UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2015

OR

¨

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

For the transition period from                       to                     

Commission file number 001-36150

 

SORRENTO THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

33-0344842

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

9380 Judicial Drive,

San Diego, California 92121

(Address of Principal Executive Offices)

(858) 210-3700

(Registrant’s Telephone Number, Including Area Code)

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of shares of the issuer’s common stock, par value $0.0001 per share, outstanding as of August 3, 2015 was 37,761,585.

 

 

 

 

 


Sorrento Therapeutics, Inc.

Index to Consolidated Financial Statements

 

Part I

 

Financial Information

 

1

Item 1.

 

Consolidated Financial Statements

  

1

 

 

Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014 (Audited)

  

1

 

 

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014

  

2

 

 

Unaudited Consolidated Statements of Statements of Stockholders’ Equity for the Six Months Ended June 30, 2015

  

3

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

  

4

 

 

Notes to Unaudited Consolidated Financial Statements

  

5

Item 2.

 

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

  

17

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

24

Item 4.

 

Controls and Procedures

  

24

 

 

 

Part II

 

Other Information

 

25

Item 1.

 

Legal Proceedings

  

25

Item 1A.

 

Risk Factors

  

25

Item 6.

 

Exhibits

  

49

Signatures

  

50

 

 

 


P ART I. FINANCIAL INFORMATION

 

I tem 1.

Consolidated Financial Statements.

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,699

 

 

$

71,902

 

Grants and accounts receivables, net

 

 

898

 

 

 

732

 

Prepaid expenses and other, net

 

 

1,210

 

 

 

1,281

 

Total current assets

 

 

53,807

 

 

 

73,915

 

Property and equipment, net

 

 

2,824

 

 

 

2,277

 

Intangibles, net

 

 

4,135

 

 

 

4,357

 

Goodwill

 

 

12,470

 

 

 

12,470

 

Investment in common stock

 

 

21,500

 

 

 

10,000

 

Long-term assets held for sale

 

 

37,478

 

 

 

38,190

 

Other, net

 

 

602

 

 

 

332

 

Total assets

 

$

132,816

 

 

$

141,541

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,474

 

 

$

1,656

 

Accrued payroll and related

 

 

1,418

 

 

 

1,825

 

Current portion of deferred compensation

 

 

947

 

 

 

1,893

 

Accrued expenses

 

 

909

 

 

 

867

 

Current portion of debt

 

 

4,613

 

 

 

3,316

 

Total current liabilities

 

 

10,361

 

 

 

9,557

 

Long-term debt

 

 

6,868

 

 

 

8,830

 

Deferred compensation

 

 

851

 

 

 

796

 

Deferred tax liabilities

 

 

1,633

 

 

 

1,709

 

Long-term liabilities held for sale

 

 

10,714

 

 

 

10,837

 

Deferred revenue, rent and other

 

 

11,135

 

 

 

1,099

 

Total liabilities

 

 

41,562

 

 

 

32,828

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 100,000,000 shares authorized and no shares

   issued or outstanding

 

 

 

 

 

 

Common stock, $0.0001 par value; 750,000,000 shares authorized and

   36,392,098 and 36,184,912 shares issued and outstanding at

   June 30, 2015 and December 31, 2014, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

180,164

 

 

 

176,227

 

Accumulated deficit

 

 

(88,914

)

 

 

(67,518

)

Total stockholders' equity

 

 

91,254

 

 

 

108,713

 

Total liabilities and stockholders' equity

 

$

132,816

 

 

$

141,541

 

 

See accompanying notes

 

 

 

1


SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant

 

$

459

 

 

$

84

 

 

$

697

 

 

$

182

 

Sales and services

 

 

714

 

 

 

691

 

 

 

1,453

 

 

 

1,569

 

Total revenues

 

 

1,173

 

 

 

775

 

 

 

2,150

 

 

 

1,751

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of revenues

 

 

314

 

 

 

510

 

 

 

823

 

 

 

1,073

 

Research and development

 

 

7,971

 

 

 

5,309

 

 

 

15,811

 

 

 

11,416

 

Acquired in-process research and development

 

 

 

 

 

 

 

 

 

 

 

209

 

General and administrative

 

 

3,072

 

 

 

2,361

 

 

 

5,291

 

 

 

5,746

 

Intangible amortization

 

 

349

 

 

 

586

 

 

 

935

 

 

 

1,172

 

Total costs and operating expenses

 

 

11,706

 

 

 

8,766

 

 

 

22,860

 

 

 

19,616

 

Loss from operations

 

 

(10,533

)

 

 

(7,991

)

 

 

(20,710

)

 

 

(17,865

)

Interest expense

 

 

(442

)

 

 

(468

)

 

 

(881

)

 

 

(691

)

Interest income

 

 

 

 

 

5

 

 

 

 

 

 

9

 

Loss from operations before income tax

 

 

(10,975

)

 

 

(8,454

)

 

 

(21,591

)

 

 

(18,547

)

Income tax benefit

 

 

(17

)

 

 

 

 

 

(195

)

 

 

 

Net loss

 

$

(10,958

)

 

$

(8,454

)

 

$

(21,396

)

 

$

(18,547

)

Net loss per share - basic and diluted

 

$

(0.30

)

 

$

(0.33

)

 

$

(0.59

)

 

$

(0.77

)

Weighted average number of shares during the

   period - basic and diluted

 

 

36,315

 

 

 

25,341

 

 

 

36,261

 

 

 

24,202

 

 

See accompanying notes

 

 

 

2


SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2015

(Unaudited)

(In thousands, except for share amounts)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance, December 31, 2014

 

 

36,184,912

 

 

 

4

 

 

 

176,227

 

 

 

(67,518

)

 

 

108,713

 

Issuance of common stock with exercise of warrants

 

 

3,563

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock with exercise of options

 

 

203,623

 

 

 

 

 

 

1,107

 

 

 

 

 

 

1,107

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,830

 

 

 

 

 

 

2,830

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(21,396

)

 

 

(21,396

)

Balance, June 30, 2015

 

 

36,392,098

 

 

$

4

 

 

$

180,164

 

 

$

(88,914

)

 

$

91,254

 

 

See accompanying notes

 

 

 

3


SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

 

2014

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(21,396

)

 

$

(18,547

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,427

 

 

 

1,567

 

Non-cash interest expense

 

 

202

 

 

 

208

 

Stock-based compensation

 

 

2,830

 

 

 

2,533

 

Acquired in-process research and development

 

 

 

 

 

209

 

Provision for doubtful accounts

 

 

4

 

 

 

9

 

Deferred tax provision

 

 

(199

)

 

 

 

Changes in operating assets and liabilities; net of acquisitions:

 

 

 

 

 

 

 

 

Grants and other receivables

 

 

(170

)

 

 

(191

)

Prepaid expenses and other

 

 

(242

)

 

 

(369

)

Accounts payable

 

 

321

 

 

 

(955

)

Deferred revenue, accrued expenses and other liabilities

 

 

9,671

 

 

 

24

 

Net cash used for operating activities

 

 

(7,552

)

 

 

(15,512

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(500

)

 

 

(198

)

Investment in common stock

 

 

(11,500

)

 

 

 

Net cash used for investing activities

 

 

(12,000

)

 

 

(198

)

Financing activities

 

 

 

 

 

 

 

 

Net borrowings under loan and security agreement

 

 

 

 

 

7,500

 

Proceeds from issuance of common stock, net of issuance costs and repurchases

 

 

 

 

 

26,698

 

Net principal payments under loan and security agreement

 

 

(758

)

 

 

 

Net payments of deferred compensation

 

 

(1,000

)

 

 

 

Proceeds from exercise of stock options

 

 

1,107

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(651

)

 

 

34,198

 

Net change in cash and cash equivalents

 

 

(20,203

)

 

 

18,488

 

Cash and cash equivalents at beginning of period

 

 

71,902

 

 

 

31,667

 

Cash and cash equivalents at end of period

 

$

51,699

 

 

$

50,155

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

 

 

$

6

 

Interest paid

 

$

 

 

$

387

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment costs incurred but not paid

 

$

497

 

 

$

 

 

See accompanying notes

 

 

 

4


SORRENTO THERAPEUTICS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

(In thousands, except for share amounts)

 

1. Nature of Operations, Summary of Significant Accounting Policies and Business Activities

Nature of Operations and Basis of Presentation

Sorrento Therapeutics, Inc. (NASDAQ: SRNE), together with its wholly-owned subsidiaries (collectively, the “Company”) is a biopharmaceutical company focused on the discovery, acquisition, development and commercialization of proprietary drug therapeutics for addressing significant unmet medical needs in the U.S. as well as international markets. The Company’s primary therapeutic focus is oncology, including the treatment of chronic cancer pain, but is also developing therapeutic products for other indications, including immunology and infectious diseases. The Company currently has one clinical development program underway: resiniferatoxin, or RTX, a non-opiate, ultra potent and selective agonist of the TRPV-1 receptor for intractable pain in end-stage disease. On July 8, 2015, the Company consummated the previously announced sale to NantPharma, LLC, a related party, of all of the Company’s equity interests in IgDraSol, Inc., a wholly-owned subsidiary of the Company and the holder of the rights to Cynviloq, a polymeric micelle based Cremophor free paclitaxel injectable finished formulation. See Note 9.

The Company’s pipeline also includes preclinical fully human therapeutic monoclonal antibodies (mAbs), including its fully human anti-PD-L1 and anti-PD-1 checkpoint inhibitors derived from its proprietary G-MAB ® library platform, antibody drug conjugates (ADCs), bispecific antibodies (BsAbs), as well as Chimeric Antigen Receptor Tumor-attacking Neukoplast® (CAR.TNK™, pronounced “CARTANK”) for adoptive cellular immunotherapies (ACI). The Company’s objective is to develop its antibody drug products and adoptive cellular immunotherapies as: (i) First in Class (FIC), and/or (ii) Best in Class (BIC), which may offer greater efficacy and/or fewer adverse events or side effects as compared to existing drugs, as well as fully human therapeutic antibodies derived from its proprietary G-MAB ® library platform and antibody drug conjugates, or ADCs.  

Through June 30, 2015, the Company had devoted substantially all of its efforts to product development, raising capital and building infrastructure, and had not realized revenues from its planned principal operations.

The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with United States generally accepted accounting principles (GAAP). The accompanying consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries; IgDraSol, Inc., or IgDraSol; Concortis Biosystems Corp., or Concortis; Ark Animal Health, Inc., or Ark; TNK Therapeutics, Inc., or TNK; LA Cell, Inc., or LA Cell; Scintilla Pharmaceuticals, Inc., or Scintilla; and Sorrento Therapeutics, Inc. Hong Kong Limited, or Sorrento Hong Kong, which was registered effective December 4, 2012. Sorrento Hong Kong, TNK, LA Cell and Scintilla had no operating activity through June 2015. As of June 30, 2015 assets and liabilities for IgDraSol have be reported as held for sale in the consolidated balance sheets.  See Note 9.  All intercompany balances and transactions have been eliminated in consolidation.

The balance sheet at December 31, 2014 is derived from the audited consolidated financial statements at that date which are not presented herein.

In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of financial position, results of operations and cash flows. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Operating results for interim periods are not expected to be indicative of operating results for the Company’s 2015 fiscal year.  

Liquidity

The Company anticipates that it will continue to incur net losses into the foreseeable future as it (i) advances RTX into clinical trials and potentially pursues other human indications, (ii) continues to identify a number of potential mAb and ADC drug candidates and further advances various preclinical and development activities, (iii) continues development of, and seeks regulatory approvals for, its product candidates, (iv) expands corporate infrastructure, including the costs associated with being a NASDAQ listed public company, and (v) invests in JV’s or other third party collaboration agreements. The Company believes it has the ability to meet all obligations due over the course of the next twelve months.

I n March 2015, the Company entered into a binding term sheet with NantCell Inc., or NantCell, a wholly owned subsidiary of NantWorks, LLC, or NantWorks, a private company owned by Dr. Patrick Soon-Shiong who is an affiliate of the Company.  Under

5


the terms of the binding term sheet , the Company w ould license to NantCell a number of immune-checkpoint antibodies, immune-oncology antibodies, antibody drug conju gates and certain other antibodies against NantWorks’ discovered neoepitopes from its G-MAB library, as well as a number of CAR-TNK products. The Company and NantCell establish ed a new joint venture called Immunotherapy NANTibody, LLC, or JV, a Delaware li mited liability company as a stand-alone biotechnology company with $ 10 0.0 million initial joint funding .  NantCell’s ownership in the JV is 60% and will contribute $ 60 .0 million and the Company’s ownership is 40% and will contribute $ 40 .0 million. The JV will focus on accelerating the development of a phase III immune-oncology monoclonal antibody (mAb) and multiple immuno-oncology mAbs for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4 mAbs, and other immune -check point antibodies as well as antibody drug conjugates (ADCs) and bispecific antibodies. In July 2015, u pon the closing of the sale of Ig D ra S ol, the Company contributed its portion of the initial joint funding of $40 million to the JV . See Note 9.

