Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis of our financial condition and
results of operations together with our condensed consolidated financial statements and the related notes appearing in “Item
1. Financial Statements” in this Quarterly Report on Form 10-Q. In addition to historical information, some of the information
contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with
respect to our plans and strategy for our business, future financial performance, expense levels and liquidity sources, includes
forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” in this Quarterly
Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the following discussion and analysis.
We are an immuno-oncology company that has been focused on the development and commercialization
of individualized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary precision immunotherapy
technology platform called Arcelis.
In April 2018, we terminated our development program for rocapuldencel-T, our lead product
candidate, which we had been developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. Additionally,
in August 2018, we ceased our support for the development of our other clinical product candidate, AGS-004, which we were developing
for the eradication of HIV. We have ceased our research and development activities and we have significantly reduced our workforce.
Based on a review of the status of our internal programs, resources and capabilities, we are pursuing a strategic alternative
that may involve an asset sale, dissolution, liquidation, wind-down or protection under bankruptcy laws. There can be no assurance
that we will be able to enter into a strategic transaction on a timely basis, on terms that are favorable to us, or at all. If
we decide to seek protection under the bankruptcy laws, and if we decide to wind down the company under the bankruptcy laws or
otherwise, it is unclear to what extent we will be able to pay our obligations to creditors, and, whether and to what extent any
resources will be available for distributions to our stockholders. However, based on our current resources, we believe that it
is unlikely that any resources will be available for distributions to our stockholders and that a likely outcome of our wind-down
and potential bankruptcy proceeding will be the cancellation or extinguishment of all outstanding shares in the company without
any payment or other distribution on account of those shares.
Prior to April 2018, we had been conducting a pivotal Phase 3 clinical trial of rocapuldencel-T
in combination with sunitinib / standard of care for the treatment of newly diagnosed mRCC, or the ADAPT trial. In February 2017,
the independent data monitoring committee, or the IDMC, for the ADAPT trial recommended that the trial be discontinued for futility
based on its planned interim data analysis. The IDMC concluded that the trial was unlikely to demonstrate a statistically significant
improvement in overall survival in the combination treatment arm, utilizing the intent-to-treat population at the pre-specified
number of 290 events (deaths), the original primary endpoint of the study.
Notwithstanding the IDMC’s recommendation, we determined to
continue to conduct the trial while we analyzed interim data from the trial. Following a meeting with the U.S. Food and Drug Administration,
or FDA, we determined to continue the ADAPT trial until at least the pre-specified number of 290 events occurred, and to submit
to the FDA a protocol amendment to increase the pre-specified number of events for the primary analysis of overall survival in
the trial beyond 290 events. In April 2018, we submitted a protocol amendment to the FDA that included an amended primary endpoint
analysis with four co-primary endpoints. Subsequently in April 2018, we conducted another interim analysis of the data from the
ADAPT trial, at which time 51 new events (deaths) had occurred subsequent to the February 2017 interim analysis. Based upon review
of the interim data from this analysis, we determined that the endpoints were unlikely to be achieved if the trial were to be continued
and decided to discontinue the ADAPT clinical trial.
We had also been developing AGS-004, also an Arcelis-based product candidate, for the
treatment of HIV. We have completed Phase 1 and Phase 2 trials funded by government grants and a Phase 2b trial that was funded
in full by the National Institutes of Health, or NIH, and the National Institute of Allergy and Infectious Diseases, or NIAID.
More recently, we were supporting an investigator-initiated clinical trial of AGS-004 in adult HIV patients evaluating the use
of AGS-004 in combination with vorinostat, a latency reversing drug, for HIV eradication. In connection with the cessation of our
research and development activities, we recently ceased our support for the trial, and enrollment was suspended.
On March 3, 2017, we entered into a payoff letter with Horizon Technology Finance Corporation
and Fortress Credit Co LLC, or the Lenders, under our venture loan and security agreement, or the Loan Agreement, pursuant to which
we paid, on March 6, 2017, a total of $23.1 million to the Lenders, representing the principal balance and accrued interest outstanding
under the Loan Agreement in repayment of our outstanding obligations under the Loan Agreement. In addition, we issued to the Lenders
five year warrants to purchase an aggregate of 5,000 shares of common stock at an exercise price of $26.00 per share in consideration
of the Lenders acceptance of $23.1 million as payment in full. Upon the payment of the $23.1 million and the issuance of the warrants
pursuant to the payoff letter, all of our outstanding indebtedness and obligations to the Lenders under the Loan Agreement were
paid in full, and the Loan Agreement and the notes thereunder were terminated.
In March 2017, we announced that our board of directors approved a workforce action plan
designed to streamline operations and reduce operating expenses. During the year ended December 31, 2017, we recognized $1.2 million
in severance costs, all of which was paid as of December 31, 2017. We also recognized $3.2 million in stock-based compensation
expense from the acceleration of vesting of stock options and restricted stock held by the terminated employees during the year
ended December 31, 2017.
In June 2017, we raised net proceeds of $6.0 million through the issuance of a secured
convertible note to Pharmstandard International S.A., or Pharmstandard, a collaborator and our largest stockholder, in the aggregate
principal amount of $6.0 million.
In August 2017, we entered into an agreement with Medpace, Inc., or Medpace, regarding
$1.5 million in deferred fees that we owed Medpace for contract research and development services. Under the agreement we paid
$0.85 million of the amount during the third quarter of 2017 and paid the balance in April 2018.
In September 2017, we entered into a satisfaction and release agreement, or the Invetech
Satisfaction and Release Agreement, with Invetech Pty Ltd, or Invetech. Under the Invetech Satisfaction and Release Agreement,
we agreed to make, issue and deliver to Invetech (i) a cash payment of $0.5 million, (ii) 57,142 shares of our common stock and
(iii) an unsecured convertible promissory note in the original principal amount of $5.2 million on account of and in full satisfaction
and release of all of our payment obligations to Invetech arising under our development agreement with Invetech, or the Invetech
Development Agreement, prior to the date of the Invetech Satisfaction and Release Agreement, including our obligation to pay Invetech
up to a total of $8.3 million in deferred fees, bonus payments and accrued interest.
In November 2017, we entered into a satisfaction and release agreement, or the Saint-Gobain
Satisfaction and Release Agreement, with Saint-Gobain Performance Plastics Corporation, or Saint-Gobain. Under the Saint Gobain
Satisfaction and Release Agreement, we agreed to make, issue and deliver to Saint-Gobain (i) a cash payment of $0.5 million, (ii)
34,499 shares of our common stock, (iii) an unsecured convertible promissory note in the original principal amount of $2.4 million,
and (iv) certain specified equipment originally provided to us by Saint-Gobain under the development agreement with Saint-Gobain,
or the Saint-Gobain Development Agreement, on account of and in full satisfaction and release of all of our payment obligations
to Saint-Gobain arising under the Saint-Gobain Development Agreement, prior to the date of the Saint-Gobain Satisfaction and Release
Agreement, including the development fees and charges. In connection with entering into the Saint-Gobain Satisfaction and Release
Agreement, we and Saint-Gobain entered into an amendment to the Saint-Gobain Development Agreement to extend the term to December
31, 2019.
From June 2017 through December 31, 2017, we raised proceeds of $15.5 million through
the issuance of common stock in an at-the-market offering under our original sales agreement with Cowen & Company, LLC, or
Cowen. In February 2018, we amended and restated the original sales agreement with Cowen to increase the maximum aggregate offering
price of the shares of our common stock which we may sell under the agreement from $30 million to up to $45 million. From December
31, 2017 through April 25, 2018, we raised an additional $7.5 million of proceeds. However, upon the delisting of our common stock
from The Nasdaq Capital Market in April 2018, we ceased to sell any additional shares under the sales agreement.
In January 2018, we entered into a stock purchase agreement with Lummy (Hong Kong), Ltd.,
or Lummy HK, under which we agreed to issue and sell to Lummy HK in a private financing 375,000 shares of common stock for an aggregate
purchase price of $1.5 million. In March 2018, we and Lummy HK amended the stock purchase agreement to reduce the aggregate price
for the shares to $450,000. Concurrent with such amendment, we entered into a third amendment to our license agreement with Lummy
HK pursuant to which Lummy HK agreed to pay us a $1.05 million milestone payment. The $450,000 payment for the shares of common
stock and the $1.05 million milestone payment were received in April 2018.
On April 23, 2018, we received a notification from The Nasdaq Stock Market LLC indicating
that, because we had indicated that we would be unable to meet the stockholders’ equity requirement for continued listing
as of the April 24, 2018 deadline that had been set by the Nasdaq Hearing Panel, the Nasdaq Hearing Panel determined to delist
our common stock from The Nasdaq Capital Market and to suspend trading in our common stock effective at the open of business on
April 25, 2018. Following such delisting, we transferred our common stock to the OTCQB® Venture Market.
As of September 30, 2018, we had cash and cash equivalents of $7.9 million. We do not
currently have sufficient cash resources to pay all of our accrued obligations in full or to continue our business operations
beyond the end of 2018.
