The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
NOTE 1. GENERAL ORGANIZATION AND BUSINESS
Lion Biotechnologies, Inc. (the “Company,”
“we,” “us” or “our”) is a biotechnology company focused on developing in order to commercialize
adoptive cell therapy (ACT) using autologous tumor infiltrating lymphocytes (TIL) for the treatment of metastatic melanoma and
other solid tumor cancers. ACT utilizes T-cells harvested from a patient to treat cancer in that patient. TIL, a kind of anti-tumor
T-cells that are naturally present in a patient’s tumors, are collected from individual patient tumor samples. The TIL are
then expanded ex vivo and then infused back into the patient to fight their tumor.
Basis of Presentation of Unaudited Condensed Financial
Information
The unaudited condensed financial statements
of the Company for the three and nine months ended September 30, 2016 and 2015 have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant
to the requirements for reporting on Form 10-Q and Regulation S-K. Accordingly, they do not include all the information and footnotes
required by GAAP for complete financial statements. However, such information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the financial position
and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for
a full fiscal year. The balance sheet information as of December 31, 2015 was derived from the audited financial statements included
in the Company's financial statements as of and for the year ended December 31, 2015 included in the Company’s Annual Report
on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2016. These financial statements
should be read in conjunction with that report.
Reclassification
Certain amounts within the condensed balance
sheet for the prior periods have been reclassified to conform with the current period presentation. These reclassifications had
no impact on the Company's previously reported financial position or net loss.
Liquidity
We are currently engaged in the development
of therapeutics to fight cancer. We do not have any commercial products and have not yet generated any revenues from our biopharmaceutical
business. We currently do not anticipate that we will generate any revenues during 2016 from the sale or licensing of any products.
As shown in the accompanying condensed financial statements, we have incurred a net loss of $37.2 million for the nine months ended
September 30, 2016 and used $20.5 million of cash in our operating activities during the nine months ended September 30, 2016.
As of September 30, 2016, we had $179.3 million of cash and cash equivalents and short-term investments on hand, stockholders’
equity of $179.1 million and had working capital of $177.4 million.
We expect to further increase our research
and development activities, which will increase the amount of cash we will use during 2017. Specifically, we expect increased spending
on clinical trials, research and development activities, higher payroll expenses as we increase our professional and scientific
staff, as well as continuing payments under our Cooperative Research and Development Agreement (CRADA) with the National Cancer
Institute (NCI) and continued and expansion of manufacturing activities. Based on the funds we have available, we believe that
we have sufficient capital to fund our anticipated operating expenses for at least 12 months from the date of filing this quarterly
report.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
Short-term Investments
The Company’s short-term investments
represent available-for-sale securities and are recorded at fair value with any unrealized gains and losses recorded within accumulated
other comprehensive loss. The estimated fair value of the available for sale securities is determined based on quoted market prices
or rates for similar instruments. In addition, the cost of debt securities in this category is adjusted for amortization of premium
and accretion of discount to maturity. The Company evaluates securities with unrealized losses to determine whether such losses,
if any, are other than temporary. No losses have been recognized for the three and nine months ended September 30, 2016 and 2015.
Loss per Share
Basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed
using the weighted average number of shares of common stock outstanding during the period increased to include the number of additional
shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.
At September 30, 2016 and 2015, the dilutive
impact of the following outstanding equity equivalents have been excluded because their impact on the loss per share is anti-dilutive.
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
4,945,358
|
|
|
|
2,704,195
|
|
Warrants
|
|
|
6,808,216
|
|
|
|
7,237,216
|
|
Series A Preferred
|
|
|
847,000
|
|
|
|
1,847,000
|
|
Series B Preferred
|
|
|
7,946,673
|
|
|
|
-
|
|
Restricted stock awards
|
|
|
9,167
|
|
|
|
494,000
|
|
Restricted stock units
|
|
|
550,000
|
|
|
|
-
|
|
|
|
|
21,106,414
|
|
|
|
12,282,411
|
|
The dilutive effect of potentially dilutive
securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock
method, an increase in the fair market value of the Company's common stock can result in a greater dilutive effect from potentially
dilutive securities.
Fair Value Measurements
Under Financial Accounting Standards Board
(“FASB”) ASC 820, Fair Value Measurements and Disclosures, fair value is defined as the price at which an asset could
be exchanged or a liability transferred in a transaction between knowledgeable, willing parties in the principal or most advantageous
market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from
such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.
Assets and liabilities recorded at fair
value in our financial statements are categorized based upon the level of judgment associated with the inputs used to measure their
fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of
these assets and liabilities, are as follows:
Level 1—Inputs are unadjusted,
quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for
the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
The fair valued assets we hold that are
generally included under this Level 1 are money market securities where fair value is based on publicly quoted prices.
