 2016 was to fund our operations related to the Plan. Cash used in operating activities of $17.9 million for the nine months ended September 30, 2016 primarily related to our net loss of $21.8 million, adjusted for non-cash items, such as $1.6 million related to reorganization items related to the debtor-in-possession financing, $1.5 million related to the issuance of stock to our CEO and two directors, $0.3 million related to the issuance of warrants to Savant in connection with the acquisition of certain rights related to the benznidazole license, $0.2 million related to a net gain on lease termination, other non-cash items of $0.4 million and net cash outflows of $0.3 million related to changes in operating assets and liabilities, primarily Liabilities subject to compromise, Accounts payable and Accrued expenses.

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Net cash used in operating activities of $21.1 million for the nine months ended September 30, 2015 primarily related to our net loss of $22.3 million, adjusted for non-cash items such as $0.9 million of stock-based compensation expense, $0.9 million relating to the fair value of stock options that were modified due to executive retirement and restructuring activities, depreciation and amortization of $0.1 million, noncash expense related to interest and the financing derivative of $0.4 million and other adjustments of $0.2 million, offset by net cash outflows of $1.3 million related to changes in operating assets and liabilities.

Net cash provided by investing activities was $0.1 million for the nine months ended September 30, 2016, primarily related to the reduction in restricted cash related to the termination of our office lease in South San Francisco. Net cash provided by investing activities was $29.5 million for the nine months ended September 30, 2015, primarily related to proceeds from maturities of marketable securities of $33.4 million partially offset by purchases of investments of $3.7 million.

Net cash provided by financing activities was $12.3 million for the nine months ended September 30, 2016 related to the debtor-in-possession and bankruptcy-related equity financings. Net cash used in financing activities was $11.7 million for the nine months ended September 30, 2015 relating to an increase in restricted cash of $8.3 million relating to notes payable obligations and $3.4 million relating to the payments on our borrowings.

In connection with our emergence from bankruptcy, we closed an $11 million financing that provided the funds required to enable our exit from Chapter 11 as well as to fund our current working capital needs. However, we will require substantial additional capital to support our business efforts, including obtaining regulatory approvals for benznidazole or other product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. The amount of capital we will require and the timing of our need for additional capital will depend on many factors, including:

the type, number, timing, progress, costs, and results of the product candidate development programs that we are pursuing or may choose to pursue in the future;

the scope, progress, expansion, costs, and results of our pre-clinical and clinical trials;

the timing of and costs involved in obtaining regulatory approvals;

our ability to establish and maintain development partnering arrangements and any associated funding;

the emergence of competing products or technologies and other adverse market developments;

the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

the resources we devote to marketing, and, if approved, commercializing our product candidates;

the scope, progress, expansion and costs of manufacturing our product candidates; and

the costs associated with being a public company.

We are pursuing efforts to raise additional capital from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all.

On January 13, 2016, our common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the ticker symbol KBIOQ. On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of our common stock, and the delisting was effective on February 5, 2016. On June 30, 2016, upon emergence from bankruptcy, the ticker symbol for the trading of our common stock on the over-the-counter market reverted back to KBIO. Although our common stock is listed for quotation on the OTC Pink marketplace operated by OTC Markets Group, Inc., trading is limited and an active market for our common stock may never develop in the future, which could harm our ability to raise capital to continue to fund operations.

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Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

Item 4.

Controls and Procedures.

Management’s Evaluation of our Disclosure Controls and Procedures

“Disclosure controls and procedures,” as defined in Rules 13a‑15(e) and 15d‑15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit 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, those designed to ensure that this information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management, including our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation our Chief Executive Officer and Interim Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of September 30, 2016 to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a‑15(f) and 15d‑15(f) under the Exchange Act). Our Chief Executive Officer and Interim Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of September 30, 2016. In making this assessment, our Chief Executive Officer and Interim Chief Financial Officer used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework . Based on that assessment and using the COSO criteria, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of September 30, 2016, our internal control over financial reporting was not effective because of the material weaknesses described below.

A material weakness is defined as “a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”

The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses, each of which relates to our limited number of accounting and financial reporting personnel and high levels of turnover in our personnel responsible for performing activities related to our internal control over financial reporting : (i) an insufficient degree of segregation of duties amongst our accounting and financial reporting personnel; and (ii) a lack of technical competency in review and approval of financial reporting processes.

During the quarter ended September 30, 2016, we retained a new controller and other highly qualified accounting support staff and implemented certain other remedial measures, including the implementation of a formal closing procedure. Based on these actions, among others, our management believes it has successfully remediated our previously reported material weakness relating to our inability to complete our financial statement close process in a timely and accurate manner. During the fourth quarter of 2016, our management intends to work to remediate the material weaknesses identified above, which will include the review and implementation of improvements to the segregation of duties as well as the review and implementation of improvements to the review and approval of financial reporting processes.

Despite the existence of the material weaknesses above, we believe that our Condensed Consolidated Financial Statements contained in this Form 10-Q fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.

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Other than as described above, there has been no change in our internal control over financial reporting during the quarter ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision‑making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost‑effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

On June 30, 2016, the Plan became effective and the Company emerged from its Chapter 11 bankruptcy proceedings. Pursuant to the Plan, the Company consummated the transactions described below in the three months ended September 30, 2016.

On various dates between July 1, 2016 and August 30, 2016, the Company issued 166,675 shares of common stock to the plaintiffs in litigation related to the Company’s 2015 private financing transaction in accordance with a settlement stipulation. The Company was obligated to issue a total of 327,608 shares of common stock to such plaintiffs, and 160,933 shares were previously issued on June 30, 2016 in partial satisfaction of such obligation.

On July 5, 2016, the Company issued 300,000 shares of common stock to the plaintiffs in class action litigation related to the events surrounding the Company’s former Chairman and Chief Executive Officer.

On July 13, 2016, the Company issued 3,750 shares of common stock to a former director in satisfaction of claims against the Company.

The common stock was issued under the Plan pursuant to an exemption from the registration requirements of the Securities Act under Section 1145 of the Bankruptcy Code, Section 4(a)(2) of the Securities Act, and/or Regulation D promulgated thereunder. Please s ee the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q for more information regarding the Plan, the settlement stipulation and the class action litigation.

Item 6.

Exhibits.

A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

Table of Contents

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.


	KALOBIOS PHARMACEUTICALS, INC.