In April 2015, the Company and NantCell entered into a binding term sheet for a license agreement with NantCell.  NantCell agreed to pay a royalty not to exceed five percent (5%) to the Company on any net sales of products (as defined) from the assets licensed by the Company to NantCell.  In addition to the future royalties payable under this agreement, NantCell paid an upfront payment of $10 million to the Company.  As of June 30, 2015, the Company had not yet provided all of the items noted in the agreement and therefore has recorded the upfront payment as deferred revenue.  Further, NantCell shall issue to the Company $100 million of vested equity in NantCell upon a third party equity financing of NantCell.  See Note 9.

In April 2015, the Company entered into a common stock purchase agreement with NantBioScience, Inc., or NantBioScience, a wholly owned subsidiary of NantWorks, pursuant to which the Company purchased 1,000,000 shares of NantBioScience common stock for an aggregate purchase price of $10 million which has been recorded as a cost-method investment in common stock.  As part of the agreement, the Company became a party to a right of first refusal, co-sale and drag along agreement with other stockholders of NantBioScience as well as an investor rights agreement with certain stockholders of NantBioScience.

In May 2015, the Company entered into a stock sale and purchase agreement (the “Agreement”) with NantPharma, LLC, or NantPharma, a private company owned by Dr. Patrick Soon-Shiong, pursuant to which the Company agreed to sell to NantPharma all of the Company’s equity interests in IgDraSol, Inc., a wholly-owned subsidiary of the Company and the holder of the rights to Cynviloq, a polymeric micelle based Cremophor free paclitaxel injectable finished formulation. Pursuant to the Agreement, NantPharma agreed to pay the Company an upfront payment of $90.05 million, of which $80 million is obligated to fund the Company’s joint ventures. In addition, the Company will be entitled to receive up to $620 million in regulatory milestone payments and up to $600 million in sales milestone payments should certain events occur. The Company will also receive specified additional per unit payments in excess of cost of supply from total unit sales. In addition, during the first three years after closing, the Company has the option to co-develop and/or co-market Cynviloq on terms to be negotiated. The Agreement contains customary representations, warranties and covenants of the Company and NantPharma. Consummation of the Sale is subject to various conditions, including, among others, (i) all consents, approvals, assignments, permits and authorizations having been obtained, (ii) no change, effect, event, development, occurrence, condition or states of facts occurring that would be materially adverse to IgDraSol for with respect to Cynviloq, and (iii) all Hart-Scott-Rodino conditions shall have expired or been terminated or been obtained or made.

In June 2015, the National Institutes of Health, or NIH announced that the Clinical Center suspended operations of its Pharmaceutical Development Section after FDA inspections that occurred in May 2015.  An FDA inspection report issued on May 29, 2015 noted “deficiencies in the physical facility, including flaws in the air handling system, and operational failures including inadequate quality control, insufficient employee training, and lack of compliance with standard operating procedures”.  As a result, 46 clinical programs, including the resiniferatoxin (RTX) study in patients with severe pain in advanced cancer, were placed on clinical hold by the FDA.  NIH has developed an interim corrective action/preventative action plan which has been submitted to the FDA for its approval.  The Company continues to move forward with its own corporate IND for RTX.

On July 8, 2015, the Company consummated the previously announced sale to NantPharma of its equity interests in IgDraSol, Inc., its wholly-owned subsidiary and the holder of the rights to Cynviloq.  See Note 9.

 

On July 9, 2015, the Company announced that it and NantBioScience have jointly committed $100 million to establish a joint venture called NantCancerStemCell, LLC, or NantStem, to focus on the development of ‘first-in-class’ small molecules against targets that have eluded the pharmaceutical industry to date and which may address important drivers of cancer growth including cancer stem cells. The Company will contribute key small molecule programs (lead inhibitors of the proto-oncogenes c-Myc, and the master metabolism regulator HIF-1 alpha, and an inducer of the tumor suppressor cytokine TRAIL) to NantStem, which will be 60% owned by NantBioScience and 40% owned by the Company.  The Company contributed $20.0 million of its initial joint funding and will contribute the additional $20.0 million by September 30, 2015. See Note 9.

The Company plans to continue to fund its operating losses and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. The Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which was declared effective by the SEC in July 2013. The Shelf Registration Statement provides the Company the ability to offer up to $100 million of securities, including equity and other securities as described in the registration statement. After the May 2014 underwritten offering

6


the Company has the ability to offer up to $36. 6 million of additional securities. In November 2014, the Company filed a universal shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC in December 2014. This Shelf Registration Statement provides the Company with the ability to offer up to $250 million of securities, including equity and other securities as described in the registration statement. Included in the 2014, shelf registration is a sales agreement prospectus covering the offering, issuance and sale by t he Company of up to a maximum aggregate offering price of $50.0 million of the Company’s common stock that may be issued and sold under a sales agreement with MLV & Co. LLC.   Pursuant to these Shelf Registration Statements, the Company may offer such secur ities from time to time and through one or more methods of distribution, subject to market conditions and the Company’s capital needs. Specific terms and prices will be determined at the time of each offering under a separate prospectus supplement, which w ill be filed with the SEC at the time of any offering. However, the Company cannot be sure that such additional funds will be available on reasonable terms, or at all. If the Company is unable to secure adequate additional funding, the Company may be force d to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. In addition, if the Company does not meet its payment obligations to third parties as they come due, it may be subject to litigation claims. Even if the Company is successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. Any of these actions could materially harm the Company’s business, result s of operations, and future prospects

If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict the Company’s ability to operate its business.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management believes that these estimates are reasonable; however, actual results may differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company minimizes its credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. The Company has not experienced any losses on such accounts.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, grants and accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. As of June 30, 2015 and December 31, 2014, the carrying amount of cash and cash equivalents, grants and accounts receivable, prepaid expenses and other assets, accounts payable and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.

Grants and Accounts Receivable

Grants receivable at June 30, 2015 and December 31, 2014 represent amounts due under several federal contracts with the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, or NIH, collectively, the NIH Grants. The Company considers the grants receivable to be fully collectible; accordingly, no allowance for doubtful amounts has been established. If amounts become uncollectible, they are charged to operations.

Accounts receivable at June 30, 2015 and December 31, 2014 consists of trade receivables from sales and services provided to certain customers, which are generally unsecured and due within 30 days. Estimated credit losses related to trade accounts receivable are recorded as general and administrative expenses and as an allowance for doubtful accounts within grants and accounts receivable, net. The Company reviews reserves and makes adjustments based on historical experience and known collectability issues and disputes. When internal collection efforts on accounts have been exhausted, the accounts are written off by reducing the allowance for doubtful accounts. As of June 30, 2015 and December 31, 2014, the allowance for doubtful accounts was $4 and $33, respectively.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which are generally three to five years. Leasehold

7


im provements are amortized over the lesser of the life of the lease or the life of the asset. Repairs and maintenance are charged to expense as incurred.

Acquisitions and Intangibles

The Company has engaged in business combination activity. The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with each acquisition, as goodwill presents the excess of the purchase price of an acquired business over the fair value of its net tangible and identifiable intangible assets.

Patent rights are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, determined to be approximately nineteen years from the date of transfer of the rights to the Company in April 2013. Amortization expense for the both the three and six months ended June 30, 2015 and 2014 was $1 and $2, respectively, which has been included in intangibles amortization.

As of June 30, 2015, license rights are included in long-term assets held for sale and are stated at cost and depreciated on a straight-line basis through the date these assets were determined to be held for sale.  Amortization expense for the three months ended June 30, 2015 and 2014 was $238 and $475, respectively.  Amortization expense for the six months ended June 30, 2015 and 2014 was $713 and $950, respectively, which has been included in intangibles amortization.

Acquired technology is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, determined to be approximately nineteen years from the date of acquisition of the technology in December 2013. Amortization expense for both the three and six months ended June 30, 2015 and 2014 was $44 and $88, respectively, which has been included in intangibles amortization.

Customer relationships are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, determined to be approximately five years from the date of acquisition in December 2013. Amortization expense for both the three and six months ended June 30, 2015 and 2014 was $66 and $132, respectively, which has been included in intangibles amortization.

Goodwill and Other Long-Lived Assets

Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if events occur indicating the potential for impairment. During its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the Company proceeds to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. The Company performed its annual assessment for goodwill impairment in the fourth quarter of 2014, noting no impairment.  There have not been any triggering events through June 30, 2015.

The Company evaluates its long-lived assets with definite lives, such as property and equipment, acquired technology, customer relationships, patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of the life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparison of the assets’ book value to future net undiscounted cash flows that the assets are expected to generate. There have not been any impairment losses of long-lived assets through June 30, 2015.

Cost-Method Investments

The Company’s cost-method investments in non-publicly traded companies are included in the consolidated balance sheets and are carried at cost, adjusted for any impairment, because the Company does not have a controlling interest and does not have the ability to exercise significant influence over these companies.  The Company monitors these investments for impairment on a quarterly basis, and adjusts carrying value for any impairment charges recognized.  Realized gains and losses on these investments are

8


r eported in other income (expense), net in the consolidated statements of operations.   There have not been any impairment losses of cost-method investments through June 3 0 , 201 5 .

Revenue Recognition

The Company’s grant revenues are generated primarily from various NIH grant awards and from revenues generated from sales and services from the sale of customized reagents and providing contract development services. The revenue from the NIH grant awards is based upon subcontractor and internal costs incurred that are specifically covered by the grant, and where applicable, a facilities and administrative rate that provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by subcontractors or when the Company incurs internal expenses that are related to the grant.

Revenues from sales and services are generated from the sale of customized reagents and providing contract development services. Reagents are used for preparing ADCs, these reagents include industrial standard cytotoxins, linkers, and linker-toxins. The contract development services include providing synthetic expertise to customer’s synthesis by delivering them proprietary cytotoxins, linkers and linker-toxins and ADC service using industry standard toxin and antibodies provided by customers. Revenue is recognized when, (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured.

License fees for the licensing of product rights are recorded as deferred revenue upon receipt of cash and recognized as revenue on a straight-line basis over the license period.

The Company is obligated to accept from customers the return of products sold that are damaged or don’t meet certain specifications. The Company may authorize the return of products sold in accordance with the terms of its sales contracts, and estimates allowances for such amounts at the time of sale. The Company has not experienced any sales returns.

Acquired In-Process Research and Development Expense

The Company has acquired and may continue to acquire the rights to develop and commercialize new drug candidates. The up-front payments to acquire a new drug compound, as well as future milestone payments, are immediately expensed as acquired in-process research and development provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, have no alternative future use.

Research and Development Costs and Collaborations

All research and development costs are charged to expense as incurred. Such costs primarily consist of lab supplies, contract services, stock-based compensation expense, salaries and related benefits.

Income Taxes

The provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10, Uncertainty in Income Taxes, address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company has determined that it has no uncertain tax positions.

The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates.

The Company has deferred tax assets, which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company evaluates the recoverability of the deferred tax assets annually. As of June 30, 2015, the Company maintained a full valuation allowance against its deferred tax assets.

Stock-based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee’s requisite service period (generally the vesting period of the equity grant).

9


The Company accounts for equity instrumen ts, including restricted stock or stock options, issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. Restric ted stock issued to non-employees is accounted for at their estimated fair value as they vest.

Net Loss per Share

Net loss per share is presented as both basic and diluted net loss per share. Basic net loss per share excludes any dilutive effects of options, shares subject to repurchase and warrants. Diluted net loss per share includes the impact of potentially dilutive securities. No dilutive effect was calculated for the three and six months ended June 30, 2015 and 2014 as the Company reported a net loss for each respective period and the effect would have been anti-dilutive. The Company had outstanding common share equivalents of 5,017,945 and 1,854,626 at June 30, 2015 and 2014, respectively.

Comprehensive Income (Loss )

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive loss in the consolidated financial statements in the period in which they are recognized. Net income (loss) and other comprehensive loss, including foreign currency translation adjustments and unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive loss. For the three and six months ended June 30, 2015 and 2014, the comprehensive loss was equal to the net loss.

Segment Information

The Company is engaged primarily in the discovery and development of innovative drug therapies focused on oncology and the treatment of chronic cancer pain. Accordingly, the Company has determined that it operates in one operating segment.

New Accounting Standards

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-3, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-3”).  ASU 2015-3 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than separately as an asset.    ASU 2015-3 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within those years, and is to be applied retrospectively. Early adoption is permitted.  The Company does not expect the adoption of ASU 2015-3 will have an impact on its results of operations or cash flows.