Level 2—Are inputs, other than
quoted prices included in Level 1, that are either directly or indirectly observable for the asset or liability through correlation
with market data at the reporting date and for the duration of the instrument’s anticipated life.
The fair valued assets we hold that are
generally assessed under Level 2 are corporate bonds and commercial paper. We utilize third party pricing services in developing
fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including
benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. We use quotes from external pricing
service providers and other on-line quotation systems to verify the fair value of investments provided by our third party pricing
service providers. We review independent auditor’s reports from our third party pricing service providers particularly regarding
the controls over pricing and valuation of financial instruments and ensure that our internal controls address certain control
deficiencies, if any, and complementary user entity controls are in place.
Level 3—Unobservable inputs
that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and
which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the reporting
date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
We do not have fair valued assets classified
under Level 3.
The Company believes the carrying amount
of its financial instruments (consisting of cash and cash equivalents, accounts payable and accrued expenses) approximates fair
value due to the short-term nature of such instruments.
Financial assets measured at fair value
on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations (in
thousands):
|
|
Assets at Fair Value as of September 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
-
|
|
|
$
|
49,691
|
|
|
$
|
-
|
|
|
$
|
49,691
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
32,698
|
|
|
|
-
|
|
|
|
32,698
|
|
US Government agency securities
|
|
|
-
|
|
|
|
3,998
|
|
|
|
-
|
|
|
|
3,998
|
|
Total
|
|
$
|
-
|
|
|
$
|
86,387
|
|
|
$
|
-
|
|
|
$
|
86,387
|
|
|
|
Assets at Fair Value as of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Corporate debt securities
|
|
$
|
-
|
|
|
$
|
70,113
|
|
|
$
|
-
|
|
|
$
|
70,113
|
|
Total
|
|
$
|
-
|
|
|
$
|
70,113
|
|
|
$
|
-
|
|
|
$
|
70,113
|
|
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include valuation
of available-for-sale investments, accounting for potential liabilities, the valuation allowance associated with the Company’s
deferred tax assets, and the assumptions made in valuing stock instruments issued for services.
Stock-Based Compensation
The Company periodically grants stock options
and warrants to employees and non-employees in non-capital raising transactions as compensation for services rendered. The Company
accounts for stock option grants to employees based on the authoritative guidance provided by the Financial Accounting Standards
Board where the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts
for stock option grants to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board
where the value of the stock compensation is determined based upon the measurement date at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee
stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances
where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement date.
The fair value of the Company's common
stock option grants is estimated using a Black-Scholes option pricing model, which uses certain assumptions related to risk-free
interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded
based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used
in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
The Company as in the past issued restricted
shares of its common stock for share-based compensation programs. The Company measures the compensation cost with respect to restricted
shares issued to employees based upon the estimated fair value of the equity instruments at the date of the grant, and is recognized
as expense over the period which an employee is required to provide services in exchange for the award.
The fair value of restricted stock units
is based on the closing price of the Company’s common stock on the grant date.
Total stock-based compensation expense
related to all of our stock-based awards was recorded on the statement of operations as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
640
|
|
|
$
|
855
|
|
|
$
|
1,818
|
|
|
$
|
2,051
|
|
General and administrative
|
|
|
8,005
|
|
|
|
1,533
|
|
|
|
13,963
|
|
|
|
3,727
|
|
Total stock-based compensation expense
|
|
$
|
8,645
|
|
|
$
|
2,388
|
|
|
$
|
15,781
|
|
|
$
|
5,778
|
|
Total stock-based compensation broken down
based on each individual instrument was as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
$
|
7,877
|
|
|
$
|
1,922
|
|
|
$
|
13,944
|
|
|
$
|
4,223
|
|
Restricted stock award expense
|
|
|
145
|
|
|
|
466
|
|
|
|
976
|
|
|
|
1,555
|
|
Restricted stock unit expense
|
|
|
623
|
|
|
|
-
|
|
|
|
861
|
|
|
|
-
|
|
Total stock-based compensation expense
|
|
$
|
8,645
|
|
|
$
|
2,388
|
|
|
$
|
15,781
|
|
|
$
|
5,778
|
|
Preferred Stock
The Company applies the accounting standards
for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred
shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable
preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as
temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
Convertible Instruments
The Company applies the accounting standards
for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid contracts that feature conversion
options. The accounting standards require companies to bifurcate conversion options from their host instruments and account for
them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which
(i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument. The derivative is subsequently marked to market at each reporting date
based on current fair value, with the changes in fair value reported in results of operations.
Conversion options that contain variable
settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities
at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host
instrument.
The Company also records, when necessary,
deemed dividends for the intrinsic value of the conversion options embedded in preferred stock based upon the difference between
the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded
in the preferred stock.