Our consolidated financial statements have been prepared assuming that we will continue
as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal
course of business. As of September 30, 2018, our current assets totaled $9.0 million compared with current liabilities of $9.4
million, and we had cash and cash equivalents of $7.9 million. Based upon our current and projected cash flow, we note there is
substantial doubt about our ability to continue as a going concern within one year after the date that these financial statements
are issued. The financial statements for the three and nine months ended September 30, 2018 do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities
that may result from uncertainty related to our ability to continue as a going concern.
Prior to the termination of the development of rocapuldencel-T and the cessation of
our research and development activities, we had devoted substantially all of our resources to our drug development efforts, including
advancing our Arcelis precision immunotherapy technology platform, conducting clinical trials of our product candidates, protecting
our intellectual property and providing general and administrative support for these operations. We have not generated any revenue
from product sales and, to date, have funded our operations primarily through public offerings of our common stock and warrants,
a venture loan, private placements of common stock, preferred stock and warrants, convertible debt financings, government contracts,
government and other third party grants and license and collaboration agreements. From inception in May 1997 through September
30, 2018, we have raised a total of $526.0 million in cash, including:
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$360.7 million from the sale of our common stock, convertible debt, warrants and preferred stock;
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$32.9 million from the licensing of our technology;
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$107.4 million from government contracts, grants and license and collaboration agreements; and
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$25.0 million from the Loan Agreement with the Lenders.
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We have incurred losses in each year since our inception in May 1997. Our net loss was $53.0 million and $40.6
million for the years ended December 31, 2016, and 2017, respectively and $13.6 million for the nine months ended September 30,
2018. As of September 30, 2018, we had an accumulated deficit of $386.2 million. Substantially all of our operating losses have
resulted from costs incurred in connection with our development programs and from general and administrative costs associated with
our operations.
In light of the termination of the development of rocapuldencel-T, cessation of our
research and development activities and our cash resources, and based on a review of the status of our internal programs, resources
and capabilities, we are pursuing a strategic alternative that may involve an asset sale, dissolution, liquidation, wind-down
or protection under bankruptcy laws.. There can be no assurance that we will be able to enter into a strategic transaction on
a timely basis, on terms that are favorable to us, or at all. If we decide to seek protection under the bankruptcy laws, and if
we decided to wind down the company under the bankruptcy laws or otherwise, it is unclear to what extent we will be able to pay
our obligations to creditors, and, whether and to what extent any resources will be available for distributions to our stockholders.
However, based on our current resources, we believe that it is unlikely that any resources will be available for distributions
to our stockholders and that a likely outcome of our wind-down and potential bankruptcy proceeding will be the cancellation or
extinguishment of all outstanding shares in the company without any payment or other distribution on account of those shares.
NIH Funding
In September 2006, we entered into a multi-year research contract with the NIH and NIAID
to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. We have
used funds from this contract to develop AGS-004, including to fund in full our Phase 2b clinical trial of AGS-004. On June 29,
2016, a contract modification was agreed to that extended the NIH and NIAID’s commitment under the contract to July 31, 2018.
We have agreed to a statement of work under the contract, and are obligated to furnish all the services, qualified personnel, material,
equipment, and facilities not otherwise provided by the U.S. government needed to perform the statement of work. This contract
expired as of July 31, 2018.
Under this contract, as amended, the NIH and NIAID committed to fund up to a total of
$39.8 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up
to $38.4 million and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development
milestones. This amount includes a September 2014 modification of the contract under which the NIH and NIAID agreed to fund up
to an additional $0.5 million to cover a portion of the manufacturing costs of the planned Phase 2 clinical trial of AGS-004 for
long-term viral control in pediatric patients. Since September 2010, we have received reimbursement of our allocated overhead and
general and administrative expenses at provisional indirect cost rates equal to negotiated provisional indirect cost rates agreed
to with the NIH and NIAID in September 2010. These provisional indirect cost rates were subject to adjustment based on our actual
costs pursuant to the agreement with the NIH and NIAID.
We have recorded revenue of $38.2 million through September 30, 2018 under the NIH and
NIAID contract. This contract is the only arrangement under which we have generated substantial revenue.
Development and Commercialization Agreements
An important part of our business strategy has been to enter into arrangements with third
parties both to assist in the development and commercialization of our product candidates, particularly in international markets,
and to in-license product candidates in order to expand our pipeline.
Pharmstandard
. In August 2013, in connection with the purchase of shares
of our series E preferred stock by Pharmstandard, we entered into an exclusive royalty-bearing license agreement with Pharmstandard.
Under this license agreement, we granted Pharmstandard and its affiliates a license, with the right to sublicense, to develop,
manufacture and commercialize rocapuldencel-T and other products for the treatment of human diseases, which are developed by Pharmstandard
using our individualized immunotherapy platform, in the Russian Federation, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan,
Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, which we refer to as the Pharmstandard Territory. We also
provided Pharmstandard with a right of first negotiation for development and commercialization rights in the Pharmstandard Territory
to specified additional products we may develop.
Under the terms of the license agreement, Pharmstandard licensed us rights to clinical
data generated by Pharmstandard under the agreement and granted us an option to obtain an exclusive license outside of the Pharmstandard
Territory to develop and commercialize improvements to our Arcelis technology generated by Pharmstandard under the agreement, a
non-exclusive worldwide royalty-free license to Pharmstandard improvements to manufacture products using our Arcelis technology
and a license to specified follow-on licensed products generated by Pharmstandard outside of the Pharmstandard Territory, each
on terms to be negotiated upon our request for a license. In addition, Pharmstandard agreed to pay us pass-through royalties on
net sales of all licensed products in the low single digits until it has generated a specified amount of aggregate net sales. Once
the net sales threshold is achieved, Pharmstandard will pay us royalties on net sales of specified licensed products, including
rocapuldencel-T, in the low double digits below 20%. These royalty obligations last until the later of the expiration of specified
licensed patent rights in a country or the twelfth anniversary of the first commercial sale in such country on a country by country
basis and no further royalties on specified other licensed products. After the net sales threshold is achieved, Pharmstandard has
the right to offset a portion of the royalties Pharmstandard pays to third parties for licenses to necessary third party intellectual
property against the royalties that Pharmstandard pays to us.
The agreement will terminate upon expiration of the royalty term, upon which all licenses
will become fully paid up perpetual exclusive licenses. Either party may terminate the agreement for the other party’s uncured
material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy and we may terminate
the agreement if Pharmstandard challenges or assists a third party in challenging specified patent rights of ours. If Pharmstandard
terminates the agreement upon our material breach or bankruptcy, Pharmstandard is entitled to terminate our licenses to improvements
generated by Pharmstandard, upon which we may come to rely for the development and commercialization of rocapuldencel-T and other
licensed products outside of the Pharmstandard Territory, and Pharmstandard is entitled to retain its licenses from us and to pay
us substantially reduced royalty payments following such termination.
In November 2013, we entered into an agreement with Pharmstandard under which Pharmstandard
purchased shares of our series E preferred stock. Under this agreement, we agreed to enter into a manufacturing rights agreement
for the European market with Pharmstandard and that the manufacturing rights agreement would provide for the issuance of warrants
to Pharmstandard to purchase 24,989 shares of our common stock at an exercise price of $116.40 per share. As of November 17, 2018,
we had not entered into this manufacturing rights agreement or issued the warrants.
Pharmstandard and Actigen
.
On February 1, 2018,
we entered into an option agreement with Pharmstandard and Actigen Limited, or Actigen, under which we obtained an exclusive option
to license certain patent rights and know-how related to a group of fully human PD1 monoclonal antibodies and related technology
held by Actigen. Actigen previously granted Pharmstandard an option to exclusively license these patent rights. Under the option
agreement, Pharmstandard granted to us an exclusive license for evaluation purposes only to make, have made, use and import the
PD1 monoclonal antibodies covered by these patent rights (but not offer to sell or sell products and processes covered by or incorporating
the patent rights) for a period of one year from the date of the agreement and an option exercisable during the option exercise
period to obtain an exclusive license (with the right to sublicense) under the patent rights to make, have made, use, offer for
sale, sell and import (with a right to grant sublicenses) the PD1 monoclonal antibodies for all prophylactic, therapeutic and diagnostic
uses and for all human diseases and conditions in the United States and Canada. The parties have agreed that, if we exercise the
option during the option exercise period, the parties will negotiate in good faith a license agreement, on the terms and conditions
outlined in the option agreement, including payments by us to Pharmstandard of an upfront license fee of $3.6 million, payable
upon execution of the license agreement in our common stock, various development and regulatory milestone payments totaling $8.5
million, and upper single digit percentage royalties on net sales of any pharmaceutical product or therapeutic regimen incorporating
the licensed PD1 monoclonal antibodies that will apply on a country-by-country basis until the later of the last to expire patent
or ten years from the date of first commercial sale, against which the first $5.0 million of our development expenditures will
be credited as prepaid royalties.
In consideration for the rights granted under the option agreement, we issued 169,014
shares of our common stock to Pharmstandard the value of which will be creditable against the upfront license fee of $3.6 million
payable under the option agreement if we enter into a license agreement. Unless earlier terminated by any party for uncured material
breach or by us without cause upon thirty days prior written notice, the option agreement will terminate upon the later of the
end of the option exercise period if we decide not to exercise the option or sixty days after we exercise the option.