Date: November 10, 2016	By:	/s/ Cameron Durrant
		Cameron Durrant
		Chief Executive Officer
		(Principal Executive Officer)


Date: November 10, 2016	By:	/s/ David L. Tousley
		David L. Tousley
		Interim Chief Financial Officer
		(Principal Financial and Accounting Officer)

Table of Contents

EXHIBIT INDEX

Exhibit No.		Description

2.1		Findings of Fact, Conclusions of Law, and Order Confirming Second Amended Chapter 11 Plan of Reorganization of the Registrant (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on June 22, 2016).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on July 6, 2016).

10.1		Amendment to the 2012 Equity Incentive Plan, dated as of September 13, 2016 (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-8 filed on October 14, 2016).

10.2		Employment Agreement, dated as of September 13, 2016, by and between the Company and Cameron Durrant, MD.

31.1		Certification of Chief Executive Officer of the Registrant, as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Interim Chief Financial Officer of the Registrant, as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 **		Certification by the Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C. §1350).

32.2 **		Certification by the Interim Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C. §1350).

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

_____________________

The Certifications attached as Exhibits 32.1 and 32.2 that accompanies this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of KaloBios Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

Exhibit 10.2

EMPLOYMENT AGREEMENT (“Agreement”), as of July 1, 2016, by and between KaloBios Pharmaceuticals, Inc., a Delaware corporation with offices at 1000 Marina Blvd, Suite 250, Brisbane, CA 94005 (the “Corporation”), and Dr. Cameron Durrant, an individual (“Executive”).

W I T N E S S E T H

WHEREAS , Executive currently serves as the Chief Executive Officer of the Corporation pursuant to that certain Letter Agreement between the Corporation and Executive, dated March 1, 2016 (the “Prior Agreement”);

WHEREAS , the Corporation desires to continue to employ Executive as its President and Chief Executive Officer upon the terms and conditions hereinafter set forth; and

WHEREAS , Executive desires to serve as the President and Chief Executive Officer of the Corporation upon the terms and conditions hereinafter set forth.

NOW, THEREFORE , the parties mutually agree as follows:

Section 1. Employment . Commencing on July 1, 2016 (hereinafter referred to as the “Effective Date”), the Corporation shall employ Executive and Executive shall commence such employment, as an executive of the Corporation, on the terms and conditions set forth in this Agreement.

Section 2. Duties . As of the Effective Date, Executive shall serve as President and Chief Executive Officer of the Corporation and shall, among other things, be responsible for all aspects of managing the Corporation including its employees and current product portfolio and shall properly perform such duties as may be assigned to him from time to time by the Corporation’s Board of Directors (the “Board”). From and after the Effective Date and during the term of this Agreement, Executive shall devote substantially all of his business time to the performance of his duties hereunder, other than 5% for outside board duties unless otherwise authorized by the Board; provided, that Executive may not serve on any public company outside boards without the prior written consent of the Board.

Section 3. Term of Employment . Unless earlier terminated pursuant to the provisions of Section 5 hereof, the term of Executive’s employment shall continue as of the Effective Date and shall continue until June 30, 2019, and shall automatically renew for successive (1) year terms unless not renewed by the Corporation upon no less than six (6) months advance written notice to Executive, or non-renewed by Executive upon no less than six (6) months advance written notice to the Corporation (the term of employment hereinafter referred to as the “Term”).

Section 4. Compensation of Executive .

4.1. Compensation . As compensation for his services hereunder the Corporation shall pay Executive an annual salary (“Salary”) equal to Six Hundred Thousand ($600,000) Dollars. The Salary shall be payable according to the salary payment cycle of the Corporation, less such deductions as shall be required to be withheld by applicable law and regulations. Upon each anniversary of the Effective Date during the term of this Agreement, Executive’s Salary shall be reviewed by the Compensation Committee of the Board (the “Compensation Committee”), or earlier at the sole discretion of the Compensation Committee and the Board.

4.2. Bonus; Stock Options .

(a) In addition to his Salary, Executive may receive a cash or cash equivalent bonus (“Bonus”) in respect of each calendar year during the Term, including, without limitation, calendar year 2016. The Bonus for each calendar year shall be determined by the Compensation Committee and the Board in their sole discretion. The Target Bonus shall be sixty percent (60%) of the Salary in any one year, with a maximum amount at the sole discretion of the Compensation Committee and the Board. Such Bonus may be a mix of cash and stock, as determined by the Board in its sole discretion; provided, that, with respect to calendar year 2016, Executive’s Bonus, if any, shall be paid fifty percent (50%) in cash and fifty percent (50%) in shares of the Corporation’s Common Stock, with the number of shares of stock to be determined by the Board based on the closing market price of the Corporation’s Common Stock on the date the Bonus is approved by the Board. Objectives for the Bonus will be set and agreed to by the Board and Executive at the beginning of each calendar year. The Bonus for any particular calendar year, if any, will be paid by March 15 of the following calendar year. Notwithstanding anything contained in this Section 4.2(a) to the contrary, Executive’s Bonus in respect of calendar year 2016 shall be determined based on Executive’s achievement of performance objectives during the period commencing on July 1, 2016 and ending on December 31, 2016 (the “2016 Performance Period”), which performance objectives shall be agreed to by the Board and Executive, and the Bonus earned by Executive in respect of calendar year 2016, if any, shall be pro-rated based on the number of days in the 2016 Performance Period as compared to the total number of days in such calendar year.

(b) Subject to Compensation Committee and Board approval, Executive shall be eligible to receive, as promptly as possible following the Effective Date, an option to purchase one million and forty-three thousand, two hundred and twenty-two (1,043,022) shares of the Corporation’s Common Stock, subject to and in accordance with the terms and provisions of the Corporation’s 2012 Equity Incentive Plan, as amended (the “Plan”) and the applicable award agreement. Such stock options will vest quarterly over three years in equal installments.

(c) Subject to Compensation Committee and Board approval, for each fiscal year during the term of his employment following the first fiscal year, Executive may be eligible to receive, at such time as the Compensation Committee and Board may deem appropriate, options to purchase additional shares of the Corporation’s Common Stock in accordance with the terms and provisions of the Plan or any successor plan.

4.3. Expenses . The Corporation shall pay or reimburse Executive for all reasonable and necessary business, travel or other expenses incurred by him, upon proper documentation thereof, in accordance with the Corporation’s travel and expense policy, which may be incurred by him in connection with the rendition of the services contemplated hereunder.

4.4. Benefits . From and after the Effective Date and during the Term, Executive shall be entitled to participate in such pension, profit sharing, group insurance, term life, option plans, hospitalization, and group health benefit plans and all other benefits and plans as the Corporation provides to its senior executives, subject to the terms and conditions of such plans.