 

 

2. Cost-Method Investments

 

As of June 30, 2015 and December 31, 2014 , the aggregate carrying amount of the Company’s cost-method investments in non-publicly traded companies was $21.5 million and $10.0 million , respectively. The Company’s cost-method investments are assessed for impairment quarterly. The Company determines that it is not practicable to estimate the fair value of its cost-method investments on a regular basis and does not reassess the fair value of cost-method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments.  No impairment losses were recorded during the three and six months ended June 30, 2015 and 2014.  The Company has a $10.0 million cost-method investment in NantKwest, Inc., or NantKwest, and in July 2015 NantKwest completed its initial public offering (“IPO”).  As of the date of the IPO, the Company will no longer account for this investment using the cost method.  See Note 9.

3. Goodwill and Intangible Assets

 

As of June 30, 2015 and December 31, 2014, the Company had goodwill of $12,470.  The Company performed a qualitative test for goodwill impairment as of December 31, 2014. Based upon the results of the qualitative testing the Company concluded that it is more-likely-than-not that the fair values of the Company’s goodwill were in excess of the carrying values and therefore performing the first step of the two-step impairment test was unnecessary. No goodwill impairment was recognized for the three and six months ended June 30, 2015 and 2014.

 

10


The Company’s intangible assets, excluding goodwill, include p atent rights, core technologies and customer relationships. Amortization for the intangible assets that have finite useful lives is generally recorded on a straight-line basis over their useful lives.  A summary of the Company’s identif iable intangible assets is as follows:

 

 

 

June 30, 2015

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Intangibles, net

 

Customer relationships

 

 

1,320

 

 

 

405

 

 

 

915

 

Acquired technology

 

 

3,410

 

 

 

269

 

 

 

3,141

 

Patent rights

 

 

90

 

 

 

11

 

 

 

79

 

Total intangible assets

 

$

4,820

 

 

$

685

 

 

$

4,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Intangibles, net

 

Customer relationships

 

 

1,320

 

 

 

272

 

 

 

1,048

 

Acquired technology

 

 

3,410

 

 

 

182

 

 

 

3,228

 

Patent rights

 

 

90

 

 

 

9

 

 

 

81

 

Total intangible assets

 

$

4,820

 

 

$

463

 

 

$

4,357

 

 

As of June 30, 2015, the remaining amortization period for identifiable intangible assets is 5 to 19 years.

 

Estimated future amortization expense related to intangible assets at June 30, 2015 is as follows:

 

Years Ending December 31,

 

Amount

 

2015

 

$

222

 

2016

 

 

445

 

2017

 

 

445

 

2018

 

 

436

 

2019

 

 

181

 

Thereafter

 

 

2,406

 

Total

 

$

4,135

 

 

4. Significant Agreements and Contracts

License Agreement with The Scripps Research Institute

In January 2010, the Company entered into a license agreement, or the TSRI License, with The Scripps Research Institute, or TSRI. Under the TSRI License, TSRI granted the Company an exclusive, worldwide license to certain TSRI patent rights and materials based on quorum sensing for the prevention and treatment of Staphylococcus aureus (“Staph”) infections, including Methicillin-resistant Staph. In consideration for the license, the Company: (i) issued TSRI a warrant for the purchase of common stock, (ii) agreed to pay TSRI a certain annual royalty commencing in the first year after certain patent filing milestones are achieved, (iii) agreed to pay a royalty on any sales of licensed products by the Company or its affiliates and a royalty for any revenues generated by the Company through its sublicense of patent rights and materials licensed from TSRI under the TSRI License. The TSRI License requires the Company to indemnify TSRI for certain breaches of the agreement and other matters customary for license agreements. The parties may terminate the TSRI License at any time by mutual agreement. In addition, the Company may terminate the TSRI License by giving 60 days’ notice to TSRI and TSRI may terminate the TSRI License immediately in the event of certain breaches of the agreement by the Company or upon the Company’s failure to undertake certain activities in furtherance of commercial development goals. Unless terminated earlier by either or both parties, the term of the TSRI License will continue until the final expiration of all claims covered by the patent rights licensed under the agreement. The warrant was exercised in February 2015.  For the three months ended June 30, 2015 and 2014, the Company recorded $21 and $49 in patent prosecution and maintenance costs associated with the TSRI License, respectively.  For the six months ended June 30, 2015 and 2014, the Company recorded $46 and $56 in patent prosecution and maintenance costs associated with the TSRI License, respectively.  All such costs have been included in general and administrative expenses.

NIH Grants

In June 2012, the NIAID awarded the Company a third Advanced Technology STTR grant to support the Company’s program to generate and develop novel human antibody therapeutics to combat Staph infections, including Methicillin-resistant Staph, or the

11


Staph Grant II award. The project period for the Phase I grant covers a two-year per iod which commenced in June 2012, with a total grant award of $600. During the three months ended June  3 0 , 201 5 and 201 4 , the Company recorded $ 0 and $ 52 of revenue , respectively, associated with the Staph Grant II award.   During the six months ended June 30, 2015 and 2014, the Company recorded $ 0 and $ 150 of revenue, respectively, associated with the Staph Grant II award .

In June 2014, the NIAID awarded the Company a Phase II STTR grant to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat Staphylococcus aureus ( S. aureus or Staph) infections, including methicillin-resistant S. aureus (MRSA), or the Staph Grant III award. The project period for this Phase II grant covers a two-year period which commenced in June 2014, with total funds available of approximately $1 million per year for up to 2 years. During the three months ended June 30, 2015 and 2014, the Company recorded $331 and $32 of revenue, respectively, associated with the Staph Grant III award. During the six months ended June 30, 2015 and 2014, the Company recorded $417 and $32 of revenue, respectively, associated with the Staph Grant III award.

In June 2014, the NIAID awarded the Company a Phase I STTR grant entitled “Anti-Pseudomonas Immunotherapy and Targeted Drug Delivery”. This grant will support the preclinical development of novel anti- Pseudomonas aeruginosa mAb immunotherapy or an antibody-mediated targeted antibiotic delivery vehicle. Each modality may be an effective and safe stand-alone therapy and/or a component of a “cocktail” therapeutic option for prevention and treatment of P. aeruginosa infections. The project period for this Phase I grant covers a two-year period which commenced in July 2014, with total funds available of approximately $300 per year for up to 2 years. During the three months ended June 30, 2015 and 2014, the Company recorded $38 and $0 of revenue, respectively, associated with the Phase I STTR grant award.   During the six months ended June 30, 2015 and 2014, the Company recorded $93 and $0 of revenue, respectively, associated with the Phase I STTR grant award.

In July 2014, the National Cancer Institute (NCI), a division of the NIH, awarded the Company a Phase I STTR grant, entitled “Targeting of Myc-Max Dimerization for the Treatment of Cancer”. This grant will support the preclinical development of the Myc inhibitor, which interferes with the protein-protein interaction (PPI) between Myc and its obligatory dimerization partner, Max, preventing sequence-specific binding to DNA and subsequent initiation of oncogenic transformation. The project period for this Phase I grant covers a one-year period which commenced in August 2014, with total funds available of approximately $225. During the three months ended June 30, 2015 and 2014, the Company recorded $56 and $0 of revenue, respectively, associated with the Phase I Myc grant award.   During the six months ended June 30, 2015 and 2014, the Company recorded $130 and $0 of revenue, respectively, associated with the Phase I Myc grant award.

In August 2014, the National Heart, Lung, and Blood Institute (NHBLI), a division of the NIH awarded the Company a Phase I Small Business Technology Transfer (SBIR) grant entitled “Human Anti-WISP-1 Antibodies for Treatment of Idiopathic Pulmonary Fibrosis”. This grant will advance the Company’s immunotherapy targeting WNT-1 Inducible Signaling Protein-1(WISP1) for the treatment of Idiopathic Pulmonary Fibrosis (IPF). WISP1 is a protein that has been shown to be upregulated in IPF, linked to key growth factors, cellular proliferation, hyperplasia and is correlated with late stage cancers. IPF is a fatal disease, which results in progressive loss of lung function due to fibrosis of the lungs. The project period for this Phase I grant covers a one-year period which commenced in August 2014, with total funds available of approximately $225.  During the three months ended June 30, 2015 and 2014, the Company recorded $21 and $0 of revenue, respectively, associated with the Phase I WISP1 grant award.  During the six months ended June 30, 2015 and 2014, the Company recorded $31 and $0 of revenue, respectively, associated with the Phase I WISP1 grant award.

5. Loan and Security Agreement

In September 2013, the Company entered into a $5.0 million loan and security agreement with two banks pursuant to which: (i) the lenders provided the Company a term loan which was funded at closing, (ii) the Company repaid its then outstanding equipment loan balance of $762, and (iii) the lenders received a warrant to purchase an aggregate 31,250 shares of the Company’s common stock at an exercise price of $8.00 per share exercisable for seven years from the date of issuance. The value of the warrants, totaling $215, was recorded as debt discount and additional paid-in capital.

In March 2014, the Company entered into an amended and restated loan and security agreement, increasing the September 2013 facility to $12.5 million from $5.0 million, with the same two banks. Such loan was funded at closing and is secured by a lien covering substantially all of the Company’s assets, excluding intellectual property, which is subject to a negative pledge. In October 2014, the Company entered into a second amendment to its amended and restated loan and security agreement to extend the interest only payments on the outstanding amount of the loan from October 1, 2014 to May 1, 2015, after which equal monthly payments of principal and interest are due until the loan maturity date of September 30, 2017. The amended and restated loan: (i) interest rate is 7.95% per annum, and (ii) provided the Lenders additional warrants to purchase an aggregate of 34,642 shares of the Company’s common stock at an exercise price of $12.99 per share, exercisable for seven years from the date of issuance. The value of the warrants, totaling $321, was recorded as debt discount and additional paid-in capital.

12


At the Company’s option, it may prepay all of the outstanding principal balance, sub ject to certain pre-payment fees ranging from 1% to 3% of the prepayment amount. In the event of a final payment of the loans under the loan agreement, either in the event of repayment of the loan at maturity or upon any prepayment, the Company is obligate d to pay the amortized portion of the final fee of $781.

The Company is also subject to certain affirmative and negative covenants under the loan agreement, including limitations on its ability to: undergo certain change of control events; convey, sell, lease, license, transfer or otherwise dispose of any equipment financed by loans under the loan agreement; create, incur, assume, guarantee or be liable with respect to indebtedness, subject to certain exceptions; grant liens on any equipment financed under the loan agreement; and make or permit any payment on specified subordinated debt. In addition, under the loan agreement, subject to certain exceptions, the Company is required to maintain with the lender its primary operating, other deposit and securities accounts.

Long-term debt and unamortized discount balances are as follows (in thousands):

 

Face value of amended and restated loan

 

$

11,741

 

Fair value of all warrants

 

 

(536

)

Accretion of debt discount

 

 

276

 

Balance at June 30, 2015

 

$

11,481

 

 

Future minimum payments under the amended and restated loan and security agreement are as follows:

 

Year Ending December 31,

 

 

 

 

2015

 

$

2,749

 

2016

 

 

5,497

 

2017

 

 

4,579

 

Total future minimum payments

 

 

12,825

 

Unamortized interest

 

 

(1,084

)

Debt discount

 

 

(260

)

Total minimum payment

 

 

11,481

 

Current portion

 

 

(4,613

)

Long-term debt

 

$

6,868

 

 

6. Stock Incentive Plans

2009 Equity Incentive Plan

In February 2009, the Company’s Board of Directors approved the 2009 Equity Incentive Plan, or the EIP, under which 400,000 shares of common stock were reserved for issuance to employees, non-employee directors and consultants of the Company. In March 2009, the Company issued 296,154 restricted common stock awards to certain consultants for aggregate gross proceeds of less than $1, of which the Company repurchased 44,166 unvested shares of restricted common stock for a nominal amount in January 2011. The restricted shares vest monthly over four years and all remaining shares were fully vested as of June 30, 2015. No further shares are available for grant under the EIP.

2009 Non-Employee Director Grants

In September 2009, prior to the adoption of the 2009 Stock Incentive Plan, the Company’s Board of Directors approved the reservation and issuance of 8,000 nonstatutory stock options to the Company’s non-employee directors. The outstanding options vested on the one year anniversary of the vesting commencement date in October 2010, and are exercisable for up to 10 years from the grant date. No further shares may be granted under this plan and, as of June 30, 2015, 3,200 options were outstanding.

2009 Stock Incentive Plan

In October 2009, the Company’s stockholders approved the 2009 Stock Incentive Plan. In June 2014, the Company’s stockholders approved, among other items, the amendment and restatement of the 2009 Stock Incentive Plan, or the Stock Plan, to increase the number of common stock authorized to be issued pursuant to the Stock Plan to 3,760,000. Such shares of the Company’s common stock are reserved for issuance to employees, non-employee directors and consultants of the Company. The Stock Plan provides for the grant of incentive stock options, non-incentive stock options, stock appreciation rights, restricted stock awards, unrestricted stock awards, restricted stock unit awards and performance awards to eligible recipients. Recipients of stock options shall be eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the Stock Plan is ten years. Employee option

13


grants will generally vest 25% on the firs t anniversary of the original vesting commencement date, with the balance vesting monthly over the remaining three years. The vesting schedules for grants to non-employee directors and consultants will be determined by the Company’s Compensation Committee. Stock options are generally not exercisable prior to the applicable vesting date, unless otherwise accelerated under the terms of the applicable stock plan agreement. Unvested shares of the Company’s common stock issued in connection with an early exercis e however, may be repurchased by the Company upon termination of the optionee’s service with the Company.