Recent Accounting Pronouncements
In June 2016,
the FASB issued Accounting Standards Update (“ASU”) No. 2016-13,
Allowance
for Loan and Lease Losses (Financial Instruments - Credit Losses Topic 326.). New impairment guidance for certain financial instruments
(including trade receivables) will replace the current “incurred loss” model for estimating credit losses with a forward
looking “expected loss” model. The ASU is effective for the Company for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. Early application is permitted as of the fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact of this standard on
its financial statements.
In March
2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. This ASU identifies areas for simplification involving several aspects
of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity
or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well
as certain classifications on the statement of cash flows. This ASU will be effective for fiscal years beginning after December
15, 2016, and interim periods within those annual periods. The Company is currently assessing the potential impact of this ASU
on its condensed financial statements. Early adoption is permitted.
The FASB issued ASU No. 2016-08 “Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” This
guidance amends the principal versus agent guidance in the new revenue standard. The amendments retain the guidance that the principal
in an arrangement controls a good or service before it is transferred to a customer. The amendments clarify how an entity should
identify the unit of accounting for principal versus agent evaluation and how it should apply the control principle to certain
types of arrangements, such as service transactions. The amendments also reframe the indicators to focus on evidence that an entity
is acting as a principal rather than an agent, revise examples in the new standard and add new examples. The Company has not yet
determined the effect of the adoption of this standard on the Company’s financial position and results of operations.
In February
2016, the FASB issued ASU
2016-02-Leases
with
fundamental changes to how entities account for leases.
Lessees will need to recognize
a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term
lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to
adjustment, such as for initial direct costs. Additional disclosures for leases will also be required. The standard is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.
The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. The
new standard may materially impact the Company’s financial statements.
In January
2016, the FASB issued ASU 2016-01
Financial Instruments-Overall, which address certain
aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this Update are effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Earlier
application is permitted under specific circumstances. The Company is currently assessing the potential impact of this standard
on its financial statements.
Subsequent Events
The Company evaluates events that have
occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did
not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed
financial statements.
NOTE 3. CASH AND CASH EQUIVALENTS
AND SHORT-TERM INVESTMENTS
Cash and cash equivalents and short-term
investments consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash - Demand deposits
|
|
$
|
1,240
|
|
|
$
|
13,642
|
|
Cash equivalents - money market funds
|
|
|
88,656
|
|
|
|
19,945
|
|
Cash equivalents - commercial paper
|
|
|
2,999
|
|
|
|
-
|
|
Cash and cash equivalents total
|
|
$
|
92,895
|
|
|
$
|
33,587
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Commercial paper
|
|
$
|
49,691
|
|
|
$
|
-
|
|
Corporate debt securities
|
|
|
32,698
|
|
|
|
70,113
|
|
US Government agency securities
|
|
|
3,998
|
|
|
|
-
|
|
Short-term investments total
|
|
$
|
86,387
|
|
|
$
|
70,113
|
|
Money market funds and short-term investments
include the following securities with gross unrealized gains and losses (in thousands):
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
As of Septmeber 30, 2016
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Money market funds
|
|
$
|
88,656
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
88,656
|
|
Commercial paper
|
|
|
49,517
|
|
|
|
174
|
|
|
|
-
|
|
|
|
49,691
|
|
Corporate debt securities
|
|
|
32,708
|
|
|
|
3
|
|
|
|
(13
|
)
|
|
|
32,698
|
|
US Government agency securities
|
|
|
3,999
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
3,998
|
|
Total
|
|
$
|
174,880
|
|
|
$
|
177
|
|
|
$
|
(14
|
)
|
|
$
|
175,043
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
As of December 31, 2015
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Money market funds
|
|
$
|
19,945
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,945
|
|
Corporate debt securities
|
|
|
70,065
|
|
|
|
48
|
|
|
|
-
|
|
|
|
70,113
|
|
Total
|
|
$
|
90,010
|
|
|
$
|
48
|
|
|
$
|
-
|
|
|
$
|
90,058
|
|
At
September 30,
2016, the Company's short-term investments had the following remaining contractual maturities (in thousands):
|
|
Amortized Cost
|
|
|
Estimated Fair Value
|
|
Less than one year
|
|
$
|
86,224
|
|
|
$
|
86,387
|
|
The Company’s investment policy limits
investments to certain types of instruments such as certificates of deposit, money market instruments, obligations issued by the
U.S. government and U.S. government agencies as well as corporate debt securities, and places restrictions on maturities and concentration
by type and issuer.
NOTE 4. STOCKHOLDERS’
EQUITY
Series B Preferred Stock
In June 2016, the Company created a new
class of Preferred Stock designated as Series B Preferred Stock (the “Series B Preferred”). The rights of the
Series B Preferred are set forth in the Certificate of Designation of Rights, Preferences and Privileges of Series B
Preferred Stock (the “Series B Certificate of Designation”). A total of 11,500,000 shares of Series B Preferred
are authorized for issuance under the Certificate of Designation. The shares of Series B Preferred have a stated value of $4.75
per share and are convertible into shares of common stock at an initial conversion price of $4.75 per share.
