ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our Consolidated Financial Statements and the notes thereto included elsewhere in this Annual Report on Form 10‑K. This discussion contains forward‑looking statements that involve risks and uncertainties. For additional discussion, see “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS” above.
Overview
We are a biopharmaceutical company focused on developing medicines for patients with neglected and rare diseases, with an ancillary focus on pediatric conditions, and on executing our Responsible Pricing Model in the commercialization of our products that may be approved. Our lead product candidate is benznidazole for the treatment of Chagas disease, a parasitic illness that can lead to long-term heart, intestinal and neurological problems. We are developing one of our proprietary monoclonal antibodies, lenzilumab (formerly known as KB003), for the treatment of chronic myelomonocytic leukemia, or CMML, and potentially for the treatment of juvenile myelomonocytic leukemia, or JMML, both of which are rare hematologic cancers with high unmet medical need. We are exploring partnering opportunities to enable development of ifabotuzumab (another of our proprietary monoclonal antibodies, formerly known as KB004), for the potential treatment of serious pulmonary conditions and certain rare solid and hematologic cancers, and KB001-A which was being developed for the treatment of cystic fibrosis. With a focus on neglected, rare and orphan diseases, we believe we have the opportunity to benefit from various regulatory incentives, such as orphan drug exclusivity, breakthrough therapy designation, fast track designation, accelerated approval, priority review and priority review vouchers, or PRVs, where available, that provide for certain periods of exclusivity, expedited review and/or other benefits.
Upon regulatory approval of any of our products, we intend to apply our Responsible Pricing Model, which focuses on affordability for patients and payers, transparency for all stakeholders, and delivery of a reasonable return in recognition of the risks we are taking in our development efforts.
Benznidazole is an oral small molecule antiprotozoal for the treatment of Chagas disease, which is also known as American trypanosomiasis. Benznidazole has undergone numerous clinical trials and studies that show efficacy against Chagas disease and we believe is the current preferred treatment for Chagas disease in the countries where it is approved. No treatments for Chagas disease are approved by the United States Food and Drug Administration, or FDA for use in the United States. On June 30, 2016, we acquired certain worldwide rights relating to benznidazole for human use from Savant Neglected Diseases, LLC, or Savant, and we are focused on the development necessary to seek and obtain FDA approval of benznidazole. We believe benznidazole as a treatment for Chagas disease could qualify for priority review and potentially other FDA regulatory incentives, and to receive a PRV if FDA approves the drug for marketing.
Lenzilumab is a recombinant monoclonal antibody, or mAb, that neutralizes soluble granulocyte-macrophage colony-stimulating factor, or GM-CSF, a critical cytokine for the growth of certain hematologic malignancies and solid tumors and may be implicated in other serious conditions. Consistent with our strategic focus on neglected and rare diseases, in July 2016, we initiated dosing in a Phase 1 clinical trial in patients with CMML to identify the maximum tolerated dose, or MTD, or recommended Phase 2 dose of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity. We may assess interim data from the lenzilumab CMML Phase I study to determine the feasibility of rapidly commencing a Phase I study in JMML patients, or explore progressing directly with the JMML Phase I study. JMML is associated with a very high unmet medical need and there are no FDA-approved therapies.
Ifabotuzumab is an anti-EphA3 mAb that has the potential to offer a novel approach to treating serious pulmonary conditions as well as solid tumors and hematologic malignancies. EphA3 is aberrantly expressed on the surface of tumor cells and stroma cells in certain cancers. We have completed the Phase 1 dose escalation portion of a Phase 1/2 clinical trial in ifabotuzumab in multiple hematologic malignancies. We are evaluating partnering opportunities for ifabotuzumab.
We also have an additional drug candidate, KB001-A, a recombinant, PEGylated, anti‑Pseudomonas PcrV high‑affinity Fab antibody that we are no longer developing, but for which we are seeking strategic options including sale, license or partnerships.
Lenzilumab, ifabotuzumab and KB001-A were each developed with our proprietary, patent-protected Humaneered® technology, which consists of methods for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use, typically for chronic conditions.