The following table summarizes stock option activity as of June 30, 2015 and the changes for the period then ended:

 

 

 

Options Outstanding

 

 

Weighted-

Average

Exercise Price

 

 

Aggregate Intrinsic Value

 

Outstanding at December 31, 2014

 

 

2,231,800

 

 

$

6.34

 

 

$

8,323

 

Options Granted

 

 

1,188,500

 

 

$

11.56

 

 

 

 

 

Options Canceled

 

 

(174,562

)

 

$

7.24

 

 

 

 

 

Options Exercised

 

 

(203,623

)

 

$

5.43

 

 

 

 

 

Outstanding at June 30, 2015

 

 

3,042,115

 

 

$

8.36

 

 

$

28,156

 

  

The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. The fair value of employee stock options was estimated at the grant date using the following assumptions:

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

Weighted-average grant date fair value

 

$

11.56

 

 

$

11.70

 

Dividend yield

 

 

 

 

 

 

Volatility

 

 

75

%

 

 

78

%

Risk-free interest rate

 

 

1.65

%

 

 

1.94

%

Expected life of options

 

6.1 years

 

 

6.1 years

 

  

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Due to the Company’s limited historical data, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options.

The total employee stock-based compensation recorded as operating expenses was $801 and $286 for the three months ended June 30, 2015 and 2014, respectively, and $1,783 and $2,130 for the six months ended June 30, 2015 and 2014, respectively.

The total unrecognized compensation cost related to unvested stock option grants as of June 30, 2015 was $9,666 and the weighted average period over which these grants are expected to vest is 2.8 years.

The Company records equity instruments issued to non-employees as expense at their fair value over the related service period as determined in accordance with the authoritative guidance and periodically revalues the equity instruments as they vest.  Stock-based compensation expense related to non-employee consultants recorded as operating expenses was $593 and $344 for the three months ended June 30, 2015 and 2014, respectively, and $1,047 and $403 for the six months ended June 30, 2015 and 2014, respectively.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance consists of the following at June 30, 2015:

 

Common stock warrants outstanding under the underwriters agreement

 

 

182,600

 

Common stock warrants outstanding under the loan and security agreement

 

 

65,892

 

Common stock warrants outstanding under the Cambridge securities agreement

 

 

1,724,138

 

Common stock options outstanding under the EIP

 

 

3,200

 

Authorized for future grant or issuance under the Stock Plan

 

 

427,762

 

Issuable to former IgDraSol stockholders upon achievement of specified milestones

 

 

1,306,272

 

Issuable under assignment agreement based upon achievement of certain milestones

 

 

80,000

 

 

 

 

3,789,864

 

14


7. Income Taxes

The Company maintains deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets include net operating loss carryforwards, research credits and capitalized research and development. The net deferred tax asset has been fully offset by a valuation allowance because of the Company’s history of losses. Utilization of operating losses and credits may be subject to substantial annual limitation due to ownership change provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

8. Related Party Agreements  

During the three and six months ended June 30, 2015, the Company purchased products totaling $350 and $415, respectively, from Levena Biopharma Co., LTD (Levena), a Chinese Corporation.  The Company’s Senior Vice President and Head of Antibody Drug Conjugates is also one of the owners of Levena.

In December 2014, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an affiliated entity of Dr. Patrick Soon-Shiong (the “Investor”) pursuant to which the Company agreed to issue and sell to the Investor an aggregate of 7,188,061 shares of the Company’s common stock at a price of $5.80 per share for an aggregate purchase price of $41,691. In connection with the Purchase Agreement, the Investor received a warrant to purchase 1,724,138 shares of the Company’s Common Stock. The warrant is exercisable for a period of three years from the date of issuance at an initial exercise price of $5.80 per share.

In December 2014, the Company entered into a joint development and license agreement with Conkwest Inc., which has changed its name to NantKwest, and of which Dr. Patrick Soon-Shiong is a majority owner.  In addition, the Company purchased approximately 5.6 million shares of NantKwest common stock for $10 million.

During the six months ended June 30, 2015, the Company has entered into a joint venture called Immunotherapy NANTibody, LLC with NantCell, a wholly-owned subsidiary of NantWorks, a private company owned by Dr. Patrick Soon-Shiong.  In July 2015, the Company contributed its portion of the initial joint funding of $40 million to the Immunotherapy NANTibody joint venture.  The Company and NantCell have also entered into a license agreement pursuant to which the Company received a $10 million upfront license payment.  

The Company has also entered into a joint venture called NantCancerStemCell, LLC, with NantBioScience, a wholly-owned subsidiary of NantWorks.  In July 2015, the Company contributed $20 million of the initial joint funding to NantCancerStemCell and will contribute the remaining $20 million by September 30, 2015.  During the six months ended June 30, 2015, the Company purchased 1,000,000 shares of NantBioScience common stock for $10 million.

In May 2015, the Company entered into a stock sale and purchase agreement with NantPharma, a private company owned by NantWorks pursuant to which the Company sold its equity interests in IgDraSol, its wholly-owned subsidiary and holder of the rights to Cynviloq for an upfront payment of $90.05 million and potential regulatory and sales milestones of up to $1.2 billion.

9. Subsequent Events

On July 8, 2015, the Company consummated the previously announced sale to NantPharma of its equity interests in IgDraSol, Inc., its wholly-owned subsidiary and the holder of the rights to Cynviloq, a polymeric micelle based Cremophor free paclitaxel injectable finished formulation. Pursuant to the Agreement, NantPharma paid the Company an upfront payment of $90.05 million, of which $80 million is obligated to fund the Company’s joint ventures.   In addition, the Company will be entitled to receive up to $620 million in regulatory milestone payments and up to $600 million in sales milestone payments should certain events occur. The Company will also receive specified additional per unit payments in excess of cost of supply from total unit sales. In addition, during the first three years after closing, the Company has the option to co-develop and/or co-market Cynviloq on terms to be negotiated. Upon the closing of the agreement in July, the specified development milestone was satisfied and the Company issued 1,306,272 million shares to former IgDraSol shareholders .            

In April 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-08 - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity , which amends the definition of a discontinued operation, and requires additional disclosures about discontinued operations, as well as disposal transactions that do not meet the discontinued operations criteria. Under the new guidance, only disposals of a component representing a strategic shift in operations, that has or will have a major impact on the Company’s operations or financial results, should be classified as discontinued operations. The sale of the Company’s equity interests in IgDraSol did not represent a strategic shift in the Company’s operations, and accordingly, is not being reported as a discontinued operation.

Had the Company consummated this sale as of the beginning of the year, the Company’s revenues for the three and six months ended June 30, 2015 would be unchanged, for the three months ended June 30, 2015 research and development expenses would be $5,604 general and administrative expenses would be $2,974 and loss from operations before income tax would have been $8,274.  For the six months ended June 30, 2015, research and development expenses would be $9,810 general and administrative expenses

15


would be $5,104 an d loss from operations before income tax would have been $14,691.  Additionally, the balance sheet as of June 30, 2015 would have balances of total assets of $95,338 and deferred tax liabilities of $1,676, and current assets and current liabilities would r emain unchanged.

On July 8, 2015, the Company contributed its portion of the initial joint funding of $40 million to the Immunotherapy NANTibody, LLC joint venture.  This joint venture with NantCell will focus on accelerating the development of multiple immuno-oncology monoclonal antibodies (mAbs) for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4 mAbs, and other immune-check point antibodies as well as antibody drug conjugates (ADCs) and bispecific antibodies.

On July 9, 2015, the Company announced that it and NantBioScience have jointly committed $100 million to establish a joint venture called NantCancerStemCell, LLC, or NantStem, to focus on the development of ‘first-in-class’ small molecules against targets that have eluded the pharmaceutical industry to date and which may address important drivers of cancer growth including cancer stem cells. The Company will contribute key small molecule programs (lead inhibitors of the proto-oncogenes c-Myc, and the master metabolism regulator HIF-1 alpha, and an inducer of the tumor suppressor cytokine TRAIL) to NantStem which will be 60% owned by NantBioScience and 40% owned by the Company.  The Company contributed $20.0 million of its initial joint funding and will contribute the additional $20.0 million by September 30, 2015.

On July 27, 2015, NantKwest, Inc. completed its initial public offering (“IPO”).  Prior to the IPO the Company’s investment in NantKwest was accounted for using the cost method and the total investment was classified as part of investments in common stock on the Company’s consolidated balance sheets.  As of the date of the IPO, the Company will no longer account for this investment using the cost method but will reflect this investment as an available-for-sale equity security on the consolidated balance sheet and will adjust the investment to fair value each quarterly reporting period with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss).

On August 3, 2015, the Company announced that it has entered into an exclusive licensing agreement to develop and commercialize multiple prespecified and undisclosed biosimilar or biobetter antibodies from Mabtech Limited, a holding company for premier antibody development and manufacturing companies in China.  Under the terms of the agreement, the Company will develop and market these 4 monoclonal antibodies (mAbs) for the North American, European and Japanese market. The Company made an initial license payment of $10.0 million with additional payments totaling $190.0 million payable per the agreement over the next four years.  Each of the mAbs has completed a Phase III study; two are currently in registration for marketing approval in China, while the other two are under data analyses for subsequent NDA submission in China.  

In August 2015, the Company received a vested equity interest in NantCell, a private company, in accordance with the licensing agreement entered into in April 2015.

 

 

 

 

16


I tem 2.

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

This Quarterly Report on Form 10-Q contains “forward-looking statements” about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as “assumes,” “plans,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” or “will,” and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission, or the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Overview

We are a biopharmaceutical company engaged in the discovery, acquisition, development and commercialization of proprietary drug therapeutics for addressing significant unmet medical needs in the U.S. as well as international markets. The Company’s primary therapeutic focus is oncology, including the treatment of chronic cancer pain, but is also developing therapeutic products for other indications, including immunology and infectious diseases. We currently have one clinical development program underway: resiniferatoxin, or RTX, a non-opiate, ultra potent and selective agonist of the TRPV-1 receptor for intractable pain in end-stage disease.

Our pipeline also includes preclinical fully human therapeutic monoclonal antibodies (mAbs), including our fully human anti-PD-L1 and anti-PD-1 checkpoint inhibitors derived from our proprietary G-MAB ® library platform, antibody drug conjugates (ADCs), bispecific antibodies (BsAbs), as well as Chimeric Antigen Receptor Tumor-attacking Neukoplast® (CAR.TNK™, pronounced “CARTANK”) for adoptive cellular immunotherapies (ACI). Our objective is to develop our antibody drug products and adoptive cellular immunotherapies as: (i) First in Class (FIC), and/or (ii) Best in Class (BIC), which may offer greater efficacy and/or fewer adverse events or side effects as compared to existing drugs, as well as fully human therapeutic antibodies derived from our proprietary G-MAB ® library platform and antibody drug conjugates, or ADCs.  

Through June 30, 2015, we identified and further developed a number of potential drug product candidates across various therapeutic areas, and intend to select several lead product candidates to further advance into preclinical development activities in 2015. It is too early to assess which of these candidates, if any, will merit further evaluation in clinical trials. Our libraries were designed to facilitate the rapid identification and isolation of highly specific, antibody therapeutic product candidates that are fully-human and that bind to disease targets appropriate for antibody therapy. We built our initial antibody expression and production capabilities to enable us to make sufficient product material to conduct preclinical safety and efficacy testing in animal models.

Although we intend to retain ownership and control of product candidates by advancing their development, we regularly also consider, (i) partnerships with pharmaceutical or biopharmaceutical companies in order to balance the risks and costs associated with drug discovery and development and maximize our stockholders’ returns, and (ii) sale of our products. Our partnering objectives include generating revenue through license fees, milestone-related development fees and royalties by licensing rights to our product candidates.

Recent Developments

 

In April 2015, we entered into a license agreement with NantCell, Inc., or NantCell, a wholly-owned subsidiary of NantWorks, Inc., a private company owned by Dr. Patrick Soon-Shiong, an affiliate of the Company.  NantCell agreed to pay a royalty not to exceed five percent (5%) to us on any net sales of products (as defined) from the assets licensed by us to NantCell.  In addition to the future royalties payable under this agreement, NantCell paid an upfront payment of $10 million to us.  As of June 30, 2015, we had not yet provided all of the items noted in the agreement and therefore have recorded the upfront payment as deferred revenue.  Further, NantCell shall issue to us $100 million of vested equity in NantCell upon a third party equity financing of NantCell.  