Green Cross
. In July 2013, in connection with the purchase of our series
E preferred stock by Green Cross Corp., or Green Cross, we entered into an exclusive royalty-bearing license agreement with Green
Cross. Under this agreement we granted Green Cross a license to develop, manufacture and commercialize rocapuldencel-T for mRCC
in South Korea. We also provided Green Cross with a right of first negotiation for development and commercialization rights in
South Korea to specified additional products we may develop.
Under the terms of the license, Green Cross has agreed to pay us $0.5 million upon the
initial submission of an application for regulatory approval of a licensed product in South Korea, $0.5 million upon the initial
regulatory approval of a licensed product in South Korea and royalties ranging from the mid-single digits to low double digits
below 20% on net sales until the fifteenth anniversary of the first commercial sale in South Korea. In addition, Green Cross has
granted us an exclusive royalty free license to develop and commercialize all Green Cross improvements to our licensed intellectual
property in the rest of the world, excluding South Korea, except that, as to such improvements for which Green Cross makes a significant
financial investment and that generate significant commercial benefit in the rest of the world, we are required to negotiate in
good faith a reasonable royalty that we will be obligated to pay to Green Cross for such license. Under the terms of the agreement,
we are required to continue to develop and to use commercially reasonable efforts to obtain regulatory approval for rocapuldencel-T
in the United States.
The agreement will terminate upon expiration of the royalty term, which is 15 years from
the first commercial sale, upon which all licenses will become fully paid up perpetual non-exclusive licenses. Either party may
terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other
party’s insolvency or bankruptcy and we may terminate the agreement if Green Cross challenges or assists a third party in
challenging specified patent rights of ours. If Green Cross terminates the agreement upon our material breach or bankruptcy, Green
Cross is entitled to terminate our licenses to improvements and retain its licenses from us and to pay us substantially reduced
milestone and royalty payments following such termination.
Medinet
.
In December 2013, we entered into a license agreement
with Medinet. Under this agreement, we granted Medinet an exclusive, royalty-free license to manufacture in Japan rocapuldencel-T
and other products using our Arcelis technology solely for the purpose of the development and commercialization of rocapuldencel-T
and these other products for the treatment of mRCC. We refer to this license as the manufacturing license. In addition, under this
agreement, we granted Medinet an option to acquire a nonexclusive, royalty-bearing license under our Arcelis technology to sell
in Japan rocapuldencel-T and other products for the treatment of mRCC. We refer to the option as the sale option and the license
as the sale license.
The sale option expired on April 30, 2016. As a result, Medinet has only retained the
manufacturing license and may only manufacture rocapuldencel-T and these other products for us or our designee. We have agreed
to negotiate in good faith a supply agreement under which Medinet would supply us or our designee with rocapuldencel-T and these
other products for development and sale for the treatment of mRCC in Japan. During the term of the manufacturing license, we may
not manufacture rocapuldencel-T or these other products for us or any designee for development or sale for the treatment of mRCC
in Japan.
In consideration for the manufacturing license, Medinet paid us $1.0 million. Medinet
also loaned us $9.0 million in connection with us entering into the agreement. We have agreed to use these funds in the development
and manufacturing of rocapuldencel-T and the other products. Medinet also agreed to pay us milestone payments of up to a total
of $9.0 million upon the achievement of developmental and regulatory milestones and $5.0 million upon the achievement of a sales
milestone related to rocapuldencel-T and these products.
We borrowed the $9.0 million pursuant to an unsecured promissory note that bears interest
at a rate of 3.0 % per annum. The principal and interest under the note are due and payable on December 31, 2018. Under
the terms of the note and the manufacturing license agreement, any milestone payments related to the developmental and regulatory
milestones that become due will be applied first to the repayment of the loan. We have achieved $5.0 million in milestones. As
a result, the outstanding principal of the loan as of February 1, 2018 has been reduced to $4.0 million. We have the right to prepay
the loan at any time. If we have not repaid the loan by December 31, 2018, then we have agreed to grant to Medinet a non-exclusive,
royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer. In such event, the amounts owing
under the loan as of December 31, 2018 may constitute pre-paid royalties under the license or would be due and payable. We
do not expect to pay the amounts owing under the loan by December 31, 2018. Royalties under this license would be paid until the
expiration of the licensed patent rights in Japan at a rate to be negotiated. If we cannot agree on the royalty rate, we have agreed
to submit the matter to arbitration.
Under the agreement, we had the right to revoke both the manufacturing license and the
sale license to be granted to Medinet or the sale license only. In February 2018, we notified Medinet that we irrevocably agreed
to have no further right to exercise our right under the license agreement to revoke the manufacturing and the sale license, or
the sale license only. As a result of our decision to forego these revocation rights, during the three months ended March 31, 2018,
we recognized as revenue $5.8 million of milestone payments that had previously been received and recorded as deferred revenue.
The agreement will terminate upon expiration of the royalty term, upon which all licenses
will become fully paid up, perpetual non-exclusive licenses. Either party may terminate the agreement for the other party’s
uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy, and we may
terminate the agreement if Medinet challenges or assists a third party in challenging specified patent rights of ours. If Medinet
terminates the agreement upon our material breach or bankruptcy, Medinet is entitled to terminate our licenses to improvements
and retain its royalty-bearing licenses from us.
Lummy
.
On April 7, 2015, we and Lummy HK, entered into a license
agreement pursuant to which we granted to Lummy HK an exclusive license under the Arcelis technology, including patents, know-how
and improvements to manufacture, develop and commercialize products for the treatment of cancer in China, Hong Kong, Taiwan and
Macau. Lummy HK also has a right of first negotiation with respect to a license under the Arcelis technology for the treatment
of infectious diseases in China, Hong Kong, Taiwan and Macau. This agreement was subsequently amended in December 2016, October
2017 and March 2018.
Under the terms of the license agreement, the parties will share relevant data, and we
will have a right to reference Lummy HK data for purposes of its development programs under the Arcelis technology. In addition,
Lummy HK has granted to us an exclusive, royalty-free license under and to any and all Lummy HK improvements to the Arcelis technology
conceived or reduced to practice by Lummy HK and Lummy HK data to develop and/or commercialize products outside China, Hong Kong,
Taiwan and Macau, an exclusive, royalty-free license under and to any and all investigational new drugs, or INDs, and other regulatory
approvals and Lummy HK trademarks used for an Arcelis-based product to develop and/or commercialize an Arcelis-based product outside
China, Hong Kong, Taiwan and Macau and a non-exclusive, worldwide, royalty-free license under any Lummy HK improvements and Lummy
HK data to manufacture Arcelis-based products anywhere in the world. Lummy HK has the right to reference our data, INDs and other
regulatory filings and submissions for the purpose of developing and obtaining regulatory approval of licensed products in China,
Hong Kong, Taiwan and Macau.
Pursuant to the license agreement, Lummy HK will pay us royalties on net sales and an
aggregate of up to $22.3 million upon the achievement of manufacturing, regulatory and commercial milestones. On October 18,
2017, we entered into a second amendment to the license agreement and Lummy HK paid us $1.5 million upon the achievement of a manufacturing
milestone in October 2017. On March 23, 2018, we entered into a third amendment to the license agreement pursuant to which Lummy
agreed to pay us a $1.05 million milestone. Lummy also agreed to purchase 375,000 shares of our common stock for a purchase price
of $450,000 pursuant to an amended stock purchase agreement. We received payments for the achievement of this milestone and for
the purchase of these shares of common stock in April 2018.
Of the potential $22.3 million in milestone payments, to date we have earned $2.55 million,
of which we received $1.5 million as of March 31, 2018, and $1.05 million in April 2018. The license agreement will terminate upon
expiration of the last to expire royalty term for all Arcelis-based products, with each royalty term being the longer of the expiration
of the last valid patent claim covering the applicable Arcelis-based product and 10 years from the first commercial sale of such
Arcelis-based product. Either party may terminate the license agreement for the other party’s uncured material breach or
if specified conditions occur relating to the other party’s insolvency or bankruptcy. We may terminate the license agreement
if Lummy HK challenges or assists a third party in challenging specified patent rights of ours. If Lummy HK terminates the license
agreement upon our material breach or bankruptcy, Lummy HK is entitled to terminate the licenses it granted to us and retain its
licenses from us with respect to Arcelis-based products then in development or being commercialized, subject to Lummy HK’s
continued obligation to pay royalties and milestones with respect to such Arcelis-based products.
Invetech
.
In October 2014, we entered into the Invetech Development
Agreement. Under the Invetech Development Agreement, Invetech had agreed to continue to develop and provide prototypes of the automated
production system to be used for the manufacture of our Arcelis-based products. Subsequent to signing the Invetech Development
Agreement, Invetech agreed to defer 30% of its fees, up to $5.0 million subject to payments by us in installments over 2017 and
2018.
On September 22, 2017, we entered into the Invetech Satisfaction and Release Agreement.
Under the Invetech Satisfaction and Release Agreement, we agreed to make, issue and deliver to Invetech (i) a cash payment of $0.5
million (ii) 57,142 shares of our common stock and (iii) an unsecured convertible promissory note in the original principal amount
of $5.2 million on account of and in full satisfaction and release of all of our payment obligations to Invetech arising under
the Invetech Development Agreement prior to the date of the Invetech Satisfaction and Release Agreement, including our obligation
to pay Invetech up to a total of $8.3 million in deferred fees, bonus payments and accrued interest.