Our strategy also involves identifying, acquiring, developing and supporting the commercialization of additional treatments for neglected and rare diseases. We believe the treatment of neglected and rare diseases represents an opportunity to enter underserved patient populations. We also believe our focus on neglected and rare diseases provides us the opportunity to benefit from various regulatory incentives referenced above. The potential opportunities afforded by these regulatory programs provide an important incentive to support our efforts to develop medicines for patients with neglected and rare diseases and to apply our Responsible Pricing Model for any of our approved products.
Our company has undergone a significant transformation in the last year. As a result of challenges facing us at the time, on December 29, 2015, we filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On June 30, 2016, our Second Amended Plan of Reorganization, dated May 9, 2016, as amended, or the Plan, became effective and we emerged from our Chapter 11 bankruptcy proceedings. For further information on our bankruptcy and emergence from bankruptcy, see Part I, Item 1, “Business—Bankruptcy” and Note 2 to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
We have incurred significant losses and had an accumulated deficit of $240.6 million as of December 31, 2016. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our development activities and seek regulatory approvals. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.
We will require substantial additional capital to continue as a going concern and to support our business efforts, including obtaining regulatory approvals for benznidazole or other product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. We anticipate that we will seek additional financing from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all. If in the best interests of our stockholders, we may also find it appropriate to enter into a strategic transaction that could result
in, among other things, a sale, merger, consolidation or business combination.
If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern. The Report of Independent Registered Public Accounting Firm at the beginning of the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K includes an explanatory paragraph about our ability to continue as a going concern.
T
he consolidated financial statements for the year ended December 31, 2016 were prepared on the basis of a going concern, which contemplates that we will be able to realize our assets and discharge liabilities in the normal course of business. Our ability to meet our liabilities and to continue as a going concern is dependent upon the availability of future funding.
The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
On January 13, 2016, our common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the KBIOQ symbol. On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of our common stock, and the delisting was effective on February 5, 2016. On June 30, 2016, upon emergence from bankruptcy, the ticker symbol for the trading of the Company’s common stock on the over-the-counter market reverted back to KBIO.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, valuation of financing derivative, the fair value‑based measurement of stock‑based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.
We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
While our significant accounting policies are described in more detail in Note
3
to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing contracts and purchase orders, reviewing the terms of our license agreements, communicating with our applicable personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. Some of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees to:
|
·
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contract research organizations and other service providers in connection with clinical studies;
|
|
·
|
contract manufacturers in connection with the production of clinical trial materials; and
|
|
·
|
vendors in connection with preclinical development activities.
|
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing these costs, we estimate the time period over which services will be performed for which we have not been invoiced and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period.
Stock‑Based Compensation
Our stock‑based compensation expense for stock options is estimated at the grant date based on the award’s fair value as calculated by the Black‑Scholes option pricing model and is recognized as expense over the requisite service period. The Black‑Scholes option pricing model requires various highly judgmental assumptions including expected volatility and expected term. The expected volatility is based on the historical stock volatilities of several of our publicly listed peers over a period equal to the expected terms of the options as we do not have a sufficient trading history to use the volatility of our own common stock. To estimate the expected term, we have opted to use the simplified method, which is the use of the midpoint of the vesting term and the contractual term. If any of the assumptions used in the Black‑Scholes option pricing model changes significantly, stock‑based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre‑vesting termination behavior of employees. To the extent our actual forfeiture rate is different from our estimate, stock‑based compensation expense is adjusted accordingly.
Revenue Recognition
Our contract revenue to date has been generated primarily through license agreements and research and development collaboration agreements. Contract revenue may include nonrefundable, non‑creditable upfront fees, funding for research and development efforts, and milestone or other contingent payments for achievements with regards to our licensed products. We did not materially modify any previous material collaboration agreements or enter into any new such agreements from 2011 through the end of 2016. All collaboration agreements have been accounted for in accordance with the accounting guidance applicable to such arrangements prior to our adoption of Accounting Standards Update, or ASU, 2009‑13, Multiple‑Deliverable Revenue Arrangements, and ASU 2010‑17, Revenue Recognition—Milestone Method, each of which we adopted on a prospective basis on January 1, 2011.
We recognize revenue when persuasive evidence of an arrangement exists, transfer of technology has been completed, services have been performed or products have been delivered, the fee is fixed and determinable, and collection is reasonably assured.