In April 2015, we entered into a common stock purchase agreement with NantBioScience, Inc., or NantBioScience, a wholly-owned subsidiary of NantWorks, pursuant to which we purchased 1,000,000 shares of NantBioScience common stock for an aggregate purchase price of $10 million which has been recorded as a cost-method investment in common stock.  As part of the agreement, we became a party to a right of first refusal, co-sale and drag along agreement with other stockholders of NantBioScience as well as an investor rights agreement with certain stockholders of NantBioScience.

17


In May 2015, we entered into a stock sale and purchase agreement (the “Agreement”) with NantPharma, LLC, or NantPharma , a wholly-owned subsidiary of NantWorks pursuant to which we agreed to sell to NantPharma all of our equity interests in IgDraSol, Inc., a wholly-owned subsidiary of ours and the holder of the rights to Cynviloq, a polymeric micelle based Cremophor free paclitaxel injectable finished formulation. Pursuant to the Agreement, NantPharma agreed to pay us an upfront payment of $90.05 million , of which $80 million is obligated to fund the Company’s joint ventures .   In addition, we will be entitled to receive up to $620 million in regulatory milestone payments and up to $600 million in sales milestone payments should certain events occur . We will also receive specified additional per unit payments in excess of cost of supply from total unit sales. In addition, during the first three years after closing, we have the option to co-develop and/or co-market Cynviloq on terms to be negotiated. The Agreement contains customary representations, warranties and covenants for us and NantPharma.   Upon the closing of the agreement in July, the specified development milestone was satisfied and we issued 1,306,272 million shares to former IgDraSol shareholders.

In June 2015, the National Institutes of Health, or NIH announced that the Clinical Center suspended operations of its Pharmaceutical Development Section after FDA inspections that occurred in May 2015.  An FDA inspection report issued on May 29, 2015 noted “deficiencies in the physical facility, including flaws in the air handling system, and operational failures including inadequate quality control, insufficient employee training, and lack of compliance with standard operating procedures”.  As a result, 46 clinical programs, including the resiniferatoxin (RTX) study in patients with severe pain in advanced cancer, were placed on clinical hold by the FDA.  NIH has developed an interim corrective action/preventative action plan which has been submitted to the FDA for its approval.  We continue to move forward with our own corporate IND for RTX.

On July 8, 2015, we consummated the previously announced sale to NantPharma of our equity interests in IgDraSol, Inc., our wholly-owned subsidiary and the holder of the rights to Cynviloq.   In April 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-08 - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity , which amends the definition of a discontinued operation, and requires additional disclosures about discontinued operations, as well as disposal transactions that do not meet the discontinued operations criteria. Under the new guidance, only disposals of a component representing a strategic shift in operations, that has or will have a major impact on our Company’s operations or financial results, should be classified as discontinued operations. The sale of our equity interests in IgDraSol did not represent a strategic shift in our operations, and accordingly, is not being reported as a discontinued operation.  

 

On July 8, 2015, we contributed our portion of the initial joint funding of $40 million to the Immunotherapy NANTibody, LLC joint venture.  This joint venture with NantCell will focus on accelerating the development of multiple immuno-oncology monoclonal antibodies (mAbs) for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4 mAbs, and other immune-check point antibodies as well as antibody drug conjugates (ADCs) and bispecific antibodies.

 

On July 9, 2015, we announced that we and NantBioScience have jointly committed $100 million to establish a joint venture to focus on the development of ‘first-in-class’ small molecules against targets that have eluded the pharmaceutical industry to date and which may address important drivers of cancer growth including cancer stem cells. We will contribute key small molecule programs (lead inhibitors of the proto-oncogenes c-Myc, and the master metabolism regulator HIF-1 alpha, and an inducer of the tumor suppressor cytokine TRAIL) to the joint venture which will be 60% owned by NantBioScience and 40% owned by us.  We contributed $20.0 million of our initial joint funding and will contribute the additional $20.0 million by September 30, 2015.  

 

On July 27, 2015, NantKwest, Inc. completed its initial public offering (“IPO”).  Prior to the IPO our investment in NantKwest was accounted for using the cost method and the total investment was classified as part of investments in common stock on our consolidated balance sheets.  As of the date of the IPO, we will no longer account for this investment using the cost method but will reflect this investment as an available-for-sale equity security on the consolidated balance sheet and will adjust the investment to fair value each quarterly reporting period with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss).

 

On August 3, 2015, we announced that we had entered into an exclusive licensing agreement to develop and commercialize multiple prespecified and undisclosed biosimilar or biobetter antibodies from Mabtech Limited, a holding company for premier antibody development and manufacturing companies in China.  Under the terms of the agreement, we will develop and market these 4 monoclonal antibodies (mAbs) for the North American, European and Japanese markets. We made an initial license payment of $10.0 million with additional payments totaling $190.0 million payable per the agreement over the next four years.  Each of the mAbs has completed a Phase III study; two are currently in registration for marketing approval in China, while the other two are under data analyses for subsequent NDA submission in China.  

In August 2015, we received a vested equity interest in NantCell, a private company, in accordance with the licensing agreement entered into in April 2015.

 

 

 

18


Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

During the quarter ended June 30, 2015, there were no significant changes to the items that we disclosed as our critical accounting policies and estimates in Note 2 to our consolidated financial statements for the year ended December 31, 2014 contained in our 2014 Form 10-K, as filed with the SEC.

Results of Operations

The following describes certain line items set forth in our consolidated statements of operations.

Comparison of the Three Months Ended June 30, 2015 and 2014

(figures in 000’s unless otherwise specified)

Revenues . Revenues were $1,173 for the three months ended June 30, 2015, as compared to $775 for the three months ended June 30, 2014. The net increase of $398 is primarily due to more active grants and an increase in activities under our active grants for the three months ended June 30, 2015 compared to the corresponding period of 2014. Also contributing to this increase was higher sales and service revenues generated from the sale of customized reagents and providing contract development services.

In June 2012, we were awarded a third Advanced Technology Small Business Technology Transfer Research (STTR) grant to support our program to generate and develop novel human antibody therapeutics to combat Staph infections, including Methicillin-resistant Staph, or the Staph Grant II award. The project period for the phase I grant covers a two-year period which commenced in June 2012, with a total grant award of $600. The Staph Grant II award revenues for the three months ended June 30, 2015 and 2014, were $0 and $52, respectively.

In June 2014, the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, or NIH awarded us a Phase II STTR grant to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat Staphylococcus aureus ( S. aureus or Staph) infections, including methicillin-resistant S. aureus (MRSA), or the Staph Grant III award. The project period for this Phase II grant covers a two-year period which commenced in June 2014, with total funds available of approximately $1 million per year for up to 2 years. During the three months ended June 30, 2015 and 2014, we recorded $331 and $32 of revenue, respectively, associated with the Staph Grant III award.

In June 2014, we were awarded a Phase I STTR grant entitled “Anti-Pseudomonas Immunotherapy and Targeted Drug Delivery” from the NIAID. This grant will support the preclinical development of novel anti- Pseudomonas aeruginosa mAb immunotherapy or an antibody-mediated targeted antibiotic delivery vehicle. Each modality may be an effective and safe stand-alone therapy and/or a component of a “cocktail” therapeutic option for prevention and treatment of P. aeruginosa infections. The project period for this Phase I grant covers a two-year period which commenced in July 2014, with total funds available of approximately $300 per year for up to 2 years.  During the three months ended June 30, 2015 and 2014, we recorded $38 and $0 of revenue, respectively, associated with the Phase I STTR grant award.

In July 2014, we were awarded a Phase I STTR grant from the National Cancer Institute (NCI), a division of the NIH, entitled “Targeting of Myc-Max Dimerization for the Treatment of Cancer”. This grant will support the preclinical development of the Myc inhibitor, which interferes with the protein-protein interaction (PPI) between Myc and its obligatory dimerization partner, Max, preventing sequence-specific binding to DNA and subsequent initiation of oncogenic transformation. The project period for this Phase I grant covers a one-year period which commenced in August 2014, with total funds available of approximately $225.  During the three months ended June 30, 2015 and 2014, we recorded $56 and $0 of revenue, respectively associated with the Phase I Myc grant award.

In August 2014, we were awarded a Phase I Small Business Technology Transfer (SBIR) grant from the National Heart, Lung, and Blood Institute (NHBLI), a division of the NIH, entitled “Human Anti-WISP-1 Antibodies for Treatment of Idiopathic Pulmonary Fibrosis”. This grant will advance the Company’s immunotherapy targeting WNT-1 Inducible Signaling Protein-1(WISP1) for the treatment of Idiopathic Pulmonary Fibrosis (IPF). WISP1 is a protein that has been shown to be upregulated in IPF, linked to key growth factors, cellular proliferation, hyperplasia and is correlated with late stage cancers. IPF is a fatal disease, which results in progressive loss of lung function due to fibrosis of the lungs. The project period for this Phase I grant covers a one-year period which

19


commenced in August 2014, with total funds available of approximately $225.  During the three months ended June 30, 2015 and 2014 , we recorded $ 2 1 and $ 0 of revenue , respectively, associated with the Phase I WISP1 grant award.

Revenues from a human immune-oncology anti PD-L1 license agreement for the three months ended June 30, 2015 and 2014, were $13 and $0, respectively.  We had no other revenue during the three months ended June 30, 2015 and 2014 as we have not yet developed any product candidates for commercialization or earned any licensing or royalty payments.

We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the unpredictability of the demand for products and services offered as well as the timing and amount of grant awards, research and development reimbursements and other payments received under any strategic collaborations, if any.

Cost of revenues . Cost of revenues for the three months ended June 30, 2015 and 2014 were $314 and $510, respectively, and relate to the sale of customized reagents and providing contract development services. The costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

Research and Development Expenses . Research and development expenses for the three months ended June 30, 2015 and 2014 were $7,971 and $5,309, respectively. Research and development expenses include the costs to complete our bioequivalence (“BE”) registration trial related to Cynviloq, costs to advance our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates, preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the NIH grant awards, collectively the NIH Grants. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses. The increase of $2,662 is primarily attributable to preclinical testing and completing our BE registration trial, salaries and compensation related expense, depreciation, consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance RTX into clinical trials and potentially pursue other human indications. We expect research and development expenses to increase in absolute dollars as we: (i) advance RTX into clinical trials and pursue other potential indications, the cost of acquiring, developing and manufacturing clinical trial materials, and other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to further advance a number of potential drug candidates into preclinical development activities, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical drug candidates, (iv) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, and (v) invest in our JV’s or other third party agreements.

General and Administrative Expenses . General and administrative expenses for the three months ended June 30, 2015 and 2014 were $3,072 and $2,361, respectively. General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expense, professional fees, infrastructure expenses, legal and accounting expenses and other general corporate expenses. The increase of $711 is primarily attributable to higher stock-based compensation, higher salaries and related compensation expenses and rent and facility expenses partially offset by lower legal costs related to general corporate and IP matters and consulting and business development expenses. We expect general and administrative expenses to increase in absolute dollars as we: (i) incur incremental expenses associated with expanded operations and development efforts, compliance with our public reporting obligations, (ii) increased infrastructure costs, and (iii) invest in our JV’s or other third party agreements.

Intangible Amortization . Intangible amortization for the three months ended June 30, 2015 and 2014 was $349 and $586, respectively. The decrease in the three months ended June 30, 2015 as compared to the same period  in 2014 is due to license rights being amortized on a straight line basis through the date those assets were determined to be held for sale.

Interest Expense . Interest expense for the three months ended June 30, 2015 and 2014 was $442 and $468, respectively. The decrease in interest expense resulted primarily from lower average borrowings under the amended loan and security agreement.

Interest Income . Interest income for the three months ended June 30, 2015 and 2014 was $0 and $5, respectively. We expect that continued low interest rates will significantly limit our interest income in the near term.

Income tax benefit . Income tax benefit for the three months ended June 30, 2015 and 2014 was $17 and $0, respectively. The increase in income tax benefit resulted mainly from the amortization and decrease of deferred tax liabilities and return to provision adjustments .

Net Loss . Net loss for the three months ended June 30, 2015 and 2014 was $10,958 and $8,454, respectively. The increase in net loss is mainly attributable to the development milestone consideration, expanded research and development activities and an increase in general and administrative expenses partially offset by increased revenues.

20


Comparison of the Six months Ended June  30, 201 5 and 201 4

Revenues . Revenues were $2,150 for the six months ended June 30, 2015, as compared to $1,751 for the six months ended June 30, 2014. The net increase of $399 is primarily due to more active grants and an increase in activities under our active grants for the six months ending June 30, 2015 compared to the same period of 2014, partially offset by lower sales and service revenues generated from the sale of customized reagents and providing contract development services.  