4.5. Vacations . Executive shall be entitled to four (4) weeks of paid vacation during each calendar year of the Term, during which period his Salary shall be paid in full. Executive shall take his vacation at such time or times as Executive and the Corporation shall determine is mutually convenient. It is expected that vacation time for each calendar year will be taken in such calendar year and that unused vacation time shall not rollover to subsequent calendar years.

4.6. Sick Time . Executive shall be entitled to sick time in accordance with the Corporation’s sick time policy.

Section 5. Termination.

5.1. Termination . This Agreement and Executive’s employment hereunder shall terminate immediately upon: (i) Executive’s death or Total Disability (as defined below); or (ii) termination of Executive’s employment by the Corporation For Cause (as defined below); or (iii) termination of Executive’s employment by the Corporation other than For Cause; or (iv) a Change in Control Termination (as defined below); or (v) termination of Executive’s employment by Executive without Good Reason (as defined below); or (vi) termination of Executive’s employment by Executive for Good Reason.

5.2. Termination Upon Death or Total Disability . In the event of a termination upon the death or Total Disability of Executive, the Corporation shall pay to Executive, or any person designated by Executive in writing or, if no such person is designated, to his estate, the Salary which has been earned but unpaid. As used herein, the term “Total Disability” shall mean that Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year.

5.3. Termination For Cause or without Good Reason . In the event Executive’s employment is terminated by the Corporation For Cause or by Executive without Good Reason, Executive shall be paid his Salary through the date of termination. As used herein, the term “For Cause” shall mean (i) Executive’s failure to perform Executive’s material duties hereunder (other than such failure resulting from incapacity due to physical or mental illness); (ii) Executive’s substantiated misappropriation of the Corporation’s assets or substantiated perpetration of fraud against or proven dishonesty in dealings with the Corporation; (iii) Executive’s plea of guilty or nolo contendere to, or conviction in a court of law of, any crime or offense which constitutes a felony, in each case whether or not involving the Corporation; (iv) Executive’s willful misconduct; (v) Executive’s habitual drunkenness or habitual use of illegal substances; (vi) Executive’s failure to cooperate with a governmental or regulatory investigation concerning the Corporation or Executive; (vii) Executive’s behavior which is materially detrimental to the Corporation’s reputation; (viii) Executive’s willful refusal to follow, or reckless disregard of, the policies and directives of the Corporation or the Board; or (ix) Executive’s material breach of this Agreement, which material breach, if curable, is not cured within fifteen (15) calendar days after notice thereof by the Corporation. Whether a termination is “For Cause,” as such term is defined in this Section 5.3, shall be determined by the Board in its sole discretion. For purposes of this Section 5.3, no act or failure to act by Executive shall be considered “willful” if such act is done by Executive in the good faith belief that such act is or was in the best interests of the Corporation or one or more of its businesses.

5.4. Termination for Good Reason . Executive may terminate this Agreement, upon notice to the Corporation, for Good Reason, which Good Reason is not remedied by the Corporation within thirty (30) calendar days after notice thereof by Executive. The term “Good Reason” shall include any of the following, (i) any assignment to Executive of duties inconsistent with Executive’s position of President and Chief Executive Officer or which constitutes a significant reduction in authority, responsibilities, or status; (ii) any demotion, including, but not limited to, reporting to someone other than the Board; (iii) any material reduction in Executive’s base salary, or other benefit plans available to executive officers of the Corporation, or the level, amount or value of any accrued benefit; or (iv) any attempted reduction of Executive’s bonus potential which is inconsistent with the provisions of this Agreement.

5.5. Termination by the Corporation other than For Cause or by Executive for Good Reason . If, other than as set forth in Section 10.1, Executive’s employment is terminated during the Term by the Corporation other than For Cause or by Executive as a result of Good Reason, then the Corporation shall pay to Executive after such termination, subject to his execution and non-revocation of the release described in Section 5.6, severance payments (“Severance”) equal to (i) twelve (12) months of Executive’s Salary for the year in which the termination for Good Reason occurs plus (ii) the amount of the actual bonus earned by Executive under Section 4.2(a) hereof for the year prior to the year of termination, pro-rated based on the number of days Executive was employed by the Corporation during the year of termination as compared to the total number of days in such year. The Severance shall be paid in a lump sum within thirty (30) days after the Release Effective Date (as defined below), less such deductions as shall be required to be withheld by applicable law and regulations. In addition, if Executive timely and properly elects continuation coverage under the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”), then, subject to his execution and non-revocation of the release described in Section 5.6, the Corporation shall reimburse Executive for the monthly COBRA premium paid by Executive for Executive and Executive’s eligible dependents. Executive shall be eligible to receive such reimbursement until the earliest of: (x) the twelve (12) month anniversary of the date of Executive’s termination of employment; (y) the date Executive is no longer eligible to receive COBRA continuation coverage; or (z) the date on which Executive either receives or becomes eligible to receive substantially similar coverage from another employer.

5.6. Release . Executive agrees that, as a condition to receiving the payments and benefits set forth in Section 5.5 or Section 10.1, as applicable, Executive will execute a release of claims substantially in the form of the release attached hereto as Exhibit A . Within five business days of the date of Executive’s termination of employment, the Corporation shall deliver to Executive the release for Executive to execute. Executive will forfeit all rights to the payments and benefits set forth in Section 5.5 or Section 10.1, as applicable, unless, within sixty (60) days of delivery of the release by the Corporation to Executive, Executive executes and delivers the release to the Corporation and such release has become irrevocable by virtue of the expiration of the revocation period without the release having been revoked (the first such date, the “Release Effective Date”). In the event that the Release Effective Date could occur in one of two taxable years of Executive, the Release Effective Date shall be deemed to occur on the earliest date in the later such taxable year as otherwise would apply hereunder. The Corporation shall have no obligation to provide the payments and benefits set forth in Section 5.5 or Section 10.1, as applicable, prior to the Release Effective Date.

Section 6. Confidential Information; Restrictive Covenants .

6.1. Disclosure . Executive hereby acknowledges that he will acquire confidential information concerning the Corporation, its business, products, product development, formulas, research and development, know-how, names and contact information of the Corporation’s customers, suppliers, contract manufacturers, and vendors, and the Corporation’s current and future business plans and that, among other things, his knowledge of the Corporation’s business will be enhanced through his employment by the Corporation. Executive acknowledges that such information is of great value to the Corporation, is the sole property of the Corporation, other than those customers, suppliers, contract manufacturers, and vendors introduced to the Corporation by Executive, and has been and will be acquired by him in confidence.