Although we currently have no ongoing activities under the Invetech Development Agreement,
the term of the Invetech Development Agreement will continue until the completion of the development of the production systems. The
Invetech Development Agreement can be terminated early by either party because of a technical failure or by us without cause. We
own all intellectual property arising from the development services with the exception of existing Invetech intellectual property
incorporated therein-under which we have a license.
Saint-Gobain
.
In January 2015, we entered into the Saint-Gobain
Development Agreement, that was subsequently amended in 2015, 2016 and 2017. Under the Saint-Gobain Development Agreement, Saint-Gobain
agreed to develop a range of disposables for use in our automated production systems to be used for the manufacture of our Arcelis-based
products. The Saint-Gobain agreement requires the parties to execute a commercial supply agreement under which Saint-Gobain would
become the exclusive supplier of disposables for the manufacture of our products treating solid tumors for no less than fifteen
years. The Saint-Gobain agreement will continue until December 31, 2019, but can be terminated by written agreement of the parties
because of a material default, including the failure to execute the commercial supply agreement, or a failure to achieve a performance
milestone.
On November 22, 2017, we entered into the Saint-Gobain Satisfaction and Release Agreement.
Under the Saint-Gobain Satisfaction and Release Agreement, we agreed to make, issue and deliver to Saint-Gobain (i) a cash payment
of $0.5 million, (ii) 34,499 shares of our common stock (iii) an unsecured convertible promissory note in the original principal
amount of $2.4 million, and (iv) certain specified equipment originally provided to us under the development agreement, on account
of and in full satisfaction and release of all payment obligations to Saint-Gobain arising under the development agreement, including
the development fees and charges owed by us to Saint-Gobain.
Cellscript
.
In December 2015, we entered into a development
and supply agreement with Cellscript, LLC, or Cellscript. Under the agreement, Cellscript agreed to develop cGMP processes for
the manufacture and production of CD40L RNA, a ribonucleic acid used in the production of our Arcelis-based products, and to manufacture
and produce CD40L RNA.
In consideration for these development and production services, we agreed to pay Cellscript
total fees of $4.6 million. Upon the execution of the agreement, we made an initial payment to Cellscript of $2.1 million through
the issuance to Cellscript of 45,309 shares of our common stock. The balance of the fees was payable to Cellscript, at our option,
in cash, common stock or a combination of cash and common stock upon the achievement of development milestones. Any shares of common
stock issued pursuant to the agreement are subject to a lock-up period of 180 days from the date of issuance of such shares to
Cellscript.
Under the terms of the agreement, Cellscript was to be the sole and exclusive manufacturer
and supplier to us of CD40L RNA, and we had agreed upon cash payments to Cellscript for CD40L RNA produced for us during the term
of the agreement. Under the agreement, Cellscript was to be our sole and exclusive supplier of enzymes and various kits comprising
enzymes for transcription, capping and/or polyadenylation of RNA. We had agreed upon cash payments to Cellscript for each kit that
is purchased under the agreement.
The agreement expired on June 30, 2018. As of September 30, 2018, we accrued $2.0
million of total fees for development and production services performed by Cellscript under the development and supply
agreement prior to termination of the agreement.
Manufacturing
We currently have a manufacturing suite located at our Technology Drive leased facility
in Durham, North Carolina. However, we have determined to cease the manufacture of Arcelis-based product candidates. Primarily
due to our decision to cease support for the Phase 2 trial of AGS-004 for the eradication of HIV, we elected to close our Patriot
Center facility, a manufacturing facility we previously leased in Durham, North Carolina, during the second quarter of 2018.
In January 2017, we entered into a ten-year lease agreement with two five-year renewal
options for 40,000 square feet of manufacturing and office space at the Center for Technology Innovation, or CTI, on the Centennial
Campus of North Carolina State University in Raleigh, North Carolina. We provided a security deposit in the amount of $2.4 million
as security for obligations under the lease agreement, which was provided in the form of a letter of credit. We had intended to
utilize this facility to manufacture rocapuldencel-T to support submission of a biologics license application, or BLA, to the FDA
and to support initial commercialization of rocapuldencel-T.
To provide for capacity expansion beyond the initial few years following potential launch
of rocapuldencel-T, we also had planned to build-out and equip a second facility, which we refer to as the Centerpoint facility.
In August 2014, we entered into a ten-year lease agreement with renewal options. Under the lease agreement, we agreed to lease
certain land and an approximately 125,000 square-foot building to be constructed in Durham County, North Carolina. We initially
intended this facility to house our corporate headquarters and commercial manufacturing before we entered into the lease for the
Center for Technology Innovation, or CTI, facility. The shell of the new facility was constructed on a build-to-suit basis in accordance
with agreed upon specifications and plans and was completed in June 2015. However, the build-out and equipping of the interior
of the facility was suspended as we pursued financing arrangements to support the further build out of the facility.
Due to the recommendation of the IDMC in February 2017 to discontinue the ADAPT trial,
we reassessed our manufacturing plans. In March 2017, we entered into a lease termination agreement with the landlord of our CTI
facility terminating the lease as of March 17, 2017. From the $2.4 million letter of credit, the landlord drew down $0.7 million
to cover unpaid construction costs in March 2017 and $1.7 million in April 2017 for lease termination damages and agreed to return
$0.1 million in consideration for being able to salvage some of the construction costs. Pursuant to the lease termination agreement,
we have no further obligations under the lease. During the year ended December 31, 2017, we recorded a lease termination fee of
$1.6 million that is included in restructuring costs on the statement of operations. We also recorded an impairment loss on Construction-in-progress
on the property of $0.9 million during the year ended December 31, 2017.
In November 2017, we and TKC Properties, the landlord of the Centerpoint facility, entered
into a lease termination agreement terminating the lease agreement as of November 21, 2017. In addition, TKC Properties completed
the sale of the facility to a third party and we received cash proceeds of approximately $1.8 million. As of December 31, 2017,
we recorded $0 for the Centerpoint facility and $0 for the lease liability. Additionally, we are no longer required to maintain
restricted cash of approximately $0.7 million as a security deposit.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2017 with the
Three and Nine Months Ended September 30, 2018
The following table summarizes the results of our operations for
each of the three and nine month periods ended September 30, 2017 and 2018, together with the changes in those items in dollars
and as a percentage:
|
|
Three Months Ended
September 30,
|
|
$
|
|
%
|
|
Nine Months Ended
September 30,
|
|
$
|
|
%
|
|
|
2017
|
|
2018
|
|
Change
|
|
Change
|
|
2017
|
|
2018
|
|
Change
|
|
Change
|
|
|
(in thousands)
|
Revenue
|
|
$
|
53
|
|
|
$
|
1,247
|
|
|
$
|
1,194
|
|
|
|
*
|
|
|
$
|
228
|
|
|
$
|
7,234
|
|
|
$
|
7,006
|
|
|
|
*
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,550
|
|
|
|
3,325
|
|
|
|
(1,226
|
)
|
|
|
(26.9
|
)%
|
|
|
17,585
|
|
|
|
12,794
|
|
|
|
(4,791
|
)
|
|
|
(27.2
|
)%
|
General and administrative
|
|
|
2,879
|
|
|
|
3,015
|
|
|
|
136
|
|
|
|
4.7
|
%
|
|
|
9,522
|
|
|
|
8,010
|
|
|
|
(1,512
|
)
|
|
|
(15.9
|
)%
|
Impairment of property and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,204
|
|
|
|
—
|
|
|
|
(27,204
|
)
|
|
|
(100.0
|
)%
|
Restructuring costs
|
|
|
679
|
|
|
|
—
|
|
|
|
(679
|
)
|
|
|
(100.0
|
)%
|
|
|
6,032
|
|
|
|
—
|
|
|
|
(6,032
|
)
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,108
|
|
|
|
6,340
|
|
|
|
(1,769
|
)
|
|
|
(21.8
|
)%
|
|
|
60,343
|
|
|
|
20,804
|
|
|
|
(39,539
|
)
|
|
|
(65.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,055
|
)
|
|
|
(5,093
|
)
|
|
|
2,962
|
|
|
|
36.8
|
%
|
|
|
(60,115
|
)
|
|
|
(13,569
|
)
|
|
|
46,545
|
|
|
|
77.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11
|
|
|
|
24
|
|
|
|
13
|
|
|
|
119.2
|
%
|
|
|
50
|
|
|
|
62
|
|
|
|
12
|
|
|
|
23.1
|
%
|
Interest expense
|
|
|
(67
|
)
|
|
|
(166
|
)
|
|
|
(98
|
)
|
|
|
(146.5
|
)%
|
|
|
(1,090
|
)
|
|
|
(467
|
)
|
|
|
623
|
|
|
|
57.2
|
%
|
Gain on early extinguishment of debt
|
|
|
1,507
|
|
|
|
282
|
|
|
|
(1,225
|
)
|
|
|
81.3
|
%
|
|
|
1,756
|
|
|
|
282
|
|
|
|
(1,475
|
)
|
|
|
84.0
|
%
|
Change in fair value of warrant liability
|
|
|
502
|
|
|
|
—
|
|
|
|
(502
|
)
|
|
|
100.0
|
%
|
|
|
20,682
|
|
|
|
168
|
|
|
|
(20,514
|
)
|
|
|
99.2
|
%
|
Other expense
|
|
|
36
|
|
|
|
(48
|
)
|
|
|
(85
|
)
|
|
|
*
|
|
|
|
31
|
|
|
|
(66
|
)
|
|
|
(98
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,066
|
)
|
|
$
|
(5,001
|
)
|
|
$
|
1,065
|
|
|
|
17.6
|
%
|
|
$
|
(38,685
|
)
|
|
$
|
(13,591
|
)
|
|
$
|
25,094
|
|
|
|
64.9
|
%
|
_______________
Revenue
To date, we have not generated revenue from the sale of any products. Substantially all
of our revenue has been derived from our NIH and NIAID contract and our license agreements with Medinet and Lummy HK.