For multiple element arrangements, we evaluate whether the components of each arrangement are to be accounted for as separate units of accounting based on certain criteria. Upfront payments for licensing our intellectual property to date have not been separable from the activity of providing research and development services because the license has not been assessed to have stand‑alone value separate from the research and development services provided. Such upfront payments are recorded as deferred revenue in the balance sheet and are recognized as contract revenue over the contractual or estimated substantive performance period, which is consistent with the term of the research and development obligations contained in the research and development collaboration agreement.
Payments resulting from our research and development efforts under license agreements are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because we act as a principal, with discretion to choose suppliers, bear credit risk, and perform part of the services.
Substantive, at‑risk milestone payments are recognized as revenue when the milestone is achieved and collectability is reasonably assured. When contingent payments are not for substantive and at‑risk milestones, revenue is recognized over the estimated remaining term of the related service period or, if there are no continuing performance obligations under the arrangement, upon receipt provided that collection is reasonably assured and other revenue recognition criteria have been satisfied.
Liabilities Subject to Compromise
Liabilities subject to compromise is our estimate of known or potential pre-petition claims to be resolved in connection with our Chapter 11 bankruptcy case (the “Bankruptcy Case”). Such claims remain subject to future adjustments. Payment terms for liabilities subject to compromise are established as part of the Plan.
We applied Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852,
Reorganizations
, which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. It requires that the financial statements for periods subsequent to the Chapter 11 filing distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the Consolidated Statements of Operations and Comprehensive Loss. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be subject to a plan of reorganization must be reported at the amounts expected to be allowed in the Company’s Chapter 11 case, even if they may be settled for lesser amounts as a result of the plan of reorganization or negotiations with creditors. In addition, cash used by reorganization items are disclosed separately in the Consolidated Statements of Cash Flow. As of December 31, 2015, we had not incurred or paid significant amounts related to our reorganization.
As of December 31, 2015, we had approximately $5.4 million recorded as Liabilities subject to compromise. In conjunction with our exit from bankruptcy, we reclassified remaining Liabilities subject to compromise totaling approximately $2.8 million, $0.8 million and $1.2 million to Accounts payable, Accrued expenses and Notes payable to vendors, respectively. For the year ended December 31, 2016, we paid approximately $3.4 million related to Liabilities subject to compromise, issued $1.2 million in promissory notes to vendors, wrote off approximately $0.3 million in deferred rent liabilities related to its lease termination and reversed approximately $0.1 million in accrued expenses related to a claim that has been denied by the court, which as discussed above, were previously included in Liabilities subject to compromise. As of December 31, 2016, approximately $0.4 million and $1.2 million remain in Accounts payable and Notes payable to vendors, respectively. Remaining amounts will be paid based on terms of the Plan.
For the year ended December 31, 2016, Reorganization items, net consisted of the following charges:
|
|
Year ended
|
|
(in thousands)
|
|
December 31, 2016
|
|
Legal fees
|
|
$
|
4,870
|
|
Professional fees
|
|
|
1,218
|
|
Debtor-in-possession financing costs
|
|
|
1,143
|
|
Beneficial conversion on debtor-in-possession financing
|
|
|
484
|
|
Fair value of shares issued to officer and directors for service in bankruptcy
|
|
|
700
|
|
Gain on lease termination
|
|
|
(227
|
)
|
Total reorganization items, net
|
|
$
|
8,188
|
|
Recently Issued Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 3,
Summary of Significant Accounting Policies
in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10‑K.
Results of Operations
General
We have not generated net income from operations, except for the year ended December 31, 2007, during which we recognized a one‑time license payment from Novartis. At December 31, 2016, we had an accumulated deficit of $240.6 million, primarily as a result of research and development and general and administrative expenses as well as costs incurred in reorganization. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.