In June 2012, we were awarded a third Advanced Technology Small Business Technology Transfer Research (STTR) grant to support our program to generate and develop novel human antibody therapeutics to combat Staph infections, including Methicillin-resistant Staph, or the Staph Grant II award. The project period for the phase I grant covers a two-year period which commenced in June 2012, with a total grant award of $600. The Staph Grant II award revenues for the six months ended June 30, 2015 and 2014, were $0 and $150, respectively.

In June 2014, the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, or NIH awarded us a Phase II STTR grant to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat Staphylococcus aureus ( S. aureus or Staph) infections, including methicillin-resistant S. aureus (MRSA), or the Staph Grant III award. The project period for this Phase II grant covers a two-year period which commenced in June 2014, with total funds available of approximately $1 million per year for up to 2 years. During the six months ended June 30, 2015 and 2014, we recorded $417 and $32 of revenue, respectively, associated with the Staph Grant III award.

In June 2014, we were awarded a Phase I STTR grant entitled “Anti-Pseudomonas Immunotherapy and Targeted Drug Delivery” from the NIAID. This grant will support the preclinical development of novel anti- Pseudomonas aeruginosa mAb immunotherapy or an antibody-mediated targeted antibiotic delivery vehicle. Each modality may be an effective and safe stand-alone therapy and/or a component of a “cocktail” therapeutic option for prevention and treatment of P. aeruginosa infections. The project period for this Phase I grant covers a two-year period which commenced in July 2014, with total funds available of approximately $300 per year for up to 2 years.  During the six months ended June 30, 2015 and 2014, we recorded $93 and $0 of revenue, respectively, associated with the Phase I STTR grant award.

In July 2014, we were awarded a Phase I STTR grant from the National Cancer Institute (NCI), a division of the NIH, entitled “Targeting of Myc-Max Dimerization for the Treatment of Cancer”. This grant will support the preclinical development of the Myc inhibitor, which interferes with the protein-protein interaction (PPI) between Myc and its obligatory dimerization partner, Max, preventing sequence-specific binding to DNA and subsequent initiation of oncogenic transformation. The project period for this Phase I grant covers a one-year period which commenced in August 2014, with total funds available of approximately $225.  During the six months ended June 30, 2015 and 2014, we recorded $130 and $0 of revenue, respectively associated with the Phase I Myc grant award.

In August 2014, we were awarded a Phase I Small Business Technology Transfer (SBIR) grant from the National Heart, Lung, and Blood Institute (NHBLI), a division of the NIH, entitled “Human Anti-WISP-1 Antibodies for Treatment of Idiopathic Pulmonary Fibrosis”. This grant will advance the Company’s immunotherapy targeting WNT-1 Inducible Signaling Protein-1(WISP1) for the treatment of Idiopathic Pulmonary Fibrosis (IPF). WISP1 is a protein that has been shown to be upregulated in IPF, linked to key growth factors, cellular proliferation, hyperplasia and is correlated with late stage cancers. IPF is a fatal disease, which results in progressive loss of lung function due to fibrosis of the lungs. The project period for this Phase I grant covers a one-year period which commenced in August 2014, with total funds available of approximately $225.  During the six months ended June 30, 2015 and 2014, we recorded $31 and $0 of revenue, respectively, associated with the Phase I WISP1 grant award

Revenues from a human immune-oncology anti PD-L1 license agreement for the six months ended June 30, 2015 and 2014, were $25 and $0, respectively.  We had no other revenue during the six months ended June 30, 2015 and 2014 as we have not yet developed any product candidates for commercialization or earned any licensing or royalty payments

Cost of revenues . Cost of revenues for the six months ended June 30, 2015 and 2014 were $823 and $1,073, respectively, and relate to the sale of customized reagents and providing contract development services. The costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

Research and Development Expenses. Research and development expenses for the six months ended June 30, 2015 and 2014 were $15,811 and $11,416, respectively. Research and development expenses include the costs to complete our BE registration trial related to Cynviloq, costs to advance our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates, preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the NIH grant awards, collectively the NIH Grants. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses. The

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increase of $ 4 , 39 5 is primarily attributable to preclinical testing and completion of our BE registration trial , salaries and compensation related expense, depreciation, consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance RTX into clinical trials and potentially pursue other human indi cations. We expect research and development expenses to increase in absolute dollars as we: (i) advance RTX into clinical trials and pursue other potential indications, the cost of acquiring, developing and manufacturing clinical trial materials, and other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to further advance a number of potential drug candidates into preclinical development activities, (iii) continue to identify and advance a number of fully human t herapeutic antibody and ADC preclinical drug candidates, (iv) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs , and (v) invest in our JV’s or other third party agreements .

Acquired In-process Research and Development Expenses . Acquired in-process research and development expenses for the six months ended June 30, 2015 and 2014 were $0 and $209, respectively. Acquired in-process research and development expenses for the six months ended June 30, 2014 include the costs associated with a research agreement.  

General and Administrative Expenses . General and administrative expenses for the six months ended June 30, 2015 and 2014 were $5,291 and $5,746, respectively. General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expense, professional fees, infrastructure expenses, legal and accounting expenses and other general corporate expenses. The decrease of $455 is primarily attributable to lower consulting and business development expenses and salaries and related compensation expenses partially offset by higher stock-based compensation and legal costs related to general corporate and IP matters. We expect general and administrative expenses to increase in absolute dollars as we: (i) incur incremental expenses associated with expanded operations and development efforts, compliance with our public reporting obligations, (ii) increased infrastructure costs, and (iii) invest in our JV’s or other third party agreements. 

Intangible Amortization . Intangible amortization for the six months ended June 30, 2015 and 2014 was $935 and $1,172, respectively. The decrease in the six months ended June 30, 2015 as compared to the same period  in 2014 is due to license rights being amortized on a straight line basis through the date those assets were determined to be held for sale.

Interest Expense . Interest expense for the six months ended June 30, 2015 and 2014 was $881 and $691, respectively. The increase in interest expense resulted primarily from higher average borrowings under the amended loan and security agreement entered into in March 2014.

Interest Income . Interest income for the six months ended June 30, 2015 and 2014 was $0 and $9, respectively. The decrease in interest income resulted from lower average cash balances in 2015 as compared to the same period in 2014. We expect that continued low interest rates will significantly limit our interest income in the near term.

Income tax benefit . Income tax benefit for the six months ended June 30, 2015 and 2014 was $195 and $0, respectively. The increase in income tax benefit resulted mainly from the amortization and decrease of deferred tax liabilities and return to provision adjustments .

Net Loss . Net loss for the six months ended June 30, 2015 and 2014 was $21,396 and $18,547, respectively. The increase in net loss is mainly attributable to the development milestone consideration and expanded research and development activities partially offset by lower general and administrative expenses.

Liquidity and Capital Resources

As of June 30, 2015, we had $51,699 in cash and cash equivalents attributable in part to the December 2014 issuance of 7.2 million shares of our common stock for cash to Cambridge Equities in a private equity financing totaling $41.7 million.  Our working capital as of June 30, 2015 was $43.4 million.

Cash Flows from Operating Activities . Net cash used for operating activities was $7,552 for 2015 and is primarily attributable to our net loss of $21,396 partially offset by an increase in deferred revenue and other working capital balances of $9,580, combined with $4,264 in non-cash activities relating to stock-based compensation, depreciation and amortization expense and other non-cash activities. Net cash used for operating activities was $15,512 for 2014 and primarily reflects a net loss of $18,547, which was partially offset by $4,526 in non-cash activities relating primarily to stock-based compensation, acquired in-process research and development and depreciation expense.

We expect to continue to incur substantial and increasing losses and have negative net cash flows from operating activities as we seek to expand and support our clinical and preclinical development and research activities and fund our JV’s and collaborations.

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Cash Flows from Investin g Activities . Net cash used for investing activities was $ 1 2 , 000 for 201 5 as compared to $ 198 for 201 4 . The net cash used related primarily to an investment in common stock of a non-public entity and equipment acquired for research and development activiti es.

We expect to increase our investment in equipment as we seek to expand and progress our research and development capabilities.

Cash Flows from Financing Activities . Net cash used in financing activities was $651 for 2015 which was primarily for the payment of deferred compensation and principal payments under our amended and restated loan and security agreement partially offset by the proceeds from option exercises as compared to cash provided by financing activities of $34,198 in 2014 which was provided by the closing of our underwritten public offerings and increases in net borrowings under our amended and restated loan and security agreement.

Future Liquidity Needs . We have principally financed our operations through underwritten public offerings and private equity financings with aggregate net proceeds of $124,938, as we have not generated any product related revenue from our planned principal operations to date, and do not expect to generate significant revenue for several years, if ever. We will need to raise additional capital before we exhaust our current cash resources in order to continue to fund our research and development, including our plans for clinical and preclinical trials and new product development, as well as to fund operations generally. As and if necessary, we will seek to raise additional funds through various potential sources, such as equity and debt financings, or through corporate collaboration and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs.

We anticipate that we will continue to incur net losses into the foreseeable future as we: (i) advance RTX into clinical trials and potentially pursue other human indications, (ii) continue to identify and advance a number of potential mAb and ADC drug candidates into preclinical development activities, (iii) continue our development of, and seek regulatory approvals for, our product candidates, (iv) expand our corporate infrastructure, including the costs associated with being a NASDAQ listed public company, and (v) incur our share of JV and collaboration costs for our products and technologies. We believe we have the ability to meet all obligations due over the course of the next twelve months.

We plan to continue to fund our operating losses and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. We filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which was declared effective by the SEC in July 2013. The Shelf Registration Statement provides us the ability to offer up to $100 million of securities, including equity and other securities as described in the registration statement. After the May 2014 underwritten offering, we have the ability to offer up to $36.6 million of additional securities. In November 2014, we filed an additional universal shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC in December 2014. This Shelf Registration Statement provides us with the ability to offer up to $250 million of securities, including equity and other securities as described in the registration statement. Included in the November 2014 shelf registration is a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $50 million of our common stock that may be issued and sold under a sales agreement with MLV & Co. LLC.   Pursuant to these Shelf Registration Statements, we may offer such securities from time to time and through one or more methods of distribution, subject to market conditions and our capital needs. Specific terms and prices will be determined at the time of each offering under a separate prospectus supplement, which will be filed with the SEC at the time of any offering. However, we cannot be sure that such additional funds will be available on reasonable terms, or at all. If we are unable to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. Any of these actions could materially harm our business, results of operations, and future prospects .

On July 27, 2015, NantKwest, Inc. completed its initial public offering (“IPO”).  Prior to the IPO our $10 million investment in NantKwest was accounted for using the cost method and the total investment was classified as part of investments in common stock on our consolidated balance sheets.  As of the date of the IPO, we will no longer account for this investment using the cost method but will reflect this investment as an available-for-sale equity security on the consolidated balance sheet and will adjust the investment to fair value each quarterly reporting period with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss).

On August 3, 2015, we announced that we had entered into an exclusive licensing agreement to develop and commercialize multiple prespecified and undisclosed biosimilar or biobetter antibodies from Mabtech Limited, a holding company for premier antibody development and manufacturing companies in China.  Under the terms of the agreement, we will develop and market these 4 monoclonal antibodies (mAbs) for the North American, European and Japanese markets. We made an initial license payment of $10.0 million with additional payments totaling $190.0 million payable per the agreement over the next four years.  Each of the mAbs has

23


completed a Phase III study; two are currently in registration for marketing approval in China, while the other two are under data analyses for subsequent NDA submission in Ch ina.

If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Off-Balance Sheet Arrangements

Since our inception through June 30, 2015, we have not engaged in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

New Accounting Pronouncements

Refer to Note 1, “Nature of Operations, Summary of Significant Accounting Polices and Business Activities,” in the accompanying notes to the consolidated financial statements for a discussion of recent accounting pronouncements.

 

I tem   3.

Quantitative and Qualitative Disclosures About Market Risk.  

Interest Rate Risk. Our exposure to market risk is confined to our cash and cash equivalents. We have cash and cash equivalents and invest primarily in high-quality money market funds, which we believe are subject to limited credit risk. Due to the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. Our amended and restated loan and security agreement has a fixed interest rate of 7.95% per annum through the loan maturity. We do not believe that we have any material exposure to interest rate risk arising from our investments.

 

Capital Market Risk . We currently do not have significant revenues from grants or sales and services and we have no product revenues from our planned principal operations and therefore depend on funds raised through other sources. One source of funding is through future debt or equity offerings. Our ability to raise funds in this manner depends upon, among other things, capital market forces affecting our stock price.

 

I tem 4.

Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s regulations, rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) promulgated by the SEC under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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P ART II. OTHER INFORMATION

I tem 1.

Legal Proceedings.

To the best of our knowledge, we are not a party to any legal proceedings that, individually or in the aggregate, are deemed to be material to our financial condition or results of operations.

I tem 1A.