Revenue was $1.25 million for the three months ended September 30,
2018, compared with $53,000 for the three months ended September 30, 2017, an increase of $1.2 million. The increase for
the three months ended September 30, 2018 compared with the three months ended September 30, 2017 primarily resulted from the
recognition of a $1.1 million milestone payment previously recorded as deferred revenue under the collaboration agreement with
Lummy HK.
Revenue was $7.2 million for the nine months ended September 30,
2018, compared with $0.2 million for the nine months ended September 30, 2017, an increase of $7.0 million. The increase
for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017 resulted from the recognition
of $5.9 million of revenue from milestone payments from Medinet that had previously been recorded as deferred revenue as a result
of our decision to irrevocably forego our revocation right under our license agreement with Medinet and the recognition of a $1.1
million milestone payment previously recorded as deferred revenue under the collaboration agreement with Lummy HK.
Research and Development Expenses
Since our inception in 1997, we focused our resources on our research and development
activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related
to regulatory filings for our product candidates. We recognize our research and development expenses as they are incurred. Our
research and development expenses consist primarily of:
•
|
salaries and related expenses for personnel in research and development functions;
|
•
|
fees paid to consultants and clinical research organizations, or CROs, including in connection with our clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;
|
•
|
commercial manufacturing development consisting of costs incurred under our development agreement with Invetech under which Invetech has agreed to develop and provide prototypes of the automated production system to be used for the manufacture of our Arcelis-based products;
|
•
|
allocation of facility lease and maintenance costs;
|
•
|
costs incurred under our development agreement with Saint-Gobain to develop a range of disposables for use in the automated production system;
|
•
|
depreciation of leasehold improvements, laboratory equipment and computers;
|
•
|
costs related to production of product candidates for clinical trials;
|
•
|
costs related to compliance with regulatory requirements;
|
•
|
consulting fees paid to third parties related to non-clinical research and development;
|
•
|
costs related to stock options or other share-based compensation granted to personnel in research and development functions; and
|
•
|
acquisition fees, license fees and milestone payments related to acquired and in-licensed technologies.
|
The table below summarizes our direct research and development expenses by program for
the periods indicated. Our direct research and development expenses consist principally of external costs, such as fees paid to
investigators, consultants, central laboratories and CROs, including in connection with our clinical trials, and related clinical
trial fees. Research and development expenses also include commercial manufacturing development costs consisting primarily of costs
incurred under our Invetech Development Agreement to develop and provide prototypes of the automated production system to be used
for the manufacture of our Arcelis-based products and our Saint-Gobain Development Agreement to develop a range of disposables
to be used in both our manual and automated manufacturing processes. We had been developing rocapuldencel-T and AGS-004 in parallel,
and typically use our employee and infrastructure resources across multiple research and development programs. We do not allocate
salaries, share-based compensation, employee benefit or other indirect costs related to our research and development function to
specific product candidates. Those expenses are included in “Indirect research and development expense” in the table
below.
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
|
(in thousands)
|
Direct research and development expense by program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocapuldencel-T
|
|
$
|
1,175
|
|
|
$
|
1,086
|
|
|
$
|
5,729
|
|
|
$
|
4,655
|
|
AGS-004
|
|
|
25
|
|
|
|
6
|
|
|
|
102
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct research and development program expense
|
|
|
1,200
|
|
|
|
1,092
|
|
|
|
5,831
|
|
|
|
4,686
|
|
Commercial manufacturing development expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(373
|
)
|
|
|
—
|
|
Indirect research and development expense
|
|
|
3,350
|
|
|
|
2,233
|
|
|
|
12,127
|
|
|
|
8,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expense
|
|
$
|
4,550
|
|
|
$
|
3,325
|
|
|
$
|
17,585
|
|
|
$
|
12,794
|
|
Three months ended September 30, 2017 and 2018.
Research and development expenses were $3.3 million for the three months ended September 30,
2018, compared with $4.6 million for the three months ended September 30, 2017, a decrease of $1.2 million, or 26.9%. The
decrease in research and development expense reflects a $0.1 million decrease in direct research and development expense and a
$1.1 million decrease in indirect research and development expense.
Direct research and development expense for rocapuldencel-T was $1.1 million in the three
months ended September 30, 2018, compared with $1.2 million for the three months ended September 30, 2017, a decrease of $0.1 million.
This decrease reflects a reduction of costs for the ADAPT trial following the termination of this trial in April 2018.
Direct research and development expense for AGS-004 was not significantly different in
the three months ended September 30, 2018 compared with the three months ended September 30, 2017.
The decrease in indirect research and development expense was primarily due to the reduction in the size of
our workforce engaged in research and development activities. As of September 30, 2018, we had 15 employees engaged in such activities,
compared with 29 employees engaged in such activities as of September 30, 2017.
Nine Months ended September 30, 2017 and 2018
.
Research and development expenses were $12.8 million for the nine months ended September 30,
2018, compared with $17.6 million for the nine months ended September 30, 2017, a decrease of $4.8 million, or 27.2%. The
decrease in research and development expense reflects a $1.1 million decrease in direct research and development expense and a
$4.0 million decrease in indirect research and development expense, partially offset by a credit of $0.4 million during the nine
months ended September 30, 2017 related to our Saint Gobain Development Agreement.
The decrease in direct research and development expenses for rocapuldencel-T and AGS-004
resulted primarily from the following:
•
|
Direct research and development expense for rocapuldencel-T decreased to $4.7 million in the nine months
ended September 30, 2018 from $5.7 million for the nine months ended September 30, 2017. This decrease primarily reflects a reduction
of costs for the ADAPT trial following the termination of this trial in April 2018.
|
•
|
Direct research and development expense with respect to AGS-004 was not significantly different in the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017.
|
During the nine months ended September 30, 2017, we recorded a credit of $0.4 million
related to amounts owed under our Saint-Gobain Development Agreement, which we recorded as a reduction of research and development
expense. No commercial manufacturing development expense was recorded for the nine months ended September 30, 2018.
The decrease in indirect research and development expense was primarily due to the reduction in the size of
our workforce engaged in research and development activities, as noted above.
The successful development of any product candidate is highly uncertain. Even if we resume
our research and development activities, at this time we cannot reasonably estimate the nature, timing or costs of the efforts
that will be necessary to complete the development of any product candidate, or the period, if any, in which material net cash
inflows from such product candidates may commence. This is due to the numerous risks and uncertainties associated with developing
drugs, including the uncertainty of:
|
•
|
the scope, rate of progress, expense and results of our ongoing clinical trials;
|
|
•
|
the scope, rate of progress, expense and results of additional clinical trials that we may conduct;
|
|
•
|
the scope, rate of progress, expense and results of our commercial manufacturing development efforts;
|
|
•
|
other research and development activities; and
|
|
•
|
the timing of regulatory approvals.
|
A change in the outcome of any of these variables with respect to the development of
a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate.
If the FDA or another regulatory authority were to require additional clinical trials or if there were significant delays in enrollment,
significant additional financial resources and time would be expended on the completion of clinical development.
General and Administrative Expenses
General and administrative expenses were $3.0 million for the three months ended September 30,
2018, compared with $2.9 million for the three months ended September 30, 2017, an increase of $0.1 million or 4.7%. This
increase was primarily due to an increase in legal expenses.
General and administrative expenses were $8.0 million for the nine months ended September 30,
2018, compared with $9.5 million for the nine months ended September 30, 2017, a decrease of $1.5 million or 15.9%. This decrease
was primarily due to a reduction in personnel costs consisting primarily of salaries and stock-based compensation.
General and administrative expenses consist primarily of salaries and related costs for
employees in executive, operational and finance, information technology and human resources functions. Other significant general
and administrative expenses include allocation of facilities costs, professional fees for accounting and legal services and expenses
associated with obtaining and maintaining patents.
Impairment Loss on Property and Equipment
We did not recognize an impairment loss on property and equipment
for the three and nine months ended September 30, 2018, and the three months ended September 30, 2017. We recognized an impairment
loss on property and equipment of $27.2 million for the nine months ended September 30, 2017. We review our property and equipment
for impairment whenever events or changes indicate its carrying value may not be recoverable.
Impairment of Centerpoint Facility and Construction-in-Progress
We determined during the nine months ended September 30, 2017 that we no longer planned
to develop our Centerpoint facility. Accordingly, we recorded an impairment loss of $18.3 million for the Construction-in-progress
on the property.