Research and Development Expenses
Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We track external research and development costs incurred by project for each of our clinical programs. We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. Our external research and development costs consist primarily of:
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·
|
expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;
|
|
·
|
the cost of acquiring and manufacturing clinical trial and other materials; and
|
|
·
|
other costs associated with development activities, including additional studies.
|
Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock‑based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project. The following table shows our total research and development expenses for the years ended December 31, 2016 and 2015:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
External Costs
|
|
|
|
|
|
|
KB001
|
|
$
|
22
|
|
|
$
|
1,176
|
|
Lenzilumab
|
|
|
304
|
|
|
|
340
|
|
Ifabotuzumab
|
|
|
214
|
|
|
|
5,199
|
|
Benznidazole
|
|
|
5,543
|
|
|
|
-
|
|
Internal costs
|
|
|
4,366
|
|
|
|
10,006
|
|
Total research and development
|
|
$
|
10,449
|
|
|
$
|
16,721
|
|
We expect to continue to incur substantial expenses related to our research and development activities for the foreseeable future as we continue product development including working to obtain FDA approval for benznidazole for the treatment of Chagas disease and in continuing the Phase 1clinical trial of lenzilumab in patients with CMML. Historically, we have also incurred significant costs related to KB001-A, our former respiratory program for lenzilumab and the development of ifabotuzumab. Depending on the results of our development efforts for lenzilumab in CMML we expect to incur substantial costs to prepare for potential clinical trials and activities for lenzilumab in JMML.
General and Administrative Expenses
General and administrative expenses consist principally of personnel‑related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. For the years ended December 31, 2016 and 2015, general and administrative expenses were $8.4 million and $14.3 million, respectively.
Comparison of Years Ended December 31, 2016 and 2015
|
|
Year Ended December 31,
|
|
|
Increase/ (Decrease)
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
in thousands
|
|
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
10,449
|
|
|
$
|
16,721
|
|
|
$
|
(6,272
|
)
|
|
|
(38
|
)
|
General and administrative
|
|
|
8,376
|
|
|
|
14,296
|
|
|
|
(5,920
|
)
|
|
|
(41
|
)
|
Litigation accrual expense
|
|
|
-
|
|
|
|
3,335
|
|
|
|
(3,335
|
)
|
|
|
(100
|
)
|
Loss from operations
|
|
|
(18,825
|
)
|
|
|
(34,352
|
)
|
|
|
(15,527
|
)
|
|
|
(45
|
)
|
Interest expense
|
|
|
(131
|
)
|
|
|
(842
|
)
|
|
|
(711
|
)
|
|
|
(84
|
)
|
Interest income
|
|
|
-
|
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
(100
|
)
|
Other income (expense), net
|
|
|
125
|
|
|
|
(213
|
)
|
|
|
(338
|
)
|
|
|
(159
|
)
|
Reorganization items, net
|
|
|
(8,188
|
)
|
|
|
-
|
|
|
|
8,188
|
|
|
|
100
|
|
Net loss
|
|
$
|
(27,019
|
)
|
|
$
|
(35,378
|
)
|
|
$
|
(8,359
|
)
|
|
|
(24
|
)
|
Research and development expenses decreased $6.3 million in 2016 from $16.7 million for the year ended December 31, 2015 to $10.4 million for the year ended December 31, 2016. The decrease is primarily attributable to the termination of our respiratory development program for KB001-A, the reduction in our development work with ifabotuzumab and reductions in our research and development personnel in 2015, partially offset by increased spending for benznidazole development for Chagas disease. We expect our research and development expenses will increase in 2017 compared to 2016, primarily due to the development of benznidazole for Chagas disease.
General and administrative expenses decreased $5.9 million in 2016 from $14.3 million for the year ended December 31, 2015 to $8.4 million for the year ended December 31, 2016. The decrease in general and administrative expenses is primarily attributable to the costs incurred in 2015 from the reduction in personnel and related severance and restructuring costs and stock based compensation in connection with a December 2015 warrant issuance, incurred in 2015 which did not recur in 2016. We expect our general and administrative expenses to continue to decrease in 2017 as compared to 2016 levels.
Litigation accrual expense decreased $3.3 million in 2016, from $3.3 million for the year ended December 31, 2015 to zero for the year ended December 31, 2016. The litigation accrual expense recorded in 2015 related to the accrual for the settlement of both the PIPE and class action lawsuits. No such expense was incurred in 2016.