6.2. Confidentiality . In consideration of the obligations undertaken by the Corporation herein, Executive will not, at any time during or after the Term, directly or indirectly, use for Executive’s own benefit or any other party’s benefit, or reveal, divulge or make known to any person, any information which is treated as confidential by the Corporation and not otherwise in the public domain. Confidential information shall not include information which was previously known by Executive, information which was given to Executive by any third party under no obligation of confidentiality, or information which Executive is required to disclose as a result of a governmental investigation or by a court order. Executive agrees that all materials or copies thereof containing confidential information of the Corporation in Executive’s custody or possession will not, at any time, be removed from the Corporation’s premises without the prior written consent of the Board. The parties hereto acknowledge that pursuant to 18 USC § 1833(b), an individual may not be held liable under any criminal or civil federal or state trade secret law for disclosure of a trade secret: (i) made in confidence to a government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. The parties hereto further acknowledge that an individual suing an employer for retaliation based on the reporting of a suspected violation of law may disclose a trade secret to his or her attorney and use the trade secret information in the court proceeding, so long as any document containing the trade secret is filed under seal and the individual does not disclose the trade secret except pursuant to court order.

6.3. Restrictive Covenants . Executive recognizes that the services to be performed by him hereunder are special, unique and extraordinary. The parties confirm that it is reasonably necessary for the protection of the Corporation that Executive agrees, and, accordingly, Executive does hereby agree, that he will not, either on Executive’s own behalf or as an officer, director, stockholder, partner, principal, consultant, associate, employee, owner, agent, creditor, independent contractor, or co-venturer of any third party or in any other relationship or capacity, directly or indirectly, at any time during his employment and for the Restricted Period (as defined below) solicit, induce, persuade or encourage, or attempt to solicit, induce, persuade or encourage, any individual employed by the Corporation, with whom Executive has worked, to terminate such employee’s position with the Corporation, whether or not such employee is a full-time or temporary employee of the Corporation and whether or not such employment is pursuant to a written agreement, for a determined period, or at will. The provisions of this Section 6.3 shall only apply to those individuals employed by the Corporation at the time of solicitation or attempted solicitation.

6.4. Restricted Period . “Restricted Period” shall mean the term following Executive’s employment to last for as long as Executive receives Severance or his regular Salary and benefits from the Corporation.

6.5. Modification of Restrictions . If any of the restrictions contained in this Section 6 shall be deemed to be unenforceable by reason of the extent, duration or geographical scope thereof, or otherwise, then after such restrictions have been reduced so as to be enforceable, in its reduced form this Section shall then be enforceable in the manner contemplated hereby.

Section 7. Work for Hire .

7.1. Executive agrees to make full and prompt disclosure to the Corporation of all inventions, improvements, discoveries, methods, developments, formulas, computer software (and programs and code) and works of authorship, whether or not patentable or copyrightable, which were or are created, made, conceived or reduced to practice by Executive or under Executive’s direction or jointly with others during Executive’s employment by the Corporation, whether or not during normal working hours or on the premises of the Corporation (all of which are collectively referred to in this Agreement as “Developments”).

7.2. Executive agrees to assign and, by executing this Agreement, Executive does hereby assign, to the Corporation (or to any person or entity designated by the Corporation) all of Executive’s rights, titles and interests, if any, in and to all Developments and all related patents, patent applications, copyrights and copyright applications. However, this Section 7.2 shall not apply to Developments (i) which do not relate to the present or planned business or research and development of the Corporation and (ii) which are made and conceived by Executive: (A) at a time other than during normal working hours, (B) not on the Corporation’s premises and (C) not using the Corporation’s tools, devices, equipment or proprietary information. Executive understands that to the extent that the terms of this Agreement shall be construed in accordance with the laws of any state which precludes a requirement in an employment agreement to assign certain classes of inventions made by an employee, this Section 7 shall be interpreted not to apply to any invention which a court rules and/or the Corporation agrees falls within such class or classes. Executive also agrees to waive all claims to moral and/or equitable rights in any Developments.

7.3. Executive agrees to cooperate fully with the Corporation, both during and after Executive’s employment with the Corporation, with respect to the procurement, maintenance and enforcement of copyrights, patents and other intellectual property rights (both in the United States and foreign countries) relating to Developments. Executive agrees that he will sign all papers, including, without limitation, copyright applications, patent applications, declarations, oaths, formal assignments, assignments of priority rights, and powers of attorney, which the Corporation may deem necessary or desirable in order to protect its rights and interests in any Development. Executive further agrees that if the Corporation is unable, after reasonable effort, to secure Executive’s signature on any such papers, any executive officer of the Corporation shall be entitled to execute any such papers as Executive’s agent and attorney‑in‑fact, and Executive hereby irrevocably designates and appoints each executive officer of the Corporation as Executive’s agent and attorney‑in‑fact to execute any such papers on Executive’s behalf, and to take any and all actions as the Corporation may deem necessary or desirable, in order to protect its rights and interests in any Development, under the conditions described in this sentence.

Section 8. Conflicts of Interest; Insider Trading .

8.1. Conflicts of Interest . Further, in order to avoid actual or apparent conflicts of interest, except with the Corporation’s consent, Executive shall not have any direct or indirect ownership or financial interest in any company, person or entity which is: (i) a service provider to, or vendor of the Corporation; (ii) a customer of the Corporation; or (iii) a competitor of the Corporation. Executive shall not be deemed to have any direct or indirect ownership or financial interest for any such interest that does not exceed five (5%) percent of the issued and outstanding voting securities of any class of any corporation whose voting capital stock is traded on a national securities exchange or in the over-the-counter market.

8.2. General Requirements . Executive shall observe such lawful policies of the Corporation as may from time to time be in effect.

8.3. Insider Trading . Considering that the Corporation is a publicly-traded corporation, Executive hereby agrees that Executive shall comply with the Corporation’s Insider Trading Policy and any and all federal and state securities laws, including but not limited to those that relate to non‑disclosure of information, insider trading and individual reporting requirements and shall specifically abstain from discussing the non-public aspects of the Corporation’s business affairs with any individual or group of individuals (e.g., Internet chat rooms) who does not have a business need to know such information for the benefit of the Corporation. Executive hereby agrees to immediately notify the Corporation’s Compliance Officer or Chief Financial Officer in accordance with the Corporation’s Insider Trading Policy prior to Executive’s acquisition or disposition of Corporation’s securities.

Section 9. Indemnification .