Additionally, we determined during the nine months ended September 30, 2017 that we would
no longer need to develop various equipment included in Construction-in-progress under our current manufacturing plans. As such,
we entered into agreements and understandings with various vendors to attempt to sell or dispose this equipment at prices less
than our carrying value. Accordingly, we determined that the fair value of this equipment held for sale was $0.7 million as of
March 31, 2017 and recorded an impairment loss of $1.1 million as of March 31, 2017. Additionally, we recorded a $6.1 million impairment
loss on other equipment included in Construction-in-progress that had to be abandoned or had no net realizable value. Finally,
we recorded an impairment loss of $0.9 million on Construction-in-progress that was abandoned at the CTI facility.
Impairment of Capital Leases
In August 2016, we entered into two agreements, or the Power Generation Agreements,
with an electric utility company. The Power Generation Agreements were accounted for as capital leases for financial reporting
purposes. Under the lease agreements, the electric utility company agreed to design, procure, install, own and maintain electrical
equipment at Centerpoint to provide required electrical loads. Property, plant and equipment included $2.4 million as of December
31, 2016 under the Power Generation Agreements in the Construction-in-progress account. As of September 30, 2017, $2.2 million
of these assets were classified as Assets held for sale on our Balance Sheet. Since the capital leases are for electrical equipment
held for sale on the Centerpoint property, we recorded an impairment loss of $0 and $0.1 million during the three and nine months
ended September 30, 2017, respectively.
Restructuring Costs
We recognized restructuring costs of $0.6 million and $6.0 million during the three and nine months ended
September 30, 2017, respectively, compared with $0 during the three and nine months ended September 30, 2018, respectively. The
restructuring costs during the three and nine months ended September 30, 2017 were related to the restructuring of our operations
following the recommendation by the IDMC to discontinue the ADAPT trial in February 2017.
Workforce Action Plan
On March 10, 2017, we enacted a workforce action plan designed to streamline operations
and reduce our operating expenses. Under this plan, we reduced our workforce by 61 employees during the nine months ended September
30, 2017. During the three and nine months ended September 30, 2017, we recognized $0.1 million and $1.2 million in severance costs,
respectively, and $0.6 and $3.2 million in stock compensation cost, respectively, from the acceleration of vesting of stock options
held by the terminated employees. Through additional targeted reductions and attrition, the workforce was further reduced to 21 employees as
of September 30, 2018.
CTI Lease Agreement
In January 2017, we entered into a ten-year lease agreement with two five-year renewal
options for 40,000 square feet of manufacturing and office space at CTI on the Centennial Campus of North Carolina State University
in Raleigh, North Carolina. We provided a security deposit in the amount of $2.4 million as security for obligations under the
lease agreement, which was provided in the form of a letter of credit. In March 2017, we initiated discussions with the landlord
of the CTI facility regarding the termination of this lease.
In March 2017 the landlord of our CTI facility notified us that it was terminating the
lease due to nonpayment of invoices for up-fit costs, effective immediately. On March 31, 2017, we entered into a termination agreement
with the landlord terminating the lease as of March 17, 2017. From the $2.4 million letter of credit, the landlord drew down $0.7
million to cover unpaid construction costs in March 2017 and $1.7 million in April 2017 for lease termination damages and agreed
to return $0.1 million in consideration for being able to salvage some of the construction costs. Pursuant to the termination agreement,
we have no further obligations under the lease. During the three and nine months ended September 30, 2017, we recorded a lease
termination fee of $0 and $1.6 million, respectively, which is included in Restructuring costs on the statement of operations.
We also recorded an impairment loss on Construction-in-progress on the property of $0 and $0.9 million during the three and nine
months ended September 30, 2017, respectively.
Interest Expense
Interest expense was $0.2 million for the three months ended
September 30, 2018, compared with $0.1 million for the three months ended September 30, 2017, an increase of $0.1
million or
146.5%
. The increase primarily resulted from the reversal of accrued interest during the three months ended September 30,
2017 associated with the recognition of a milestone payment against the Medinet Note.
Interest expense was $0.5 million for the nine months ended September 30,
2018, compared with $1.1 million for the nine months ended September 30, 2017, a decrease of $0.6 million or 57.2%. The decrease
resulted primarily from our repayment of the balance outstanding under the Loan Agreement on March 6, 2017 and the termination
of the Power Generation Agreements in November 2017 that were accounted for as capital leases.
Gain on Early Extinguishment of Debt
We recognized a gain on early extinguishment of debt of $1.5 million and $1.8 million for the three and nine
months ended September 30, 2017, respectively, compared with $0.3 million for each of the three and nine months ended September 30,
2018. On March 3, 2017, we entered into a payoff letter with the Lenders, pursuant to which we paid on March 6, 2017, a total of
$23.1 million to the Lenders, representing the principal balance and accrued interest outstanding under the Loan Agreement in repayment
of our outstanding obligations under the Loan Agreement. In addition, we issued to the Lenders five year warrants to purchase an
aggregate of 5,000 shares of our common stock at an exercise price of $26.00 per share in consideration of the Lenders accepting
the $23.1 million as repayment in full. During the three and nine months ended September 30, 2018, we recognized a gain on early
extinguishment of debt of $0.3 million for forgiveness of debt on our convertible note with Invetech.
Change in Fair Value of Warrant Liability
The gain from the change in fair value of the warrant liability was $0 and $0.2 million
for the three and nine months ended September 30, 2018, respectively, compared with $0.5 million and $20.7 million for the three
and nine months ended September 30, 2017, respectively. These amounts represent the change in the fair value of our warrant
liability for the warrants issued in August 2016. The August 2016 warrants contain provisions that could require cash settlement
and are recorded as a liability at fair value on the date of issuance and as of the end of each reporting period. The fair value
of the August 2016 warrants declined primarily due to a significant decline in the price of our common stock and a shorter expected
life of the warrants. As of September 30, 2018, the fair value of the August 2016 warrants was $0.
Liquidity and Capital Resources
Sources of Liquidity
As of September 30, 2018, we had cash and cash equivalents of $7.9 million.
Since our inception in May 1997 through September 30, 2018, we have funded our operations
principally with $360.7 million from the sale of common stock, convertible debt, warrants and preferred stock, $32.9 million from
the licensing of our technology, $107.4 million from government contracts, grants and license and collaboration agreements, and
$25.0 million from the Loan Agreement.
Troubled Debt Restructuring with Invetech
. As of June 30, 2017, we had
recorded a manufacturing research and development obligation payable to Invetech on our consolidated balance sheet of $8.3 million,
representing $5.2 million in deferred fees, $2.3 million in estimated bonus payments and $0.7 million in accrued interest. On
September 22, 2017, we entered into the Invetech Satisfaction and Release Agreement. Under the Invetech Satisfaction and Release
Agreement, we agreed to make, issue and deliver to Invetech (i) a cash payment of $0.5 million, (ii) 57,142 shares of our common
stock and (iii) an unsecured convertible promissory note in the original principal amount of $5.2 million on account of and in
full satisfaction and release of all of our payment obligations to Invetech arising under the Invetech Development Agreement prior
to the date of the Invetech Satisfaction and Release Agreement, including our obligation to pay Invetech up to a total of $8.3
million in deferred fees, bonus payments and accrued interest.
The maturity date for the payment of principal and interest under
the note is September 30, 2020. The note bears interest at a rate of 6.0% per annum, which interest will compound annually. For
the quarterly periods ended December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018, we paid Invetech $200,000,
$200,000, $150,000 and $150,000, respectively, in cash under the note. For the fiscal quarters ending December 31, 2018 through
March 31, 2019, we are required to make quarterly installment payments under the note, each in an aggregate amount of up to $0.3
million, consisting of (i) cash in the amount of $150,000 and (ii) if certain specified conditions are met as of the corresponding
payment date, up to $150,000 of shares of our common stock. For the fiscal quarters ending June 30, 2019 through June 30, 2020,
we are required to make quarterly installment payments under the note, each in an amount of $150,000, payable in cash. Subject
to Invetech’s conversion rights, we may prepay the note in full or in part at any time without penalty or premium.
The note also provides that on the anniversary of the issue date
of the note for each of the first three years following the issue date, the outstanding principal amount of the note, if any,
plus accrued and unpaid interest thereon shall automatically be deemed to be reduced by $250,000, if and only if we have paid
all debt service payments due under the note on or prior to the relevant anniversary date and no event of default, fundamental
transaction or change of control, each as defined in the note, has occurred on or prior to such anniversary date. As a result,
on September 21, 2018, the anniversary of the issue date of the note, the outstanding principal amount of the note was automatically
reduced by $250,000.
Upon maturity of the note or at any time within 75 days of such maturity, or upon the
occurrence of certain events of default, Invetech may, at its option, elect to convert any amount of the outstanding principal
and accrued interest into shares of our common stock. Upon a change of control pursuant to which Invetech has a redemption right,
Invetech may, at its option, elect to convert any amount of the outstanding principal and accrued interest, less any remaining
installment payments required to be made in cash, into shares of our common stock. We will be required to pay any amount not so
converted in cash. Upon the occurrence of certain events of default, Invetech may, at its option, elect to convert any amount of
the outstanding principal and accrued interest into shares of our common stock. We will be required to pay any amount not so converted
in cash. In each case, the number of shares of common stock issuable upon such complete or partial conversion of the note is determined
by dividing the portion of the principal and accrued or unpaid interest to be converted by $10.00 per share (as adjusted for any
stock dividend, stock split, stock combination, reclassification or similar transaction). Unless Invetech has elected to exercise
these conversion rights, we, subject to specified exceptions, may prepay the note in whole or in part, in cash, at any time without
penalty or premium.