Reorganization items, net increased $8.2 million in 2016, from zero for the year ended December 31, 2015 to $8.2 million for the year ended December 31, 2016 due to the amounts incurred related to the Plan, including legal fees of $4.9 million, $1.2 million in other professional fees, $0.7 million related to the fair value of common shares issue to our CEO and two directors for their service in bankruptcy, $1.1 million in legal and other costs related to the debtor-in-possession financing, $0.5 million related to the beneficial conversion expense recognized in connection with the debtor-in-possession financing, offset by a net gain on the termination of the South San Francisco lease of $0.2 million.
Interest expense of $0.8 million recognized for the year ended December 31, 2015 was related to the
Loan and Security Agreement with MidCap Financial SBIC LP that was entered into by the Company in September 2012. The loan was paid off in the fourth quarter of 2015. Interest expense of $131,000 recognized for the year ended December 31, 2016 is comprised of $46,000 related to the
debtor-in-possession financing entered into on April 1, 2016, $61,000 related to the promissory notes issued to certain vendors in accordance with the Plan and $24,000 related to interest and loan issuance costs related to the December Term Loan (as defined below).
Other income (expense), net for the year ended December 31, 2016 primarily consisted of foreign currency gains related to the payment of bankruptcy liabilities in foreign currencies. Other income (expense), net for the year ended December 31, 2015 primarily consisted of foreign currency gains and losses and realized gains and losses on the sale of investments.
Income Taxes
As of December 31, 2016, we had net operating loss carryforwards of approximately $146.8 million to offset future federal income taxes which expire in the years 2021 through 2036, and approximately $137.0 million that may offset future state income taxes which expire in the years 2017 through 2036. Current federal and state tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an ownership change. Even if the carryforwards are available, they may be subject to annual limitations, lack of future taxable income, or future ownership changes that could result in the expiration of the carryforwards before they are utilized. At December 31, 2016, we recorded a 100% valuation allowance against our deferred tax assets of approximately $64.2 million, as at that time our management believed it was uncertain that they would be fully realized. If we determine in the future that we will be able to realize all or a portion of our deferred tax assets, an adjustment to our valuation allowance would increase net income in the period in which we make such a determination.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through proceeds from the public offerings and private placements of our common stock, private placements of our preferred stock, debt financings, interest income earned on cash, and cash equivalents, and marketable securities, borrowings against lines of credit, and receipts from agreements with Sanofi and Novartis. At December 31, 2016, we had cash and cash equivalents of $2.9 million. As of March 7, 2017, we had cash and cash equivalents of $191,000.
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:
|
Year Ended December 31,
|
|
(In thousands)
|
2016
|
|
2015
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
|
|
Operating activities
|
|
$
|
(20,961
|
)
|
|
$
|
(29,063
|
)
|
Investing activities
|
|
|
103
|
|
|
|
30,097
|
|
Financing activities
|
|
|
15,333
|
|
|
|
(3,526
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(5,525
|
)
|
|
$
|
(2,492
|
)
|
Net cash used in operating activities was $21.0 million and $29.1 million for the years ended December 31, 2016 and 2015, respectively. The primary use of cash in 2015 was to fund our operations related to the development of our product candidates, whereas the primary use of cash in 2016 was to fund our operations related to the Plan. Cash used in operating activities of $21.0 million for the year ended December 31, 2016 primarily related to our net loss of $27.0 million, adjusted for non-cash items, such as $1.6 million related to reorganization items related to the debtor-in-possession financing, $1.4 million related to the issuance of stock to our CEO and two directors, $0.4 million related to the issuance of warrants to Savant in connection with the acquisition of certain rights related to the benznidazole license, $0.2 million related to a net gain on lease termination, other non-cash items of $1.2 million and net cash inflows of $1.6 million related to changes in operating assets and liabilities, primarily Liabilities subject to compromise, Accounts payable and Accrued expenses.
Net cash used in operating activities of $29.1 million for the year ended December 31, 2015 primarily related to our net loss of $35.4 million, adjusted for non-cash items such as accrual of litigation settlement expense of $2.8 million, the issuance of warrants in exchange for services of $2.5 million, $2.0 million of stock-based compensation expense, $1.0 million relating to the fair value of stock options that were modified due to executive retirement and restructuring activities, depreciation and amortization of $0.2 million and non-cash expense related to interest and the financing derivative of $0.4 million, offset by net cash outflows of $2.6 million related to changes in operating assets and liabilities, primarily Accounts payable and Accrued expenses.