9.1. Indemnification . The Corporation hereby agrees to indemnify and hold harmless Executive to the fullest extent permitted by the Corporatio n’s Certificate of Incorporation, By-Laws, the Delaware General Corporation Law or any other applicable law, as any or all may be amended from time to time. Such reimbursements shall include but not be limited to Executive’s reasonable and necessary out of pocket expenses including attorneys and expert fees, losses, judgments, claims, and settlement payments and any other such costs and expenses.

9.2. Undertaking . To the extent that the Corporation advances payment for any fees or expenses to Executive pursuant to this Section 9, such advance shall be accompanied by a written undertaking by Executive to repay such amounts if it shall be ultimately determined by a court of competent jurisdiction in a final disposition, that Executive (i) is not entitled to be indemnified by the Corporation or (ii) that the amount advanced exceeded the indemnification to which he is entitled, in which case the amount of such excess shall be repaid to the Corporation.

9.3. Notice . As a condition precedent to his right to be indemnified hereunder, Executive shall give the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement.

9.4. Cooperation . Executive shall fully cooperate with the Corporation in connection with any matter, which results in the assertion of a claim by Executive for indemnification hereunder. The Corporation shall be entitled at its own expense to participate in the defense of any proceeding, claim or action, or, if it shall elect, to assume such defense, in which event such defense shall be conducted by counsel chosen by the Corporation, subject to the consent of Executive, which consent shall not be unreasonably withheld or delayed.

9.5. Exceptions . The Corporation shall not be liable under this Agreement to make any payment in connection with any claim:

(a) For which payment is actually made to Executive under valid and collectable insurance policies, the premiums of which are paid by the Corporation or any of its affiliates, except in respect of any deductible and excess beyond the amount of payment under such insurance;

(b) For which Executive is indemnified by the Corporation otherwise than pursuant to this Agreement, provided such amount has previously been paid to Executive;

(d) For which Executive fails to cooperate in a criminal or civil investigation involving the claim; and

(e) By Executive who acts as a plaintiff suing the Corporation, its affiliates or directors, officers or shareholders of the Corporation or its affiliates, except with regard to Executive’s successful enforcement of Section 9.1 hereof .

9.6. Survival . The obligations of the Corporation hereunder will survive (i) any actual or purported termination of this Agreement by the Corporation or its successors or assigns, whether by operation of law or otherwise, (ii) any change in the Corporation’s Certificates of Incorporation or By-laws, and (iii) termination of Executive’s services to the Corporation or its affiliates (whether such services were terminated by the Corporation, such affiliate or Executive), if such claim arises as a result of an occurrence prior to the termination of this Agreement, whether or not a claim is made or an action or proceeding is threatened or commenced before or after the actual or purported termination of this Agreement, change in the Corporation’s Certificate of Incorporation or By-laws, or termination of Executive’s services.

Section 10. Change in Control .

10.1. Payment on Change in Control Termination . The Corporation will provide or cause to be provided to Executive the rights and benefits described below if, during the Term, within the three (3) month period prior to and the twelve (12) month period following a Change in Control, (x) Executive terminates his employment for Good Reason, or (y) the Corporation or its successor terminates Executive’s employment (“Change in Control Termination”); provided however, that a Change in Control Termination shall not include a termination For Cause or a termination as a result of Executive’s death or Total Disability. In the event of a Change in Control Termination during the Term, the Corporation shall pay or cause its successor to pay to Executive, in cash, in a lump sum within thirty (30) days after the Release Effective Date, less such deductions as shall be required to be withheld by applicable law and regulations, and subject to his execution and non-revocation of the release described in Section 5.6, an amount equal to two (2) times Executive’s base compensation which equals the sum of the following: (i) Executive’s annual Salary on the day preceding the Change in Control Termination, plus (ii) an amount equal to the aggregate bonus received by Executive for the year immediately preceding the Change in Control Termination or if no Bonus had been received, then at minimum fifty percent (50%) of the Target Bonus. In addition, if Executive timely and properly elects continuation coverage under COBRA, then, subject to his execution and non-revocation of the release described in Section 5.6, the Corporation shall reimburse Executive for the monthly COBRA premium paid by Executive for Executive and Executive’s eligible dependents. Executive shall be eligible to receive such reimbursement until the earliest of: (x) the eighteen (18) month anniversary of the date of Executive’s termination of employment; (y) the date Executive is no longer eligible to receive COBRA continuation coverage; or (z) the date on which Executive either receives or becomes eligible to receive substantially similar coverage from another employer. In addition, in the event of a Change in Control Termination, subject to Executive’s execution and non-revocation of the release described in Section 5.6, any and all outstanding stock options held by Executive shall become fully vested and exercisable. Executive shall have six (6) months to exercise any such stock options following his termination of employment, provided that in no event may Executive exercise a stock option following the original expiration date of such stock option as set forth in the applicable award agreement.

10.2. Change in Control Defined . A “Change in Control” shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events;

(a) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Corporation representing more than fifty percent (50%) of the total voting power represented by the Corporation’s then-outstanding voting securities;

(b) The consummation of the sale or disposition by the Corporation of all or substantially all of the Corporation’s assets;

(c) The consummation of a merger or consolidation of the Corporation with or into any other entity, other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) more than fifty percent (50%) of the total voting power represented by the voting securities of the Corporation or such surviving entity or its parent outstanding immediately after such merger or consolidation; or

(d) Individuals who are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of the Board over a period of 12 months; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board.

A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Corporation’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Corporation’s securities immediately before such transaction.

Section 11. Miscellaneous .

11.1. Section 409A . The parties intend for the payments and benefits under this Agreement to be exempt from Section 409A of the Internal Revenue Code (“Section 409A”) or, if not so exempt, to be paid or provided in a manner which complies with the requirements of such section, and intend that this Agreement shall be construed and administered in accordance with such intention. Any payments that qualify for the “short-term deferral” exception or another exception under Section 409A shall be paid under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under Section 409A, each payment of compensation under this Agreement shall be treated as a separate payment of compensation. All in-kind benefits, reimbursements, and tax-gross-ups (if any) to be provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A of the Code, including, where applicable, the requirements that (x) the amount of expenses eligible for reimbursement, or in kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in kind benefits to be provided, in any other calendar year, (y) the reimbursement of an eligible expense will be made no later than the last day of the calendar year following the year in which the expense is incurred, and (z) the right to reimbursement or in kind benefits is not subject to liquidation or exchange for another benefit. Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, (i) no amounts payable under this Agreement to Executive on termination of employment shall be paid until Executive would be considered to have incurred a separation from service from the Corporation within the meaning of Section 409A and (ii) amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the Applicable Period (as defined below) shall instead be paid on the first business day after the expiration of the Applicable Period, with interest from the date such amounts would otherwise have been paid at the short-term applicable federal rate, compounded semi-annually, as determined under Section 1274 of the Internal Revenue Code of 1986, as amended, for the month in which payment would have been made but for the delay in payment required to avoid the imposition of an additional rate of tax on Executive under Section 409A. The “Applicable Period” shall be the period commencing on Executive’s separation from service and ending on the date that is six (6) months following Executive’s separation from service.