Risk Factors.

Risks Related to Our Financial Position and Capital Requirements

We are a development-stage company subject to all of the risks and uncertainties of a new business, including the risk that we or our partners may never develop, complete development or market any of our product candidates or generate product related revenues.

We are a development-stage biopharmaceutical company that began operating and commenced research and development activities in 2009. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. There is no assurance that our libraries of fully-human mAbs will be suitable for diagnostic or therapeutic use, or that we will be able to identify and isolate therapeutics product candidates, or develop, market and commercialize these candidates. We do not expect any of our fully-human mAb, ADC, RTX, or related companion diagnostic product candidates to be commercially available for a few years, if at all. Even if we are able to commercialize our product candidates, there is no assurance that these candidates would generate revenues or that any revenues generated would be sufficient for us to become profitable or thereafter maintain profitability.

We do not have any products that are approved for commercial sale and therefore do not expect to generate any revenues from product sales in the foreseeable future, if ever.

We have not generated any product related revenues to date, and do not expect to generate any such revenues for at least the next several years, if at all. To obtain revenues from sales of our product candidates, we must succeed, either alone or with third parties, in developing, obtaining regulatory approval for, manufacturing and marketing products with commercial potential. We may never succeed in these activities, and we may not generate sufficient revenues to continue our business operations or achieve profitability.

We have incurred significant losses since inception and anticipate that we will incur continued losses for the foreseeable future.

As of June 30, 2015, December 31, 2014, 2013 and 2012, we had an accumulated deficit of $88.9 million, $67.5 million, $32.9 million and $11.0 million, respectively. We continue to incur significant research and development and other expenses related to our ongoing and acquired operations. We have incurred operating losses since our inception, expect to continue to incur significant operating losses for the foreseeable future, and we expect these losses to increase as we: (i) advance RTX into clinical trials and potentially pursue other human or veterinary indications, (ii) continue to identify and advance a number of potential mAb and ADC drug candidates into preclinical and clinical development activities, (iii) continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products, and (iv) expand our corporate infrastructure, including the costs associated with being a NASDAQ public company. As such, we are subject to all risks incidental to the development of new biopharmaceutical products and related companion diagnostics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We will require substantial additional funding which may not be available to us on acceptable terms, or at all. If we fail to raise the necessary additional capital, we may be unable to complete the development and commercialization of our product candidates, or continue our development programs.

Our operations have consumed substantial amounts of cash since inception. We expect to significantly increase our spending to advance the preclinical and clinical development of our product candidates and launch and commercialize any product candidates for which we receive regulatory approval, including building our own commercial organizations to address certain markets. We will require additional capital for the further development and commercialization of our product candidates, as well as to fund our other operating expenses and capital expenditures.

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. We may also seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available. Any of these events could significantly harm our business, financial condition and prospects.

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Our future capital requirements will depend on many factors, including:

·

the progress of the development of our fully-human mAb, ADC, RTX or related companion diagnostic product candidates;

 

·

the number of product candidates we pursue;

 

·

the time and costs involved in obtaining regulatory approvals;

 

·

the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;

 

·

our plans to establish sales, marketing and/or manufacturing capabilities;

 

·

the effect of competing technological and market developments;

 

·

the terms and timing of any collaborative, licensing and other arrangements that we may establish;

 

·

general market conditions for offerings from biopharmaceutical companies;

 

·

our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization; and

 

·

our revenues, if any, from successful development and commercialization of our product candidates.

In order to carry out our business plan and implement our strategy, we anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through strategic collaborations, licensing arrangements, public or private equity or debt financing, bank lines of credit, asset sales, government grants, or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional equity or equity-related financing may be dilutive to our stockholders, and debt or equity financing, if available, may subject us to restrictive covenants and significant interest costs. If we obtain funding through a strategic collaboration or licensing arrangement, we may be required to relinquish our rights to certain of our product candidates or marketing territories.

Further, there is uncertainty related to future NIH grant funding, and the NIH plans for new grants or cooperative agreements may be re-scoped, delayed, or canceled depending on the nature of the work and the availability of resources. As a result, we cannot assure you that we will receive any additional funding under our existing NIH grants, and we may not be successful in securing additional grants from the NIH in the future.

Our inability to raise capital when needed would harm our business, financial condition and results of operations, and could cause our stock price to decline or require that we wind down our operations altogether.

Risks Related to Our Business and Industry

We are heavily dependent on the success of our technologies and product candidates, and we cannot give any assurance that any of our product candidates will receive regulatory approval, which is necessary before they can be commercialized.

To date, we have invested a significant portion of our efforts and financial resources in the acquisition and development of our product candidates. We have not demonstrated our ability to perform the functions necessary for the successful acquisition, development or commercialization of the technologies we are seeking to develop. As an early stage company, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. Our future success is substantially dependent on our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize such product candidates. Our product candidates are currently in preclinical development or in clinical trials. Our business depends entirely on the successful development and commercialization of our product candidates, which may never occur. We currently generate no revenues from sales of any drugs, and we may never be able to develop or commercialize a marketable drug.

The successful development, and any commercialization, of our technologies and any product candidates would require us to successfully perform a variety of functions, including:

·

developing our technology platform;

 

·

identifying, developing, manufacturing and commercializing product candidates;

 

·

entering into successful licensing and other arrangements with product development partners;

 

·

participating in regulatory approval processes;

 

·

formulating and manufacturing products; and

 

·

conducting sales and marketing activities.

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Our operations have been limited to organizing our company, acquiring, developing and securing our proprietary technology and identifying and obtaining early prec linical data or clinical data for various product candidates. These operations provide a limited basis for you to assess our ability to continue to develop our technology, identify product candidates, develop and commercialize any product candidates we are able to identify and enter into successful collaborative arrangements with other companies, as well as for you to assess the advisability of investing in our securities. Each of these requirements will require substantial time, effort and financial resour ces.

Each of our product candidates will require additional preclinical or clinical development, management of preclinical, clinical and manufacturing activities, regulatory approval in multiple jurisdictions, obtaining manufacturing supply, building of a commercial organization, and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the U.S. Food and Drug Administration, or FDA, or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates. In addition, our product development programs contemplate the development of companion diagnostics by our third-party collaborators. Companion diagnostics are subject to regulation as medical devices and must themselves be approved for marketing by the FDA or certain other foreign regulatory agencies before we may commercialize our product candidates.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. It is not uncommon for companies in the biopharmaceutical industry to suffer significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Our future clinical trial results may not be successful.

This drug candidate development risk is heightened by any changes in the planned clinical trials compared to the completed clinical trials. As product candidates are developed through preclinical to early and late stage clinical trials towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for late stage clinical trials, approval and commercialization, such changes do carry the risk that they will not achieve these intended objectives.

We have not previously initiated or completed a corporate-sponsored clinical trial. Consequently, we may not have the necessary capabilities, including adequate staffing, to successfully manage the execution and completion of any clinical trials we initiate, including our planned clinical trials of RTX, in a way that leads to our obtaining marketing approval for our product candidates in a timely manner, or at all.

In the event we are able to conduct a pivotal clinical trial of a product candidate, the results of such trial may not be adequate to support marketing approval. Because our product candidates are intended for use in life-threatening diseases, in some cases we ultimately intend to seek marketing approval for each product candidate based on the results of a single pivotal clinical trial. As a result, these trials may receive enhanced scrutiny from the FDA. For any such pivotal trial, if the FDA disagrees with our choice of primary endpoint or the results for the primary endpoint are not robust or significant relative to control, are subject to confounding factors, or are not adequately supported by other study endpoints, including possibly overall survival or complete response rate, the FDA may refuse to approve a BLA based on such pivotal trial. The FDA may require additional clinical trials as a condition for approving our product candidates.

Delays in clinical testing could result in increased costs to us and delay our ability to generate revenue.

Although we are planning for certain clinical trials relating to RTX, there can be no assurance that the FDA will accept our proposed trial designs. We may experience delays in our clinical trials and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:

·

obtaining regulatory approval to commence a trial;

 

·

reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

·

obtaining institutional review board, or IRB, approval at each site;

 

·

recruiting suitable patients to participate in a trial;

 

27


·

clinical sites deviating from trial protocol or dropping out of a trial;

 

·

having patients complete a trial or return for post-treatment follow-up;

 

·

developing and validating companion diagnostics on a timely basis, if required;

 

·

adding new clinical trial sites; or

 

·

manufacturing sufficient quantities of product candidate for use in clinical trials.

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Furthermore, we intend to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and we intend to have agreements governing their committed activities, we will have limited influence over their actual performance.

We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

Competition for patients in conducting clinical trials may prevent or delay product development and strain our limited financial resources.

Many pharmaceutical companies are conducting clinical trials in patients with the disease indications that our potential drug products target. As a result, we must compete with them for clinical sites, physicians and the limited number of patients who fulfill the stringent requirements for participation in clinical trials. Also, due to the confidential nature of clinical trials, we do not know how many of the eligible patients may be enrolled in competing studies and who are consequently not available to us for our clinical trials. Our clinical trials may be delayed or terminated due to the inability to enroll enough patients. Patient enrollment depends on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. The delay or inability to meet planned patient enrollment may result in increased costs and delays or termination of the trial, which could have a harmful effect on our ability to develop products.

The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

Our product candidates could fail to receive regulatory approval for many reasons, including the following:

·

the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

 

·

we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;

 

28


·

the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;

 

·

the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

 

·

the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the U.S. or elsewhere;

 

·

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies;

 

·

the FDA or comparable foreign regulatory authorities may fail to approve the companion diagnostics we contemplate developing with partners; and

 

·

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.

In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

We have not previously submitted a biologics license application, or BLA, or a New Drug Application, or NDA, to the FDA, or similar drug approval filings to comparable foreign authorities, for any product candidate, and we cannot be certain that any of our product candidates will be successful in clinical trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market one or more of our product candidates, our revenues will be dependent, in part, upon our collaborators’ ability to obtain regulatory approval of the companion diagnostics to be used with our product candidates, as well as the size of the markets in the territories for which we gain regulatory approval and have commercial rights. If the markets for patients that we are targeting for our product candidates are not as significant as we estimate, we may not generate significant revenues from sales of such products, if approved.

We plan to seek regulatory approval to commercialize our product candidates both in the U.S., the European Union and in additional foreign countries. While the scope of regulatory approval is similar in other countries, to obtain separate regulatory approval in many other countries we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution of our product candidates, and we cannot predict success in these jurisdictions.

Our approach to the discovery and development of product candidates that target ADCs is unproven, and we do not know whether we will be able to develop any products of commercial value.

ADCs are emerging technologies and, consequently, it is conceivable that such technologies may ultimately fail to identify commercially viable drugs to treat human patients with cancer or other diseases.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

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Additionally if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

·

regulatory authorities may withdraw approvals of such products;

 

·

regulatory authorities may require additional warnings on the label;

 

·

we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

 

·

we could be sued and held liable for harm caused to patients; and

 

·

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate or for particular indications of a product candidate, if approved, and could significantly harm our business, results of operations and prospects.

We rely on third parties to conduct our preclinical and clinical trials. If these third parties do not successfully perform their contractual legal and regulatory duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We have relied upon and plan to continue to rely upon third-party CROs to monitor and manage data for our ongoing preclinical and clinical programs. We rely on these parties for execution of our preclinical and clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with current good clinical practices, or cGCP, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area, or EEA, and comparable foreign regulatory authorities for all of our products in clinical development.

Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, the European Medicines Agency, or EMA, or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with cGCP regulations. In addition, our clinical trials must be conducted with product produced under current good manufacturing practices, or cGMP, regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. In addition, our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our on-going clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

We expect to rely on third parties to manufacture our clinical drug supplies and we intend to rely on third parties to produce commercial supplies of any approved product candidate, and our commercialization of any of our product candidates could be stopped, delayed or made less profitable if those third parties fail to obtain approval of the FDA or comparable foreign regulatory authorities, fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture our clinical drug supplies for use in the conduct of our clinical trials, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the cGMP regulatory requirements for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their

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manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdr aws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

Material necessary to manufacture our product candidates may not be available on commercially reasonable terms, or at all, which may delay the development and commercialization of our product candidates.

We rely on our manufacturers to produce or purchase from third-party suppliers the materials necessary to produce our product candidates for our clinical trials. There are a limited number of suppliers for raw materials that we use to manufacture our drugs and there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our product candidates for our clinical trials, and if approved, ultimately for commercial sale. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. We currently do not have any agreements for the commercial production of these raw materials. Any significant delay in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.

We expect to continue to depend on third-party contract manufacturers for the foreseeable future. We have not entered into long-term agreements with all of our current contract manufacturers or with any alternate fill/finish suppliers, and though we intend to do so prior to commercial launch in order to ensure that we maintain adequate supplies of finished drug product, we may be unable to enter into such an agreement or do so on commercially reasonable terms, which could have a material adverse impact upon our business. We currently obtain our supplies of finished drug product through individual purchase orders.