Net cash provided by investing activities was $0.1 million for the year ended December 31, 2016, primarily related to the reduction in restricted cash related to the termination of our office lease in South San Francisco. Net cash provided by investing activities was $30.1 million for the year ended December 31, 2015, primarily related to proceeds from maturities of marketable securities of $33.4 million, partially offset by purchases of investments of $3.7 million.
Net cash provided by financing activities was $15.3 million for the year ended December 31, 2016 related to the debtor-in-possession and bankruptcy-related equity financings and proceeds from the December Term Loan (as defined below). Net cash used in financing activities was $3.5 million for the year ended December 31, 2015 related to an increase in restricted cash of $8.3 million associated with notes payable, $3.4 million related to payments on our borrowings obligations, offset by $8.2 million in proceeds from the issuance of common stock.
In connection with our emergence from bankruptcy, we closed an $11 million financing that provided the funds required to enable our exit from Chapter 11 as well as to fund our current working capital needs. We also closed on a $3.0 million term loan in December 2016 (the “December Term Loan”), providing additional working capital. However, we will require substantial additional capital to continue as a going concern and to support our business efforts, including obtaining regulatory approvals for benznidazole or other product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. The amount of capital we will require and the timing of our need for additional capital will depend on many factors, including:
|
·
|
the availability of a 505(b)(2) development pathway for the potential approval by FDA of benznidazole;
|
|
·
|
the type, number, timing, progress, costs, and results of the product candidate development programs that we are pursuing or may choose to pursue in the future;
|
|
·
|
the scope, progress, expansion, costs, and results of our pre-clinical and clinical trials;
|
|
·
|
the timing of and costs involved in obtaining regulatory approvals;
|
|
·
|
the success, progress, timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders;
|
|
·
|
our ability to re-list our common stock on a national securities exchange, whether through a new listing or by completing a strategic transaction;
|
|
·
|
our ability to establish and maintain development partnering arrangements and any associated funding;
|
|
·
|
the emergence of competing products or technologies and other adverse market developments;
|
|
·
|
the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
|
|
·
|
the resources we devote to marketing, and, if approved, commercializing our product candidates;
|
|
·
|
the scope, progress, expansion and costs of manufacturing our product candidates; and
|
|
·
|
the costs associated with being a public company.
|
We are pursuing efforts to raise additional capital from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all. If in the best interests of our stockholders, we may also find it appropriate to enter into a strategic transaction that could result
in, among other things, a sale, merger, consolidation or business combination.
If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital will not be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern.
On January 13, 2016, our common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the ticker symbol KBIOQ. On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of our common stock, and the delisting was effective on February 5, 2016. On June 30, 2016, upon emergence from bankruptcy, the ticker symbol for the trading of our common stock on the over-the-counter market reverted back to KBIO. Although our common stock is listed for quotation on the OTC Pink marketplace operated by OTC Markets Group, Inc., trading is limited and an active market for our common stock may never develop in the future, which could harm our ability to raise capital to continue to fund operations.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2016 and the effect such obligations are expected to have on our liquidity and cash flow in future years.
|
|
Payments due by period
|
|
(in thousands)
|
|
|
|
|
Less than
|
|
|
1 to 3
|
|
|
4 to 5
|
|
|
After
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
Lease obligations
|
|
$
|
442
|
|
|
$
|
240
|
|
|
$
|
202
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Principal payments on term loans
|
|
|
3,315
|
|
|
|
3,315
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest payments on term loans
|
|
|
260
|
|
|
|
260
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commitment fee payments on term loans
|
|
|
152
|
|
|
|
152
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Principal payments on notes payable to
vendors
|
|
|
1,213
|
|
|
|
—
|
|
|
|
1,213
|
|
|
|
—
|
|
|
|
—
|
|
Interest payments on notes payable to
vendors
|
|
|
364
|
|
|
|
—
|
|
|
|
364
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,746
|
|
|
$
|
3,967
|
|
|
$
|
1,779
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating Leases
In December 2013, we entered into a lease agreement for a facility in South San Francisco, California. The lease commenced in July 2014 and was set to expire in 2019. We moved into the premises in June 2014 and received a rent holiday so that rental payments did not start until October 2014. Per the terms of the lease agreement, we had the option to terminate the lease after 36 months, subject to additional fees and expenses. In March 2016, we entered into a termination agreement, or the Lease Termination Agreement, related to the lease of this facility. The Lease Termination Agreement, approved by order of the Bankruptcy Court issued March 15, 2016, waived all damages related to early termination of the lease, relieved us of March rental expenses and set an effective termination date of March 31, 2016.