11.2. Survival . The provisions of Sections 5, 6.1, 6.2, 6.4, 6.5, 7, 8, 9, 10 and 11 shall indefinitely survive Executive’s employment with the Corporation. The provisions of Section 6.3 shall survive for the Restricted Period, as defined therein.

11.3. Injunctive Relief . Executive agrees that any breach or threatened breach by him of Sections 6, 7 or 8 of this Agreement shall entitle the Corporation, in addition to all other legal remedies available to it, to apply to any court of competent jurisdiction to enjoin such breach or threatened breach without proving actual damage or posting a bond or other security. The parties understand and intend that each restriction agreed to by Executive herein shall be construed as separable and divisible from every other restriction, that the unenforceability of any restriction shall not limit the enforceability, in whole or in part, of any other restriction, and that one or more or all of such restrictions may be enforced in whole or in part as the circumstances warrant. In the event that any restriction in this Agreement is more restrictive than permitted by law in the jurisdiction in which the Corporation seeks enforcement thereof, such restriction shall be limited to the extent permitted by law.

11.4. Entire Agreement . This Agreement constitutes and embodies the entire and complete understanding and agreement of the parties with respect to Executive’s employment by the Corporation, supersedes all prior understandings and agreements, if any, whether oral or written, between Executive and the Corporation, including, without limitation, the Prior Agreement, and shall not be amended, modified or changed except by an instrument in writing executed by the party to be charged. The invalidity or partial invalidity of one or more provisions of this Agreement shall not invalidate any other provision of this Agreement. No waiver by either party of any provision or condition to be performed shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or any prior or subsequent time.

11.5. Assignment; Binding Effect . Executive may not assign or delegate any of his or duties under this Agreement. This Agreement shall inure to the benefit of, be binding upon and enforceable against, the parties hereto and their respective successors and permitted assigns.

11.6. Captions . The captions contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.

11.7. Notices . All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when personally delivered or sent by fax or certified, mail, postage prepaid, to the party at the address set forth above or to such other address as either party may hereafter give notice of in accordance with the provisions hereof.

11.8. Governing Law . This Agreement shall be governed by and interpreted under the laws of the State of California applicable to contracts made and to be performed therein without giving effect to the principles of conflict of laws thereof. Except in respect of any action commenced by a third party in another jurisdiction, the parties hereto agree that any legal suit, action, or proceeding against them arising out of or relating to this Agreement may be brought in the United States Federal Courts in the State of California or the state courts, in the State of California. By its execution hereof, the parties hereby irrevocably waive any objection and any right of immunity on the ground of venue, the convenience of the forum or the jurisdiction of such courts or from the execution of judgments resulting therefrom. The parties hereby irrevocably accept and submit to the jurisdiction of the aforesaid courts in any such suit, action or proceeding.

11.9. Waiver of Jury Trial . THE PARTIES HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. THE PARTIES AGREE THAT ANY OF THEM MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO WAIVE TRIAL BY JURY AND THAT ANY ACTION OR PROCEEDING WHATSOEVER BETWEEN THEM RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.

11.10. Counterparts . This Agreement may be executed and delivered in counterparts, including by facsimile transmission or portable document format (“.pdf”), each of which shall be deemed 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 the date set forth above.

	KalaBios Pharmaceuticals, Inc.


	By:	/s/ Timothy Morris
		Timothy Morris, Chair of Compensation Committee
		Date:



	Executive


	By:	/s/ Cameron Durrant
		Dr. Cameron Durrant
		Date: September 13, 2016

EXHIBIT A

General Release of Claims

You, for yourself, your spouse and your agents, successors, heirs, executors, administrators and assigns, hereby irrevocably and unconditionally forever release and discharge KaloBios Pharmaceuticals, Inc. (the “Corporation”), its parents, divisions, subsidiaries and affiliates and its and their current and former owners, directors, officers, stockholders, insurers, benefit plans, representatives, agents and employees, and each of their predecessors, successors, and assigns (collectively, the “Releasees”), from any and all actual or potential claims or liabilities of any kind or nature, including, but not limited to, any claims arising out of or related to your employment and separation from employment with the Corporation and any services that you provided to the Corporation; any claims for salary, commissions, bonuses, other severance pay, vacation pay, allowances or other compensation, or for any benefits under the Employee Retirement Income Security Act of 1974 (“ERISA”) (except for vested ERISA benefits); any claims for discrimination, harassment or retaliation of any kind or based upon any legally protected classification or activity; any claims under Title VII of the Civil Rights Acts of 1964, the Civil Rights Act of 1866 and 1964, as amended, 42 U.S.C. § 1981, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Americans with Disabilities Act, 42 U.S.C. §1981, 42 U.S.C. § 1983, the Family Medical Leave Act and any similar state law, the Fair Credit Reporting Act and any similar state law, the Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. , the Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101, et seq. , the Equal Pay Act and any similar state law, including the California Worker Adjustment and Retraining Notification Act, Cal. Labor Code § 1400, et seq. , the California Fair Employment and Housing Act, Cal. Gov’t Code § 12940, et seq. , California Government Code Section 12900 et seq. (which prohibits discrimination based on protected characteristics including race, color, religion, sex, gender, sexual orientation, marital status, national origin, language restrictions, ancestry, physical or mental disability, medical condition, age, and denial of leave), California Civil Code Section 51 et seq. (which prohibits discrimination based on age, sex, race, color, religion, ancestry, national origin, disability, medical condition, marital status, or sexual orientation), the California Family Rights Act of 1993, the California Equal Pay Law, Cal. Lab. Code § 1197.5, et seq . or any California wage payment law, any other section of the California Labor Code, or any section of the applicable Order of the California Industrial Welfare Commission, as well as any amendments to any such laws; any claims for any violation of any federal or state constitutions or executive orders; any claims for wrongful or constructive discharge, violation of public policy, breach of contract or promise (oral, written, express or implied), personal injury not covered by workers’ compensation benefits, misrepresentation, negligence, fraud, estoppel, defamation, infliction of emotional distress, contribution and any claims under any other federal, state or local law, including those not specifically listed in this Release, that you, your heirs, executors, administrators, successors, and assigns now have, ever had or may hereafter have, whether known or unknown, suspected or unsuspected, up to and including the date of your execution of this Release.