Holders of the Series B Preferred are entitled
to dividends on an as-if-converted basis in the same form as any dividends actually paid on shares of our Series A Convertible
Preferred Stock or our common stock. So long as any Series B Preferred remains outstanding, the Company may not redeem, purchase
or otherwise acquire any material amount of our Series A Preferred Stock or any junior securities.
The Company has also evaluated its convertible
preferred stock in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded
derivatives requiring bifurcation. The issuance of the convertible preferred stock could generate a beneficial conversion feature
(“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial
to the investor or in the money at inception because the conversion option has an effective strike price that is less than the
market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of
the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between
the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in
capital, resulting in a discount on the convertible preferred stock. As the convertible preferred stock may be converted immediately,
the Company recognized a BCF of $49.5 million as a deemed dividend in the condensed statements of operations for the three and
nine months ended September 30, 2016
During the three and nine months ended
September 30, 2016, 3,421,960 shares of Series B Preferred Stock that were originally issued in the June 2016 private placement
(discussed below) were converted into 3,421,960 shares of common stock.
Private Placement
On June 2, 2016, the Company entered into
a securities purchase agreement with various institutional and individual accredited investors to raise gross proceeds of $100
million in a private placement (the “Private Placement”). On June 7, 2016, the Company completed the Private Placement.
In the Private Placement, the Company issued (i) 9,684,000 shares of its common stock and (ii) 11,368,633 shares of its
new Series B Preferred Stock. The shares of common stock and Series B Preferred were sold for $4.75 per share. The shares
of Series B Preferred initially were not convertible into common stock and, except as required by law, are non-voting. On July
7, 2016 the Company filed a proxy statement with the SEC with respect to a stockholders meeting that was held on August 16, 2016
at which the stockholders were asked to vote on a proposal to permit the Series B Preferred to become convertible into shares of
the Company’s common stock and to permit the issuance of shares of common stock upon such conversion. The requisite stockholder
approval was obtained and, as a result, the Series B Preferred became convertible into shares of common stock at an initial
conversion price of $4.75 per share.
The Company recognized a one-time deemed
dividend of $49.5 million on August 16, 2016 as a result of the beneficial conversion feature of the Series B Preferred. The deemed
dividend was recorded on the date that our stockholders approved the provision in the Series B Preferred that allowed the Series
B Preferred to convert into common stock. This one-time, non-cash charge impacted net loss attributable to common stockholder and
loss per share for the three and nine months ended September 30, 2016.
The Company received net proceeds of approximately
$95.7 million from the Private Placement, after paying placement agent fees and estimated offering expenses.
In connection with the Private Placement,
the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with the investors
pursuant to which the Company agreed to file with the SEC, within 30 days of the closing of the Private Placement, a registration
statement covering the resale by the investors of the shares of common stock purchased by them. The Company also agreed in the
Registration Rights Agreement to file with the SEC within 30 days of any stockholders meeting approving the conversion feature
of the Series B Preferred Stock, a registration statement covering the resale of the shares of our common stock issuable upon conversion
of their shares of Series B Preferred by the holders of shares of Series B Preferred. The Company also agreed to use its best efforts
to have the respective registration statements declared effective as soon as practicable upon filing, but in any event within 90
days after filing. The Company filed the registration statement to register the Private Placement common stock on July 1, 2016,
which registration statement was amended to include the shares underlying the Series B Preferred. The combined registration statement
covering both the shares of common stock sold in the Private Placement and the shares underlying the Series B Preferred was declared
effective on September 2, 2016, thereby fulfilling the Company’s registration obligations under the Registration Rights Agreement.
The Registration Rights Agreement also provides, among other things, that if the foregoing registration statement ceases to be
effective under certain circumstances, the Company will pay to the holders on the occurrence of each such event and for each 30-day
period thereafter until the applicable event is cured, an amount in cash equal to 1% of the aggregate amount invested (or outstanding,
as specified in greater detail in the Registration Rights Agreement) by the holders under the Purchase Agreement for each 30-day
period (prorated for any period of less than 30 days) during which such registration statement was not effective.
Restricted Stock Awards
Shares of restricted stock awards granted below are subject
to forfeiture to the Company or other restrictions that will lapse in accordance with a vesting schedule determined by our Board.