Concurrent with the termination of this lease, we entered into a lease agreement for a new facility in Brisbane, California. The new lease commenced in April 2016 and was to expire on March 31, 2017. On February 16, 2017, we amended the lease to extend the term of the lease for an additional period of eighteen months such that the lease will expire on September 30, 2018. The minimum lease payments presented in the table above include payments due under the amended lease that expires on September 30, 2018.
Notes Payable
The Loan and Security Agreement provided for the borrowing of up to $15 million. In June 2013, we entered into an amendment to the Loan and Security Agreement, or the First Amendment, to extend the draw down date for the final tranche of $5.0 million from June 2013 to May 2014, and to require us to draw that amount, which we did in May 2014. In connection with the First Amendment, we issued a warrant to purchase up to 6,193 shares of our common stock with an exercise price of $96.88 per share. The warrant expires on the tenth anniversary of its issuance date and had an initial fair value of $130,000, which represents financing fees, was included in other assets and was being amortized as non‑cash Interest expense over the remaining term of the Loan and Security Agreement using the effective interest method. We estimated the fair value of this warrant using the Black‑Scholes option‑pricing model, based on the inputs for the estimated fair value of the underlying common stock at the valuation measurement date, the contractual term of the warrant, risk‑free interest rates, expected dividend rates and expected volatility of the price of the underlying common stock.
In November 2015, we elected to exercise our prepayment right to repay the loan in full and paid MidCap Financial $6.6 million in full settlement of the remaining outstanding principal balance, accrued interest, an exit fee and a reduced prepayment fee of 1%. The prepayment resulted in a gain on extinguishment of debt of $61,000 in the fourth quarter of 2015. Refer to Note 7 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details regarding the Loan and Security Agreement.
2015 Financing Transactions
On December 3, 2015, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investors (the “Purchasers”) relating to a private placement of up to an aggregate 511,596 shares of common stock at a purchase price of $29.32 per share, or up to $15 million (the “Private Placement”). On December 15, 2015 the Securities Purchase Agreement was amended resetting the share price for all Purchasers other than those Purchasers who were directors, officers, employees or consultants of the Company to $24.86. Upon closing of the Private Placement, we issued 326,698 shares of common stock to the Purchasers for an aggregate of $8.2 million.
2016 Financing Transactions
Credit Agreement
On April 1, 2016, we entered into the Credit Agreement with Black Horse Capital Master Fund Ltd., as administrative agent and lender (“BHCMF” or “Agent”), Black Horse Capital LP, as a lender (“BHC”), Cheval Holdings, Ltd., as a lender (“Cheval”) and Nomis Bay LTD, as a lender (“Nomis” and, together with BHCMF, BHC and Cheval, the “Lenders”). The Credit Agreement provided for a debtor-in-possession credit facility in the original principal amount of $3,000,000 (the “Term Loan”). The Credit Agreement provided that the Term Loan will be made by the Lenders at an original discount equal to $191,000 (the “Upfront Fee”) and required the payment by us to the Lenders of a commitment fee equal to $150,000 (the “Commitment Fee”). In accordance with the terms of the Credit Agreement, we used the proceeds of the Term Loan for working capital, bankruptcy-related costs, costs related to our plan of reorganization, the payment of certain fees and expenses owed to BHCMF and the Lenders in connection with the Credit Agreement and other costs incurred in the ordinary course of business.