We may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product candidates.

We are dependent on our third party manufacturers to conduct process development and scale-up work necessary to support greater clinical development and commercialization requirements for our product candidates. Carrying out these activities in a timely manner, and on commercially reasonable terms, is critical to the successful development and commercialization of our product candidates. We expect our third-party manufacturers are capable of providing sufficient quantities of our product candidates to meet anticipated clinical and full-scale commercial demands, however if third parties with whom we currently work are unable to meet our supply requirements, we will need to secure alternate suppliers. While we believe that there are other contract manufacturers having the technical capabilities to manufacture our product candidates, we cannot be certain that identifying and establishing relationships with such sources would not result in significant delay or material additional costs.

We currently have no sales and marketing organization. If we are unable to establish a direct sales force in the U.S. to promote our products, the commercial opportunity for our products may be diminished.

We currently have no sales and marketing organization. If any of our product candidates are approved by the FDA, we intend to market that product through our own sales force. We will incur significant additional expenses and commit significant additional management resources to establish our sales force. We may not be able to establish these capabilities despite these additional expenditures. We will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire and train sales and marketing personnel. If we elect to rely on third parties to sell our product candidates in the U.S., we may receive less revenue than if we sold our products directly. In addition, although we would intend to use due diligence in monitoring their activities, we may have little or no control over the sales efforts of those third parties. In the event we are unable to develop our own sales force or collaborate with a third party to sell our product candidates, we may not be able to commercialize our product candidates which would negatively impact our ability to generate revenue.

We may need others to market and commercialize our product candidates in international markets.

In the future, if appropriate regulatory approvals are obtained, we may commercialize our product candidates in international markets. However, we have not decided how to commercialize our product candidates in those markets. We may decide to build our own sales force or sell our products through third parties. If we decide to sell our product candidates in international markets through a third party, we may not be able to enter into any marketing arrangements on favorable terms or at all. In addition, these arrangements could result in lower levels of income to us than if we marketed our product candidates entirely on our own. If we are unable to enter into a marketing arrangement for our product candidates in international markets, we may not be able to develop an effective international sales

31


force to successfully commercialize those products in international markets. If we fail to enter into marketi ng arrangements for our products and are unable to develop an effective international sales force, our ability to generate revenue would be limited.

Even if we receive regulatory approval for any of our product candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

Any regulatory approvals that we receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase IV clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA or a comparable foreign regulatory authority approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs and cGCPs for any clinical trials that we conduct post-approval. The future discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

·

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

·

fines, warning letters or holds on clinical trials;

 

·

refusal by the FDA to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license approvals;

 

·

product seizure or detention, or refusal to permit the import or export of products; and

 

·

injunctions or the imposition of civil or criminal penalties.

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability.

We will need to obtain FDA approval of any proposed product brand names, and any failure or delay associated with such approval may adversely impact our business.

A pharmaceutical product cannot be marketed in the U.S. or other countries until we have completed rigorous and extensive regulatory review processes, including approval of a brand name. Any brand names we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the U.S. Patent and Trademark Office, or the PTO. The FDA typically conducts a review of proposed product brand names, including an evaluation of potential for confusion with other product names. The FDA may also object to a product brand name if we believe the name inappropriately implies medical claims. If the FDA objects to any of our proposed product brand names, we may be required to adopt an alternative brand name for our product candidates. If we adopt an alternative brand name, we would lose the benefit of our existing trademark applications for such product candidate and may be required to expend significant additional resources in an effort to identify a suitable product brand name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our product candidates.

Our failure to successfully discover, acquire, develop and market additional product candidates or approved products would impair our ability to grow.

As part of our growth strategy, we intend to develop and market additional products and product candidates. We are pursuing various therapeutic opportunities through our pipeline. We may spend several years completing our development of any particular current or future internal product candidate, and failure can occur at any stage. The product candidates to which we allocate our resources may not end up being successful. In addition, because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select, discover and acquire promising pharmaceutical product candidates and products. Failure of this strategy would impair our ability to grow.

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The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, inc luding some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensi ng of third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the an ticipated benefits of such efforts. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.

In addition, future acquisitions may entail numerous operational and financial risks, including:

·

disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies;

 

·

incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions;

 

·

higher than expected acquisition and integration costs;

 

·

difficulty in combining the operations and personnel of any acquired businesses with our operations and personnel;

 

·

increased amortization expenses;

 

·

impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership;

 

·

inability to motivate key employees of any acquired businesses; and

 

·

assumption of known and unknown liabilities.

Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.

Our commercial success depends upon us attaining significant market acceptance of our product candidates, if approved for sale, among physicians, patients, healthcare payors and major operators of cancer and other clinics.

Even if we obtain regulatory approval for our product candidates, the product may not gain market acceptance among physicians, health care payors, patients and the medical community, which are critical to commercial success. Market acceptance of any product candidate for which we receive approval depends on a number of factors, including:

·

the efficacy and safety as demonstrated in clinical trials;

 

·

the timing of market introduction of such product candidate as well as competitive products;

 

·

the clinical indications for which the drug is approved;

 

·

acceptance by physicians, major operators of cancer clinics and patients of the drug as a safe and effective treatment;

 

·

the safety of such product candidate seen in a broader patient group, including its use outside the approved indications;

 

·

the availability, cost and potential advantages of alternative treatments, including less expensive generic drugs;

 

·

the availability of adequate reimbursement and pricing by third-party payors and government authorities;

 

 

·

the product labeling or product insert required by the FDA or regulatory authority in other countries;

 

·

the approval, availability, market acceptance and reimbursement for a companion diagnostic, if any;

 

·

the prevalence and severity of adverse side effects; and

 

·

the effectiveness of our sales and marketing efforts.

If any product candidate that we develop does not provide a treatment regimen that is as beneficial as, or is perceived as being as beneficial as, the current standard of care or otherwise does not provide patient benefit, that product candidate, if approved for commercial sale by the FDA or other regulatory authorities, likely will not achieve market acceptance. Our ability to effectively promote and sell any approved products will also depend on pricing and cost-effectiveness, including our ability to produce a product at a competitive price and our ability to obtain sufficient third-party coverage or reimbursement. If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, patients and third-party payors, our ability to generate revenues from that product would be substantially reduced. In addition, our efforts to educate the medical community and third-party payors on

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the benefits of our product candidate s may require significant resources, may be constrained by FDA rules and policies on product promotion, and may never be successful.

If we cannot compete successfully against other biotechnology and pharmaceutical companies, we may not be successful in developing and commercializing our technology and our business will suffer.

The biotechnology and pharmaceutical industries are characterized by intense competition and rapid technological advances, both in the U.S. and internationally. In addition, the competition in the oncology market is intense. Even if we are able to develop our proprietary platform technology and additional antibody libraries, each will compete with a number of existing and future technologies and product candidates developed, manufactured and marketed by others. Specifically, we will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have validated technologies with products already FDA-approved or in various stages of development. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:

·

developing product candidates and technologies generally;

 

·

undertaking preclinical testing and clinical trials;

 

·

obtaining FDA and other regulatory approvals of product candidates;

 

·

formulating and manufacturing product candidates; and

 

·

launching, marketing and selling product candidates.

Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than we are able and may be more effective in selling and marketing their products as well. Smaller or early-stage companies or generic pharmaceutical manufacturers may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis drug products that are more effective or less costly than any drug candidate that we are currently developing or that we may develop. If approved, our product candidates will face competition from commercially available drugs as well as drugs that are in the development pipelines of our competitors and later enter the market.

Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make our product candidates less competitive. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA, EMA or other regulatory approval or discovering, developing and commercializing medicines before we do, which would have a material adverse impact on our business. If our technologies fail to compete effectively against third party technologies, our business will be adversely impacted.

  We expect that our ability to compete effectively will depend upon our ability to:

·

successfully and efficiently complete clinical trials and submit for and obtain all requisite regulatory approvals in a cost-effective manner;

 

·

maintain a proprietary position for our products and manufacturing processes and other related product technology;

 

·

attract and retain key personnel;

 

·

develop relationships with physicians prescribing these products; and

 

·

build an adequate sales and marketing infrastructure for our product candidates.

Because we will be competing against significantly larger companies with established track records, we will have to demonstrate that, based on experience, clinical data, side-effect profiles and other factors, our products, if approved, are competitive with other products.

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Reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our products profitably.

There is significant uncertainty related to the third-party coverage and reimbursement of newly approved drugs. We intend to seek approval to market our product candidates in the U.S., Europe and other selected foreign jurisdictions. Market acceptance and sales of our product candidates in both domestic and international markets will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for any of our product candidates and may be affected by existing and future health care reform measures. Government and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new drugs and, as a result, they may not cover or provide adequate payment for our product candidates. These payors may conclude that our product candidates are less safe, less effective or less cost-effective than existing or future introduced products, and third-party payors may not approve our product candidates for coverage and reimbursement or may cease providing coverage and reimbursement for these product candidates.

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use of our products. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

In some foreign countries, particularly in the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct additional clinical trials that compare the cost-effectiveness of our product candidates to other available therapies. If reimbursement of our product candidates is unavailable or limited in scope or amount in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability of our products in such country.

Healthcare reform measures could hinder or prevent our product candidates’ commercial success.

In both the U.S. and certain foreign jurisdictions, there have been and we expect there will continue to be a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products profitably. The U.S. government and other governments have shown significant interest in pursuing healthcare reform. In particular, the Medicare Modernization Act of 2003 revised the payment methodology for many products under the Medicare program in the U.S. This has resulted in lower rates of reimbursement. In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Healthcare Reform Law, was enacted. The Healthcare Reform Law substantially changes the way healthcare is financed by both governmental and private insurers. Such government-adopted reform measures may adversely impact the pricing of healthcare products and services in the United States or internationally and the amount of reimbursement available from governmental agencies or other third-party payors.

There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we may obtain regulatory approval, as well as our ability to set satisfactory prices for our products, to generate revenues, and to achieve and maintain profitability.

Certain of our potential product candidates are in early stages of development and any product candidates that we develop will require extensive preclinical and clinical testing before they are approved by the appropriate regulatory agency, if at all.

The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. We are in the early stages of developing potential product candidates, and any candidates that we develop will require extensive preclinical and clinical testing before they will be approved by the FDA or another regulatory authority in a jurisdiction outside the U.S., if at all. We have not yet developed any product candidate; if we were to do so there are a number of requirements that we would be required to satisfy in order to begin conducting preclinical trials and there can be no assurance that we will develop product candidates or complete the steps necessary to allow us to commence these trials. We cannot predict with any certainty the results of preclinical testing or whether such trials would yield sufficient data to permit us, or those with whom we collaborate, to proceed with clinical development and ultimately submit an application for regulatory approval of our product candidates in the U.S. or abroad, or whether such applications would be approved by the appropriate regulatory agency. Further, our product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.

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Failure to successfully validate, develop and obtain regulatory approval for companion diagnostics could harm our long-term drug development strategy.

As one of the key elements of our clinical development strategy, we seek to identify patients within a disease category or indication who may derive selective and meaningful benefit from the product candidates we are developing. In collaboration with partners, we plan to develop companion diagnostics to help us to more accurately identify patients within a particular category or indication, both during our clinical trials and in connection with the commercialization of certain of our product candidates. Companion diagnostics are subject to regulation by the FDA and comparable foreign regulatory authorities as medical devices and require separate regulatory approval prior to commercialization. We do not develop companion diagnostics internally and thus we are dependent on the sustained cooperation and effort of our third-party collaborators in developing and obtaining approval for these companion diagnostics. We and our collaborators may encounter difficulties in developing and obtaining approval for the companion diagnostics, including issues relating to selectivity/specificity, analytical validation, reproducibility, or clinical validation. Any delay or failure by our collaborators to develop or obtain regulatory approval of the companion diagnostics could delay or prevent approval of our product candidates. In addition, our collaborators may encounter production difficulties that could constrain the supply of the companion diagnostics, and both they and we may have difficulties gaining acceptance of the use of the companion diagnostics in the clinical community. If such companion diagnostics fail to gain market acceptance, it would have an adverse effect on our ability to derive revenues from sales of our products. In addition, the diagnostic company with whom we contract may decide to discontinue selling or manufacturing the companion diagnostic that we anticipate using in connection with development and commercialization of our product candidates or our relationship with such diagnostic company may otherwise terminate. We may not be able to enter into arrangements with another diagnostic company to obtain supplies of an alternative diagnostic test for use in connection with the development and commercialization of our product candidates or do so on commercially reasonable terms, which could adversely affect and/or delay the development or commercialization of our product candidates.

Our product development efforts may not be successful.

Our product development efforts for our FIC therapeutic antibodies, ADC, bispecific Abs, CAR.TNK and rIVIG technologies are designed to focus on novel therapeutic approaches and technologi