Troubled Debt Restructuring with Saint-Gobain
. As of September 30, 2017,
we had recorded accrued expenses of $4.8 million payable to Saint-Gobain. On November 22, 2017, we entered into the Saint-Gobain
Satisfaction and Release Agreement. Under the Saint Gobain Satisfaction and Release Agreement, we agreed to make, issue and deliver
to Saint-Gobain (i) a cash payment of $0.5 million, (ii) 34,499 shares of common stock, (iii) an unsecured convertible promissory
note in the original principal amount of $2.4 million, and (iv) certain specified equipment originally provided to us by Saint-Gobain
under the Saint-Gobain Development Agreement, on account of and in full satisfaction and release of all of our payment obligations
to Saint-Gobain arising under the Saint-Gobain Development Agreement, prior to the date of the Saint-Gobain Satisfaction and Release
Agreement, including the development fees and charges. As a result, we recognized a gain on the early extinguishment of debt of
$0.6 million during the year ended December 31, 2017.
The maturity date for the payment of principal and interest under the note is September
30, 2020. The note bears interest at a rate of 6.0% per annum, which interest will compound quarterly. For the quarterly periods
ended December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018, we paid Saint-Gobain $270,000, $270,000, $185,000
and $185,000, respectively, in cash under the note. For the fiscal quarters ending December 31, 2018 and March 31, 2019, we are
required to make quarterly installment payments under the note, each in an aggregate amount of up to $220,000, consisting of (i)
cash in the amount of $100,000 and (ii) if certain specified conditions are met as of the corresponding payment date, up to $120,000
of shares of our common stock. For the fiscal quarters ending December 31, 2017, March 31, 2018, June 30, 2018, September 30,
2018, December 31, 2018 and March 31, 2019, if the conditions required for the issuance of common stock are not met solely because
the price of the common stock at the time is less than $4.058 per share (as adjusted for any stock dividend, stock split, stock
combination, reclassification or similar transaction), then we are required to pay in each such quarter cash equal to 50% of the
value of the common stock that would otherwise have been issued. For the fiscal quarters ending June 30, 2019 through June 30,
2020, we are required to make quarterly installment payments under the note, each in an amount of $100,000, payable in cash.
Upon maturity of the note or at any time during the 75-day period prior to the maturity
date of the note, Saint-Gobain may, at its option, elect to convert any amount of the outstanding principal and accrued interest
into shares of our common stock. Upon a change of control pursuant to which Saint-Gobain has a redemption right, Saint-Gobain may,
at its option, elect to convert any amount of the outstanding principal and accrued interest, less any remaining installment payments
required to be made in cash, into shares of our common stock. We will be required to pay any amount not so converted in cash. Upon
the occurrence of certain events of default, Saint-Gobain may, at its option, elect to convert any amount of the outstanding principal
and accrued interest into shares of our common stock. We will be required to pay any amount not so converted in cash. In each case,
the number of shares of common stock issuable upon such complete or partial conversion of the note is determined by dividing the
portion of the principal and accrued or unpaid interest to be converted by $10.00 per share (as adjusted for any stock dividend,
stock split, stock combination, reclassification or similar transaction). Unless Saint-Gobain has elected to exercise these conversion
rights, we, subject to specified exceptions, may prepay the note in whole or in part, in cash, at any time without penalty or premium.
Venture Loan and Security Agreement
. In September 2014, we entered into
the Loan Agreement with the Lenders, under which we borrowed $25.0 million in two tranches of $12.5 million each. The per annum
interest rate for each tranche was a floating rate equal to 9.25% plus the amount by which the one-month LIBOR exceeds 0.50% (effectively
a floating rate equal to 8.75% plus the one-month LIBOR Rate). The total per annum interest rate could not exceed 10.75%.
On March 3, 2017, we entered into a payoff letter with the Lenders, pursuant to which
we paid, on March 6, 2017, a total of $23.1 million to the Lenders, representing the principal balance and accrued interest outstanding
under the Loan Agreement in repayment of our outstanding obligations under the Loan Agreement. In addition, we issued to the Lenders
five year warrants to purchase an aggregate of 5,000 shares of common stock at an exercise price of $26.00 per share in consideration
of the Lenders acceptance of $23.1 million as payment in full. Upon the payment of the $23.1 million and the issuance of the warrants
pursuant to the payoff letter, all of our outstanding indebtedness and obligations to the Lenders under the Loan Agreement were
deemed paid in full, and the Loan Agreement and the notes thereunder were terminated.
At-the-market Offering
.
On May 8, 2015, we filed a shelf registration
statement on Form S-3, or the 2015 Shelf, with the SEC, which covers the offering, issuance and sale of up to $125.0 million of
our common stock, preferred stock, debt securities, depositary shares, purchase contracts, purchase units and warrants. We simultaneously
entered into a sales agreement, or the Original Sales Agreement, with Cowen and Company LLC, or Cowen, to provide for the offering,
issuance and sale of up to $30.0 million of our common stock from time to time in “at-the-market” offerings under the
2015 Shelf. The 2015 Shelf was declared effective by the SEC on May 14, 2015.
On January 9, 2017, we filed a shelf registration statement on Form S-3, or the 2017
Shelf, with the SEC, which covers the offering, issuance and sale of up to $200.0 million of our common stock, preferred stock,
debt securities, depositary shares, purchase contracts, purchase units and warrants and which became effective on January 24, 2017.
On February 2, 2018, we amended and restated the Original Sales Agreement with Cowen, or the Amended and Restated Sales Agreement,
in order to increase the maximum aggregate offering price of our shares of common stock that may be offered from time to time in
“at-the-market offerings” by $15.0 million from $30.0 million to $45.0 million. On February 2, 2018, we filed a prospectus
supplement with the SEC in connection with the issuance and sale of the additional shares available under the 2017 Shelf. We refer
to the Original Sales Agreement and the Amended and Restated Sales Agreement collectively as the Sales Agreement.
Under the Sales Agreement, we paid Cowen a commission of up to 3% of the gross proceeds.
From December 31, 2017 through April 25, 2018, the Company sold 4,135,993 shares of common stock pursuant to the Sales Agreement,
resulting in proceeds of $7.5 million, net of commissions and issuance costs. However, upon the delisting of our common stock
from The Nasdaq Capital Market in April 2018, we ceased to sell any additional shares under the Sales Agreement.
Follow-On Public Offering
.
On August 2, 2016, we issued and sold
454,545 shares of common stock and warrants to purchase an aggregate of 340,909 shares of common stock, in an underwritten public
offering at a price to the public of $110.00 per share and accompanying warrant. The shares of common stock and warrants were sold
in combination, with one warrant to purchase up to 0.75 of a share of common stock accompanying each share of common stock sold.
The warrants have an exercise price of $110.00 per share, became immediately exercisable upon issuance and will expire on August
2, 2021. The aggregate net proceeds to us of the offering were approximately $48.2 million after deducting underwriting discounts
and commissions and offering expenses.
Convertible Note
. On June 15, 2017, we entered into a convertible note
purchase agreement with Pharmstandard, pursuant to which we agreed to issue and sell to Pharmstandard a convertible secured promissory
note in the original principal amount of $6.0 million in a private placement. We issued the note to Pharmstandard on June 21, 2017,
the closing date of the financing. Under the note, the maturity date for the payment of principal and interest is the fifth anniversary
of the issue date. The note bears interest at a rate of 9.5% per annum, which interest compounds annually. The note is secured
by a lien on and security interest in all of our intellectual property. We may prepay the note in whole or in part at any time
without penalty or premium. Upon the occurrence of certain events of default, Pharmstandard will have the option to require us
to repay the unpaid principal amount of the note and any unpaid accrued interest.
In addition, at Pharmstandard’s election, Pharmstandard may convert the entire
principal and interest of the note into shares of our common stock at a price per share equal to $10.00. However, Pharmstandard
will not be permitted to convert the entire note if such conversion would result in Pharmstandard and its affiliates holding shares
that exceed 39.9% of the total number of outstanding shares of our common stock or 39.9% of the combined voting power of all of
our outstanding securities. To the extent that conversion of the entire note would cause Pharmstandard and its affiliates to exceed
these thresholds, Pharmstandard may convert a portion of the note to the extent these thresholds are not exceeded by such partial
conversion.
Pharmstandard is our largest stockholder, and beneficially owned, in the aggregate,
shares representing approximately 14.7% of our outstanding common stock as of November 17, 2018. In addition, two members of our
board of directors are closely associated with Pharmstandard.
We paid $23,000 in legal expenses of Pharmstandard, including legal expenses incurred
in connection with our resale registration obligations set forth in a registration rights agreement that we entered into with Pharmstandard.
We have granted Pharmstandard, and Pharmstandard has granted us, indemnification rights with respect to each parties’ respective
representations, warranties, covenants and agreements under the note purchase agreement.