The following table summarizes restricted
common stock award activity:
|
|
|
|
|
Weighted Average
|
|
|
|
Number
|
|
|
Grant Date
|
|
|
|
of Shares
|
|
|
Fair Value
|
|
Non-vested shares, January 1, 2016
|
|
|
321,252
|
|
|
$
|
6.96
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(272,084
|
)
|
|
|
6.90
|
|
Forfeited
|
|
|
(40,001
|
)
|
|
|
-
|
|
Non-vested shares, September 30, 2016
|
|
|
9,167
|
|
|
$
|
6.49
|
|
Restricted Stock Units
On June 1, 2016, we entered into a restricted
stock unit agreement with the Company’s new Chief Executive Officer (Maria Fardis, Ph.D.) pursuant to which the Company granted
Dr. Fardis 550,000 non-transferrable restricted stock units at fair market value of $5.87 per share as an inducement of employment
pursuant to the exception to The NASDAQ Global Market rules that generally require stockholder approval of equity incentive plans.
The 550,000 restricted stock units will vest in installments as follows: (i) 137,500 restricted stock units will vest upon the
first anniversary of the effective date of Dr. Fardis’ employment agreement; (ii) 275,000 restricted stock units will vest
upon the satisfaction of certain clinical trial milestones; and (iii) 137,500 restricted stock units will vest in equal monthly
installments over the 36-month period following the first anniversary of the effective date of Dr. Fardis’ employment, provided
that Dr. Fardis has been continuously employed with the Company as of such vesting dates.
Stock-based compensation expense for RSUs
is measured based on the closing fair market value of the Company's common stock on the date of grant.
NOTE 5. STOCK
OPTIONS AND WARRANTS
Stock Options
A summary of the status of stock options
at September 30, 2016, and the changes during the nine months then ended, is presented in the following table:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
Option
|
|
|
Price
|
|
|
Life
|
|
|
(in thousands)
|
|
Outstanding at January 1, 2016
|
|
|
2,693,237
|
|
|
$
|
8.12
|
|
|
|
8.00
|
|
|
$
|
2,347
|
|
Granted
|
|
|
3,007,483
|
|
|
|
6.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(75,480
|
)
|
|
|
6.35
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(679,882
|
)
|
|
|
8.42
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
4,945,358
|
|
|
$
|
7.13
|
|
|
|
6.87
|
|
|
$
|
8,060
|
|
Exercisable at September 30, 2016
|
|
|
2,382,194
|
|
|
$
|
7.29
|
|
|
|
4.03
|
|
|
$
|
4,125
|
|
During the nine months ended September
30, 2016, the Company granted options to purchase 3,007,483 shares of common stock to employees and directors of the Company. The
stock options generally vest between one and three years. The fair value of these options was determined to be $19.2 million using
the Black-Scholes option pricing model based on the following assumptions:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Risk-free interest rate
|
|
1.26% - 1.18%
|
|
1.57%
|
|
1.79% - 1.18%
|
|
1.57%
|
Expected term (in years)
|
|
5.89 - 5.19
|
|
10
|
|
6.50 - 5.07
|
|
10
|
Expected volatility
|
|
170.54% - 158.13%
|
|
211.38%
|
|
213.64% - 158.13%
|
|
218.00% - 211.38%
|
Expected Dividend Yield
—The
Company has never paid dividends and does not expect to pay dividends.
Risk-Free Interest Rate
—The
risk-free interest rate was based on the market yield currently available on United States Treasury securities with maturities
approximately equal to the option’s expected term.
Expected Term
—Expected term
represents the period that the Company’s stock-based awards are expected to be outstanding. The Company’s assumptions
about the expected term have been based on that of companies that have similar industry, life cycle, revenue, and market capitalization
and the historical data on employee exercises.
Expected Volatility
—The expected
volatility is based on a combination of historical volatility for the Company's stock and the historical stock volatilities of
several of the Company’s publicly listed comparable companies over a period equal to the expected terms of the options, as
the Company does not have a long trading history.
Forfeiture Rate
—The Company
estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the
forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from
a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures
differs from that estimated by the Company, the Company may be required to record adjustments to stock-based compensation expense
in future periods.
Each of the inputs discussed above is subjective
and generally requires significant management judgment.
As of September 30, 2016, the value of
unvested options was $15.3 million to be recognized over a weighted period of 2.5 years.
Warrants
A summary of the status of stock warrants
at September 30, 2016, and the changes during the nine months then ended, is presented in the following table:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
|
7,202,216
|
|
|
$
|
2.51
|
|
|
|
3.3 years
|
|
|
$
|
37,596
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(381,058
|
)
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
(12,942
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
6,808,216
|
|
|
$
|
2.52
|
|
|
|
2.1 years
|
|
|
$
|
39,011
|
|
NOTE 6. AGREEMENTS
National Institutes of Health and the National Cancer
Institute
Cooperative Research and Development Agreement
Effective August 5, 2011, the Company signed
a five-year Cooperative Research and Development Agreement (“CRADA”) with the National Institutes of Health and the
National Cancer Institute (“NCI”) to work with Dr. Steven A. Rosenberg, M.D., Ph.D., chief of NCI’s Surgery Branch,
on developing adoptive cell immunotherapies that are designed to destroy metastatic melanoma cells using a patient’s tumor
infiltrating lymphocytes. On January 22, 2015, the Company executed an amendment (the “Amendment”) to the CRADA to
include four new indications. As amended, in addition to metastatic melanoma, the CRADA included the development of TIL therapy
for the treatment of patients with bladder, lung, triple-negative breast, and HPV-associated cancers.