For the purpose of implementing a full and complete release and discharge of the Releasees as set forth above, you acknowledge that this Release is intended to include in its effect, without limitation, all claims known or unknown that you have or may have against the Releasees which arise out of or relate to your employment, including but not limited to compensation, performance or termination of employment with the Corporation, except for, and notwithstanding anything in this Release to the contrary, claims which cannot be released solely by private agreement. This Release also excludes any claims relating to any right you may have to payments pursuant to Section 5.5 or Section 10.1, as applicable of the Employment Agreement, entered into as of ___________________, 2016, by and between the Corporation and you, any claim for workers’ compensation benefits and any rights you may have to indemnification or directors’ and officers’ liability insurance under the Corporation’s bylaws or certificate of incorporation, any indemnification agreement to which you are a party or beneficiary or applicable law, as a result of having served as an officer, director or employee of the Corporation or any of its affiliates. You further acknowledge and agree that you have received all leave, compensation and reinstatement benefits to which you were entitled through the date of your execution of this Release, and that you were not subjected to any improper treatment, conduct or actions as a result of a request for leave, compensation or reinstatement.

You further acknowledge that you have read Section 1542 of the Civil Code of the State of California, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

You understand that Section 1542 gives you the right not to release existing claims of which you are not now aware, unless you voluntarily choose to waive this right. Even though you are aware of this right, you nevertheless hereby voluntarily waive the right described in Section 1542 and any other statutes of similar effect, and elect to assume all risks for claims that now exist in your favor , known or unknown , arising from the subject matter of the Release. You acknowledge that different or additional facts may be discovered in addition to what you now know or believe to be true with respect to the matters released in this Release, and you agree that this Release will be and remain in effect in all respects as a complete and final release of the matters released, notwithstanding any such different or additional facts.

You affirm, by signing this Release, that you have not suffered any unreported injury or illness arising from your employment, and that you have not filed, with any federal, state, or local court or agency, any actions or charges against the Releasees relating to or arising out of your employment with or separation from the Corporation. You further agree that while this Release does not preclude you from filing a charge with the National Labor Relations Board (“NLRB”), the Equal Employment Opportunity Commission (“EEOC”) or a similar state or local agency, or from participating in any investigation or proceeding with them, you do waive your right to personally recover monies or reinstatement as a result of any complaint or charge filed against the Corporation with the NLRB, EEOC or any federal, state or local court or agency, except as to any action to enforce or challenge this Release, to recover any vested benefits under ERISA, or to recover workers’ compensation benefits.

You acknowledge:

(a)

That you were provided [ twenty-one (21) / forty-five (45) ] full days during which to consider whether to sign this Release. If you have signed this Agreement prior to the expiration of the [ 21-day / 45-day ] period, you have voluntarily elected to forego the remainder of that period.

(b)

That you have carefully read and fully understand all of the terms of this Release [ , including its Attachment A ] .

(c)

That you understand that by signing this Release, you are waiving your rights under the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act, 29 U.S.C. § 621, et seq., and that you are not waiving any rights arising after the date that this Release is signed.

(d)

That you have been given an opportunity to consult with anyone you choose, including an attorney, about this Release.

(e)

That you understand fully the terms and effect of this Release and know of no claim that has not been released by this Release. And, you further acknowledge that you are not aware of, or that you have fully disclosed to the Corporation, any matters for which you are responsible or which has come to your attention as an employee of the Corporation that might give rise to, evidence, or support any claim of illegal conduct, regulatory violation, unlawful discrimination, or other cause of action against the Corporation.

(f)

That these terms are final and binding on you.

(g)

That you have signed this Release voluntarily, and not in reliance on any representations or statements made to you by any employee or officer of the Corporation or any of its subsidiaries.

(h)

That you have seven (7) days following your execution of this Release to revoke it in writing, and that this Release is not effective or enforceable until after this seven (7) day period has expired without revocation. If you wish to revoke this Release after signing it, you must provide written notice of your decision to revoke this Release to the Corporation, to the attention of the Chair of the Compensation Committee pursuant to customary communications between you and such Chair, by no later than 11:59 p.m. on the seventh calendar day after the date on which you have signed this Release.

PLEASE READ CAREFULLY. THIS RELEASE INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

ACKNOWLEDGED AND AGREED


Dr. Cameron Durrant	Date


Delaware		77-0557236
(State or other jurisdiction of		(IRS Employer
incorporation)		Identification No.)


Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☒

	September 30,			December 31,
	2016			2015
Assets
Current assets:
Cash and cash equivalents	$	2,905		$	8,431
Prepaid expenses and other current assets		1,806			1,963
Total current assets		4,711			10,394

Property and equipment, net		121			288
Restricted cash		101			193
Other assets		-			271
Total assets	$	4,933		$	11,146

Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	3,481		$	-
Accrued expenses		395			-
Total current liabilities		3,876			-
Liabilities subject to compromise		-			5,414
Notes payable to vendors		1,242			-
Total liabilities		5,118			5,414

Stockholders’ equity (deficit):
Common stock, $0.001 par value: 85,000,000 shares authorized at September 30, 2016 and December 31, 2015; 14,903,022 and 4,450,994 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		15			4
Additional paid-in capital		235,352			219,319
Accumulated deficit		(235,552	)		(213,591	)
Total stockholders’ equity (deficit)		(185	)		5,732
Total liabilities and stockholders’ equity (deficit)	$	4,933		$	11,146

					Additional						Total
	Common Stock				Paid-In			Accumulated			Stockholders’
	Shares		Amount		Capital			Deficit			Equity (Deficit)
Balances at December 31, 2015		4,450,994	$	4	$	219,319		$	(213,591	)	$	5,732
Issuance of common stock to officer and directors		323,155		1		1,451			-			1,452
Issuance of common stock, net of issuance costs		7,147,035		7		10,125			-			10,132
Issuance of common stock in settlement of litigation		631,358		1		(1	)		-			-
Issuance of warrants in connection with acquisition of licenses		-		-		272			-			272
Conversion of notes payable and related accrued interest and fees to common stock		2,350,480		2		3,385			-			3,387
Beneficial conversion feature		-		-		484			-			484
Stock-based compensation expense		-		-		317			-			317
Comprehensive loss		-		-		-			(21,961	)		(21,961	)
Balances at September 30, 2016		14,903,022	$	15	$	235,352		$	(235,552	)	$	(185	)