Cash Flows
The following table sets forth the major sources and uses of cash for the periods set
forth below:
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2018
|
|
|
(in thousands)
|
|
|
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(31,513
|
)
|
|
$
|
(14,646
|
)
|
Investing activities
|
|
|
(2,213
|
)
|
|
|
630
|
|
Financing activities
|
|
|
(9,884
|
)
|
|
|
6,771
|
|
Effect of exchange rate changes on cash
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(43,601
|
)
|
|
$
|
(7,248
|
)
|
Operating Activities
.
Net cash used in operating activities of $14.6 million during the nine months ended
September 30, 2018 was primarily a result of our $13.6 million net loss and an increase in net operating assets of $5.1 million,
partially offset by non-cash items of $4.1 million.
The increase in net operating assets reflects a decrease in deferred revenue of $6.0
million and a decrease in accounts payable of $0.6 million partially offset by a decrease in prepaid expenses and other receivables
of $0.3 million and an increase in accrued expenses of $1.3 million.
The non-cash items primarily reflect compensation expense related to stock options of
$2.0 million, depreciation and amortization expense of $1.7 million, interest accrued on long term debt of $0.5 million and issuance
of common stock for a license option of $0.4 million, partially offset by a gain on the early extinguishment of debt of $0.3 million
and a decrease in the fair value of the warrant liability of $0.2 million.
Net cash used in operating activities of $31.5 million during the nine months ended
September 30, 2017 was primarily a result of our $38.7 million net loss and an increase in net operating assets of $5.9 million,
partially offset by non-cash items of $12.9 million.
The increase in net operating assets reflects a decrease in accounts payable of $2.4
million, a decrease in accrued expenses of $2.8 million, an increase in prepaid expenses and other receivables of $0.4 million,
a decrease in the manufacturing research and development obligation of $0.4 million and a decrease in deferred liabilities of $0.1
million, partially offset by an increase in the current portion of the restructuring obligation of $0.2 million.
The non-cash items primarily reflect an impairment loss on property and equipment of
$27.2 million, compensation expense related to stock options of $7.0 million, depreciation and amortization expense of $0.7 million
and interest accrued on long term debt of $0.5 million, partially offset by a decrease in the fair value of the warrant liability
of $20.7 million and a gain on the early extinguishment of debt of $1.7 million.
Investing Activities.
Net cash provided by investing activities was $0.6 million during
the nine months ended September 30, 2018, consisting of proceeds of $0.6 million from the sale of property and equipment.
Net cash used in investing activities was $2.2 million during the
nine months ended September 30, 2017, consisting of $3.7 million of purchases of property and equipment, partially offset
by proceeds of $1.5 million from the sale of property and equipment.
Financing Activities.
Net cash provided by financing activities was $6.8 million during the nine months ended
September 30, 2018, consisting primarily of $7.5 million of proceeds from the issuance of common stock through our at-the-market
offering and the sale of $0.4 million of common stock to Lummy HK, partially offset by $1.1 million of debt amortization payments.
Net cash used in financing activities was $9.9 million during the nine months ended September 30,
2017, consisting primarily of $23.6 million for repayment of the Loan Agreement, partially offset by $6.0 million of proceeds from
the convertible note issued to Pharmstandard and $7.8 million of proceeds from the issuance of common stock through our at-the-market
offering.
Funding Requirements
To date, we have not generated any product revenue from our development stage product
candidates. We do not know when, or if, we will generate any product revenue. We do not expect to generate significant product
revenue unless or until we obtain marketing approval of, and commercialize, a product candidate.
As of September 30, 2018, we had cash and cash equivalents of $7.9 million. We do not
currently have sufficient cash resources to pay all of our accrued obligations in full or to continue our business operations
beyond the end of 2018.
In light of the termination of the development of rocapuldencel-T, cessation of our
research and development activities and our cash resources, and based on a review of the status of our internal programs, resources
and capabilities, we are pursuing a strategic alternative that may involve an asset sale, dissolution, liquidation, wind-down
or protection under the bankruptcy laws. There can be no assurance that we will be able to enter into a strategic transaction
on a timely basis, on terms that are favorable to us, or at all. If we decide to seek protection under the bankruptcy laws, and
if we decide to wind down the company under the bankruptcy laws or otherwise, it is unclear to what extent we will be able to
pay our obligations to creditors, and, whether and to what extent any resources will be available for distributions to our stockholders.
However, based on our current resources, we believe that it is unlikely that any resources will be available for distributions
to our stockholders and that a likely outcome of our wind-down and potential bankruptcy proceeding will be the cancellation or
extinguishment of all outstanding shares in the company without any payment or other distribution on account of those shares.
On April 23, 2018, we received a notification from The Nasdaq Stock Market LLC indicating
that, because we had indicated that we would be unable to meet the stockholders’ equity requirement for continued listing
as of the April 24, 2018 deadline that had been set by the Nasdaq Hearing Panel, the Nasdaq Hearing Panel had determined to delist
our common stock from The Nasdaq Capital Market and to suspend trading in our common stock effective at the open of business on
April 25, 2018. Following such delisting, we transferred our common stock to the OTCQB® Venture Market. Because our common
stock is not listed for trading on a national securities exchange, our ability to raise capital to continue to fund our operations
by selling shares and our ability to acquire other companies or technologies by using our shares as consideration has been impaired.
We have based our estimates on assumptions that may prove to be wrong, and we may use
our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with
the development and commercialization of product candidates, we are unable to estimate the amounts of increased capital outlays
and operating expenditures necessary to complete the development of product candidates.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. The preparation
of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the
reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We
base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 1 of the notes to our financial
statements in our Annual Report on Form 10-K for the year ended December 31, 2017. Other than as described below, there have
been no significant changes to our critical accounting policies since December 31, 2017.
Revenue Recognition.
An important part of our business strategy has been
to enter into arrangements with third parties both to assist in the development and commercialization of our product candidates,
particularly in international markets, and to in-license product candidates in order to expand our pipeline. The terms of the agreements
typically include non-refundable license fees, funding of research and development, payments based upon achievement of clinical
development and regulatory objectives, and royalties on product sales. We have adopted the provisions of the Financial Accounting
Standards Board, or FASB, Codification Topic 606, Revenue from Contracts with Customers, or Topic 606, effective January 1, 2018.
This guidance supersedes the provisions of FASB Codification Topic 605, Revenue Recognition.
License Fees and Multiple Element Arrangements.
If a license to our intellectual
property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues
from non-refundable, up-front fees allocated to the license at such time as the license is transferred to the licensee and the
licensee is able to use, and benefit from, the license. For licenses that are bundled with other promises, we utilize judgment
to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied
over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue
from non-refundable, up-front fees. We evaluate the measure of progress in each reporting period and, if necessary, adjusts the
measure of performance and related revenue recognition.
If we are involved in a steering committee as part of a multiple element arrangement,
we assess whether our involvement constitutes a performance obligation or a right to participate. Steering committee services that
are determined to be performance obligations are combined with other research services or performance obligations required under
an arrangement, if any, in determining the level of effort required in an arrangement and the period over which we expect to complete
our aggregate performance obligations.
If we cannot reasonably measure its progress toward complete satisfaction of a performance
obligation because it lacks reliable information that would be required to apply an appropriate method of measuring progress, but
we can reasonably estimate when the performance obligation ceases or the remaining obligations become inconsequential and perfunctory,
then revenue is not recognized until we can reasonably estimate when the performance obligation ceases or becomes inconsequential.
Revenue is then recognized over the remaining estimated period of performance.
Significant management judgment is required in determining the level of effort required
under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement.
Development Milestone Payments.
At the inception of each arrangement that includes
development milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount
to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal
would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our
control or the control of the licensee, such as regulatory approvals, are not considered probable of being achieved until those
approvals are received. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must
be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining
whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, we
reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjusts our estimate of the
overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings
in the period of adjustment.
Reimbursement of Costs.
Reimbursement of research and development costs by third
party collaborators is recognized as revenue over time provided we have determined that it transfers control (for example, performs
the services) of a service over time and, therefore, satisfies a performance obligation according to the provisions outlined in
the FASB Codification Topic 606-10-25-27, Revenue Recognition.
Royalty Revenue.
For arrangements that include sales-based royalties, including
milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license
is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales
occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially
satisfied. To date, we have not recognized any royalty revenue resulting from any of its collaboration agreements.
Deferred Revenue.
Amounts received prior to satisfying the above revenue recognition
criteria are recorded as deferred revenue in the accompanying condensed consolidated balance sheets. Short-term deferred revenue
would consist of amounts that are expected to be recognized as revenue within the next fiscal year. Amounts that the we expect
will not be recognized in the next fiscal year would be classified as long-term deferred revenue.
With respect to each of the foregoing areas of revenue recognition, we exercise significant
judgment in determining whether an arrangement contains multiple elements, and, if so, how much revenue is allocable to each element.
In addition, we exercise our judgment in determining when its significant obligations have been met under such agreements and the
specific time periods over which we recognized revenue, such as non-refundable, up-front license fees. To the extent that actual
facts and circumstances differ from our initial judgments, revenue recognition with respect to such transactions would change accordingly
and any such change could affect our reported financial results.
Contractual Obligations
During the nine months ended September 30, 2018, there were no material changes outside
the ordinary course of our business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2017.