On August 18, 2016, the NCI and the Company
entered into a second amendment to the CRADA. The principal changes effected by the second amendment included (i) extending the
term of the CRADA by another five years to August 2021, and (ii) modifying the focus on the development of TIL as a stand-alone
therapy or in combination with FDA-licensed products and commercially available reagents routinely used for adoptive cell therapy.
The parties will continue the development of improved methods for the generation and selection of TIL with anti-tumor reactivity
in metastatic melanoma, bladder, lung, breast, and HPV-associated cancers.
Patent License Agreement Related to the Development and
Manufacture of TIL
Effective October 5, 2011, the Company
entered into a Patent License Agreement with the National Institutes of Health, an agency of the United States Public Health Service
within the Department of Health and Human Services (“NIH”), which Patent License Agreement was subsequently amended
on February 9, 2015 and October 2, 2015. Pursuant to the License Agreement as amended, the NIH granted the Company a right and
license to certain technologies relating to autologous tumor infiltrating lymphocyte adoptive cell therapy products for the treatment
of metastatic melanoma, lung, breast, bladder and HPV-positive cancers. The Patent License Agreement requires the Company to pay
royalties based on a percentage of net sales (which percentage is in the mid-single digits), a percentage of revenues from sublicensing
arrangements, and lump sum benchmark royalty payments on the achievement of certain clinical and regulatory milestones for each
of the various indications and other direct costs incurred by the NIH pursuant to the agreement.
Exclusive Patent License Agreement
On February 10, 2015, the Company entered
into an Exclusive Patent License Agreement with the NIH under which the Company received an exclusive license to the NIH’s
rights to patent-pending technologies related to methods for improving adoptive cell therapy through more potent and efficient
production of TIL from melanoma tumors by selecting for T-cell populations that express various inhibitory receptors. Unless terminated
sooner, the license shall remain in effect until the last licensed patent right expires.
In consideration for the exclusive rights
granted under the Exclusive Patent License Agreement, the Company agreed to pay the NIH a non-refundable upfront licensing fee
which was recognized as research and development expense during the year ended December 31, 2015. The Company also agreed to pay
customary royalties based on a percentage of net sales of a licensed product (which percentage is in the mid-single digits), a
percentage of revenues from sublicensing arrangements, and lump sum benchmark payments upon the successful completion of clinical
studies involving licensed technologies, the receipt of the first FDA approval or foreign equivalent for a licensed product or
process resulting from the licensed technologies, the first commercial sale of a licensed product or process in the United States,
and the first commercial sale of a licensed product or process in any foreign country. The Company will also be responsible for
all costs associated with the preparation, filing, maintenance and prosecution of the patent applications and patents covered by
the License.
H. Lee Moffitt Cancer Center
Research Collaboration Agreement
In September, 2014, the Company entered
into a research collaboration agreement with the H. Lee Moffitt Cancer Center and Research Institute, Inc. (“Moffitt”)
to jointly engage in transitional research and development of adoptive tumor-infiltrating lymphocyte cell therapy with improved
anti-tumor properties and process.
License Agreement
The Company entered into a license agreement
(the “Moffitt License Agreement”), effective as of June 28, 2014, with Moffitt under which the Company received a world-wide
license to Moffitt’s rights to patent-pending technologies related to methods for improving tumor-infiltrating lymphocytes
for adoptive cell therapy. Unless earlier terminated, the term of the license extends until the earlier of the expiration of the
last patent related to the licensed technology or 20 years after the effective date of the license agreement.
Pursuant to the Moffitt License Agreement,
the Company paid an upfront licensing fee which was recognized as research and development expense during 2014. A patent issuance
fee will also be payable under the Moffitt License Agreement, upon the issuance of the first U.S. patent covering the subject technology.
In addition, the Company agreed to pay milestone license fees upon completion of specified milestones, customary royalties based
on a specified percentage of net sales (which percentage is in the low single digits) and sublicensing payments, as applicable,
and annual minimum royalties beginning with the first sale of products based on the licensed technologies, which minimum royalties
will be credited against the percentage royalty payments otherwise payable in that year. The Company will also be responsible for
all costs associated with the preparation, filing, maintenance and prosecution of the patent applications and patents covered by
the Moffitt License Agreement related to the treatment of any cancers in the United States, Europe and Japan and in other countries
selected that the Company and Moffitt agreed to.
During the nine months ended September
30, 2016 and 2015, the Company recognized $0.6 million and $0.4 million respectively, of expenses related to its license agreements.