	Nine Months Ended September 30,
	2016			2015
Operating activities:
Net loss	$	(21,961	)	$	(22,262	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		81			144
Loss on disposal of property and equipment		-			39
Gain on lease termination		(227	)		-
Noncash interest expense		46			164
Financing derivative		-			252
Reorganization items related to debtor-in-possession financing		1,627			-
Amortization of premium on marketable securities		-			130
Stock based compensation expense		317			913
Modification of stock options related to executive retirement		-			389
Modification of stock options related to restructuring activities		-			479
Issuance of warrants in connection with acquisition of licenses		272			-
Issuance of common stock to officer and directors		1,452			-
Changes in operating assets and liabilities:
Prepaid expenses and other assets		428			940
Accounts payable		3,537			(804	)
Accrued expenses		(367	)		(1,444	)
Deferred rent		-			(9	)
Liabilities subject to compromise		(3,153	)		-
Net cash used in operating activities		(17,948	)		(21,069	)

Investing activities:
Purchase of marketable securities		-			(3,703	)
Proceeds from maturities of marketable securities		-			33,371
Purchases of property and equipment		-			(136	)
Proceeds from disposal of property and equipment		-			1
Changes in restricted cash		92			7
Net cash provided by investing activities		92			29,540

Financing activities:
Increase in restricted cash for notes payable		-			(8,291	)
Net proceeds from issuance of common stock		10,132			-
Net proceeds from convertible notes payable		2,198			-
Principal payments under notes payable		-			(3,452	)
Settlement of fractional shares upon reverse split		-			(1	)
Net cash provided by (used in) financing activities		12,330			(11,744	)

Net decrease in cash and cash equivalents		(5,526	)		(3,273	)
Cash and cash equivalents, beginning of period		8,431			10,923
Cash and cash equivalents, end of period	$	2,905		$	7,650

Supplemental cash flow disclosure:
Cash paid for interest	$	-		$	564
Supplemental disclosure of non-cash investing and financing activities:
Principal payments under notes payable from restricted cash	$	-		$	432
Conversion of notes payable and related accrued interest and fees to common stock	$	3,387		$	-
Issuance of warrants in connection with acquisition of licenses	$	272		$	-
Issuance of common stock to officer and directors	$	1,452		$	-
Issuance of notes payable to vendors	$	1,212		$	-

			Page

PART I. FINANCIAL INFORMATION			3

	Item 1.	Financial Statements (unaudited)	3

		Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3

		Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015	4

		Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2016	5

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	6

		Notes to Condensed Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION			32

	Item 6.	Exhibits	32

SIGNATURES			33

	Nine months ended
(in thousands)	September 30, 2016
Upfront fee	$	191
Commitment fee		150
Beneficial conversion feature		484
Legal fees		802
Total credit agreement expense	$	1,627

	As of September 30,
	2016		2015
Options to purchase common stock		2,036,117		527,120
Restricted stock units		3,750		3,750
ESPP contributions to purchase common stock		—		375
Warrants to purchase common stock		331,193		11,067
		2,371,060		542,312

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses		Fair Value
Money market funds	$	101	$	—	$	—	$	101
Total investments	$	101	$	—	$	—	$	101

Reported as:
Cash and cash equivalents							$	—
Restricted cash, long-term								101
Total investments							$	101

	Fair Value Measurements as of
	September 30, 2016
(in thousands)	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	101	$	—	$	—	$	101
Total assets measured at fair value	$	101	$	—	$	—	$	101

	Fair Value Measurements as of
	December 31, 2015
(in thousands)	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	196	$	—	$	—	$	196
Total assets measured at fair value	$	196	$	—	$	—	$	196

	Fair Value Measurements of Level 3 Liabilities
	(in thousands)
Balance as of December 31, 2014	$	89
Loss on re-measurement of the financing derivative liability		3
Balance as of March 31, 2015		92
Loss on re-measurement of the financing derivative liability		135
Balance as of June 30, 2015		227
Loss on re-measurement of the financing derivative liability		114
Balance as of September 30, 2015		341
Loan payoff		(341	)
Balance as of December 31, 2015, March 31, June 30 and September 30, 2016	$	—

				Weighted
				Average
				Exercise
	Options			Price
Outstanding at December 31, 2015		465,401		$	19.29
Granted		—			—
Exercised		—			—
Cancelled (forfeited)		(3,416	)		5.86
Cancelled (expired)		(63,997	)		33.51
Outstanding at March 31, 2016		397,988		$	17.12
Granted		—			—
Exercised		—			—
Cancelled (forfeited)		—			—
Cancelled (expired)		(9,551	)		12.39
Outstanding at June 30, 2016		388,437		$	17.23
Granted		1,678,022			3.38
Exercised		—			—
Cancelled (forfeited)		—			—
Cancelled (expired)		(30,342	)		16.83
Outstanding at September 30, 2016		2,036,117		$	5.82

	Three Months Ended September 30, 2016
Exercise price	$	3.38
Market value	$	3.38
Risk-free rate		1.41%
Expected term	6.0 years
Expected volatility		84.8%
Dividend yield		-

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(in thousands)	2016		2015		2016		2015
General and administrative	$	273	$	137	$	275	$	466
Research and development		40		134		42		447
	$	313	$	271	$	317	$	913

(in thousands)	Contract termination costs - R&D			Salaries and benefits - R&D			Salaries and benefits - G&A			Total
Balance as of December 31, 2014	$	1,185		$	—		$	—		$	1,185
Accrued		—			522			82			604
Paid		(479	)		(257	)		—			(736	)
Balance as of March 31, 2015		706			265			82			1,053
Accrued		—			57			122			179
Paid		(135	)		(142	)		—			(277	)
Balance as of June 30, 2015		571			180			204			955
Accrued		—			—			—			—
Adjustments		(78	)		—			—			(78	)
Paid		(493	)		(148	)		(136	)		(777	)
Balance as of September 30, 2015		—			32			68			100
Accrued		—			588			807			1,395
Paid		—			(620	)		(864	)		(1,484	)
Balance as of December 31,2015		—			—			11			11
Accrued		—			—			—			—
Paid		—			—			—			—
Balance as of March 31, June 30 and September 30, 2016	$	—		$	—		$	11		$	11

	/s/ Cameron Durrant
	Cameron Durrant, Chief Executive Officer (Principal Executive Officer)

	/s/ David L. Tousley
	David L. Tousley Interim Chief Financial Officer (Principal Financial and Accounting Officer)

	By:	/s/ Cameron Durrant
	Name:	Cameron Durrant
	Title:	Chief Executive Officer
		(Principal Executive Officer)
	Date:	November 10, 2016