The amounts were recorded as part of research and development expenses in the statements of operations. Additionally, during the
nine months ended September 30, 2016, there were no net sales subject to certain annual minimum royalty payments or sales that
would require us to pay a percentage of revenues from sublicensing arrangements. In addition, there were no benchmarks or milestones
achieved that would require payment under the lump sum benchmark royalty payments on the achievement of certain clinical regulatory
milestones for each of the various indications.
PolyBioCept, AB
Exclusive and Co-exclusive License Agreement
On September 14, 2016, the Company entered
into an Exclusive and Co-Exclusive License Agreement (the “License Agreement”) with PolyBioCept AB, a corporation organized
under the laws of Sweden (“PolyBioCept”). PolyBioCept has filed two patent applications with claims related to a cytokine
cocktail for use in expansion of lymphocytes. Under the License Agreement, the Company received the exclusive right and license
to PolyBioCept’s intellectual property to develop, manufacture, market and genetically engineer tumor infiltrating lymphocytes
(TIL) produced by expansion, selection and enrichment using a cytokine cocktail. The Company also received a co-exclusive license
(with PolyBioCept) to develop, manufacture and market genetically engineered TIL under the same intellectual property. The licenses
are for the use in all cancers and are worldwide in scope, with the exception that the uses in melanoma are not included for certain
countries of the former Soviet Union.
The Company paid PolyBioCept a total of
$2.5 million as an up-front exclusive license payment. The Company will also have to make additional milestone payments to PolyBioCept
under the License Agreement if, and when, (i) certain product development milestones are achieved, (ii) certain regulatory approvals
have been obtained from the U.S. Food and Drug Administration (FDA) and/or the European Medicines Agency (EMA), and (iii) certain
product sales targets are achieved. The milestone payments will be payable both in cash (U.S. dollars) and in shares of the Company’s
common stock. If all of the foregoing product development, regulatory approval and sales milestone payments are met, the Company
will have to pay PolyBioCept an additional $8.7 million and will have to issue to PolyBioCept a total 2,219,376 shares of unregistered
common stock. In addition to these potential payments, the Company will reimburse PolyBioCept up to $0.2 million in expenses related
to the transfer of know-how and will pay PolyBioCept $0.1 million as a clinical trials management fee. The Company also separately
engaged PolyBioCept as a consultant to provide certain product development and research related services in a one-year agreement
for up to $0.2 million, subject to the consent of the Karolinska Institute to the services to be performed by its employees thereunder.
The License Agreement has an initial term of 30 years, and may be extended for additional five-year periods.
In connection with the execution of the
License Agreement, the Company also (i) entered into a clinical trials agreement with the Karolinska University Hospital to conduct
clinical trials in glioblastoma and pancreatic cancer at the Karolinska University Hospital, and (ii) agreed to enter into a sponsored
research agreement with the Karolinska Institute for the research of the cytokine cocktail in additional indications. The Company
agreed to enter into the sponsored research agreement within 90 days after the date of the License Agreement. Failure to do so
will give PolyBioCept the right to terminate the License Agreement (and to return $2.2 million of the payments it received). The
Company will pay the Karolinska an additional $2.6 million in connection with these other related agreements. The Company recognized
$2.4 million and $0 as research and development expense in connection with this agreement in the quarter ended September30, 2016
and September 30, 2015, respectively.
NOTE 7. LEGAL
PROCEEDINGS
SEC Settlement.
On April 23, 2014
the Company received a subpoena from the SEC that stated that the staff of the SEC was conducting an investigation then designated
as “
In the Matter of Galena Biopharma, Inc.
” File No. HO 12346 (now known as “
In the Matter of Certain
Stock Promotions
”) and that the subpoena was issued to the Company as part of the foregoing investigation. The Company
has been informed by the Staff of the SEC that the SEC’s investigation, in part, involves the conduct of the Company’s
former Chief Executive Officer, Manish Singh, during the period between September 2013 and April 2014. As the Company understands,
as it pertains to the Company’s former Chief Executive Officer, the investigation has focused on the failure by authors
of certain articles about the Company to disclose that they were compensated by one of our former investor relations firms. The
Company understands that it is the position of the SEC Staff that the conduct of the former Chief Executive Officer with respect
to these articles may be imputed to the Company.
In order to resolve this matter, the Company
has agreed with the Staff of the SEC to a proposed settlement framework under which it would consent to the entry of an order
requiring that it cease and desist from any future violations of certain provisions of the federal securities laws, without admitting
or denying any allegations, and agree to a financial penalty. The Company does not anticipate that the amount of the financial
penalty will have a material impact on its cash position. The proposed settlement is contingent upon reaching agreement with the
Staff of the SEC on a complete set of settlement terms and approval by the Commissioners of the SEC, neither of which can be assured.
Solomon Capital, LLC.
On April
8, 2016, a lawsuit titled Solomon Capital, LLC, Solomon Capital 401(K) Trust, Solomon Sharbat and Shelhav Raff against Lion Biotechnologies,
Inc. was filed by Solomon Capital, LLC, Solomon Capital 401(k) Trust, Solomon Sharbat and Shelhav Raff against the Company in
the Supreme Court of the State of New York County of New York (index no. 651881/2016). The plaintiffs allege that, between June
and November 2012 they provided to the Company $0.1 million and that they advanced and paid on our behalf an additional $0.2 million.
The complaint further alleges that the Company agreed to (i) provide them with promissory notes totaling $0.2 million, plus interest,
(ii) issue a total of 111,425 shares to the plaintiffs (before the 1-for-100 reverse split of our common stock effected in September
2013), and (iii) allow the plaintiffs to convert the foregoing funds into our securities in the next transaction. The plaintiffs
allege that they should have been able to convert their advances and payments into shares of the Company’s common stock
in the Restructuring that it effected in May 2013. Based on the foregoing, the plaintiffs allege causes for breach of contract
and unjust enrichment and demand judgment against the Company in an unspecified amount exceeding $1.5 million, plus interest and
attorneys’ fees.
On June 3, 2016, the Company filed an
answer and counterclaims in the lawsuit. In its counterclaims, the Company alleges that the plaintiffs misrepresented their
qualifications to assist it in fundraising and that they failed to disclose that they were under investigation for securities
laws violations. The Company is seeking damages in an amount exceeding $0.5 million and an order rescinding any and all
agreements that the plaintiffs contend entitled them to obtain stock in the Company. The Company’s investigation of
the allegations made by the plaintiffs is ongoing and it intends to vigorously defend the complaint and pursue its counterclaims.
The Company may be involved, from time
to time, in legal proceedings and claims arising in the ordinary course of its business. Such matters are subject to many uncertainties
and outcomes are not predictable with assurance. The Company accrues amounts, to the extent they can be reasonably estimated,
that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company
believes will result in a probable loss. While there can be no assurances as to the ultimate outcome of any legal proceeding or
other loss contingency involving the Company, management does not believe any pending matter will be resolved in a manner that
would have a material adverse effect on the Company’s condensed consolidated financial position, results of operations or
cash flows.
NOTE 8. COMMITMENTS
AND CONTINENGIES
Lease Obligations
Tampa Lease
In December 2014, the Company commenced
a five-year non-cancellable operating lease with the University of South Florida Research Foundation for a 5,115 square foot facility
located in Tampa, Florida. The facility is part of the University of South Florida research park and is used as the Company’s
research and development facilities. The Company has the option to extend the lease term of this facility for an additional five-year
period on the same terms and conditions, except that the base rent for the renewal term will be increased in accordance with the
applicable consumer price index.
In April 2015, the Company amended the
original lease agreement to increase the rentable space to 6,043 square feet. In September 2016, the Company further increased
the rentable space to 8,673 square feet. The per square foot cost and term of the lease were unchanged.
San Carlos Lease
On August 4, 2016, the Company entered
into an agreement to lease 8,733 square feet in San Carlos, California. The term of the lease is 54 months subsequent to the commencement
date, and total expected rental payments under the lease are expected to be $2.1 million.
The Company
recognizes rental expense on the facilities on a straight-line basis over the lease term. Differences between the straight line
rent expense and rent payments are classified as deferred rent liability on the balance sheet. As of
September 30,
2016, the Company's future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
Year
|
|
Amount
|
|
2016 (remaining three months)
|
|
$
|
39
|
|
2017
|
|
|
610
|
|
2018
|
|
|
629
|
|
2019
|
|
|
633
|
|
2020
|
|
|
495
|
|
2021
|
|
|
169
|
|
|
|
$
|
2,575
|
|
Commitments under the CRADA
On August 18, 2016, the NCI and the Company
entered into second amendment to the CRADA. In connection with the amendment, the Company is required to make quarterly payments
starting August 2016 in the amount of $0.5 million through August 2021 (or a total of $10 million over the life of the amended
CRADA).
Other Matters
During the second
quarter of 2016, warrants representing 128,500 shares were exercised. The 128,500 shares of common stock had previously been registered
for re-sale. However, we believe that these 128,500 warrant shares were sold by the holders in open market transactions in May
2016 at a time when the registration statement was ineffective. Accordingly, those sales were not made in accordance with Sections
5 and 10(a)(3) of the Securities Act, and the purchasers of those shares may have rescission rights (if they still own the shares)
or claims for damages (if they no longer own the shares). The amount of any such liability is uncertain and as such, an accrual
for any potential loss has not been made. The Company believes that any claims brought against it would not result in a material
impact to the Company’s financial position or results of operations. The Company has not accrued a loss for a potential
claim associated with this matter as it is unable to estimate any at this time.