The Credit Agreement provided that the outstanding principal balance of the Term Loan, plus accrued and unpaid interest, plus the Upfront Fee, plus the Commitment Fee and all other non-contingent obligations would mature on the earlier of an event of default under the Credit Agreement or the effective date of our plan of reorganization. The Maturity Date was deemed to occur simultaneously with the Effective Date and, accordingly, on June 30, 2016, 2,350,480 shares of common stock were issued to the Lenders in repayment of our debt obligations under the Credit Agreement, including 201,436 shares to BHC, 470,096 shares to BHCMF, 503,708 shares to Cheval, 940,192 shares to Nomis and 235,048 shares to Cortleigh Limited (“Cortleigh”). Pursuant to the terms of the Credit Agreement, we also paid $406,000 to BHC in payment of its fees and expenses and $285,000 to Nomis in payment of its fees and expenses.
2016 Securities Agreement
Also on April 1, 2016, we entered into the Securities Purchase Agreement, or the SPA, with the Lenders. The SPA provides for the sale to the Lenders on the closing date of an aggregate of 5,885,000 shares of common stock, subject to adjustment as provided in the SPA, in respect of exit financing in the amount of $11,000,000 (the “Exit Financing”) plus an exit financing commitment fee of $770,000 payable by us to the Lenders, plus payment to the Lenders of their fees and expenses incurred in connection with the Exit Financing and the SPA. Nomis subsequently assigned twenty percent (20%) of its interest in the shares of common stock to be purchased by Nomis under the SPA and the Credit Agreement to Cortleigh (collectively with the Lenders, the “Purchasers”).
The issuance of the shares contemplated by the SPA was consummated on the Effective Date, and we issued to the Purchasers an aggregate of 7,147,035 shares of common stock for an aggregate purchase price of $11,000,000, including 612,501 shares to BHC, 1,429,407 shares to BHCMF, 1,531,610 shares to Cheval, 2,858,814 shares to Nomis and 714,703 shares to Cortleigh. Pursuant to the terms of the SPA, we paid $427,000 to BHC in payment of its fees and expenses and $304,000 to Nomis in payment of its fees and expenses.
Notes Payable to Vendors
On June 30, 2016, we issued promissory notes in an aggregate principal amount of approximately $1,212,000 to certain claimants in accordance with the Plan. The notes are unsecured, bear interest at 10% per annum and are due and payable in full, including principal and accrued interest on June 30, 2019. As of December 31, 2016, we have accrued $61,000 in interest related to these promissory notes.
December Term Loan
On December 21, 2016, we entered into a Credit and Security Agreement (the “December Term Loan”) with BHCMF, as administrative agent and lender, BHC, as a lender, Cheval, as a lender and Nomis, as a lender (collectively, the “Lenders”). The December Term Loan provides for a credit facility in the original principal amount of $3,315,000, provides an original discount equal to $265,000 (the “Upfront Fee”) and requires the payment by us to the Lenders of a commitment fee equal to $153,000 (the “Commitment Fee”). In accordance with the terms of the December Term Loan, we are required to use the proceeds for general working capital, the payment of certain fees and expenses owed to BHCMF and the Lenders and other costs incurred in the ordinary course of business.
The outstanding principal balance of the December Term Loan, plus accrued interest and fees, are due on the earlier of acceleration after an event of default under the agreement, or October 31, 2017. However, to the extent we raise capital through any SEC-registered stock offering, 50% of such offering’s proceeds (net of costs) are required to be used to pay down the December Term Loan. Our obligations under the December Term Loan are secured by a first priority interest in all of our real and personal property, subject only to certain carve outs and permitted liens, as set forth in the agreement.
For further discussion of the 2015 and 2016 financing transactions, please refer to Notes 2, 7 and 10 to the Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10‑K
.
Contracts
We are obligated to make future payments to third parties under in‑license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones.
The Company records upfront and milestone payments made to third parties under licensing arrangements as an expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.
Indemnification
In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
Off‑Balance Sheet Arrangements
We currently have no off‑balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information requested by this Item is not applicable as we are electing scaled disclosure requirements available to Smaller Reporting Companies with respect to this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and The Report of Independent Registered Public Accounting Firm are included in this Annual Report on Form 10-K on pages F-1 through F-33.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, and in light of the certain changes in our internal control over financial reporting described below, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a‑15(f) and 15d‑15(f) under the Exchange Act). Our Chief Executive Officer and Interim Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, our Chief Executive Officer and Interim Chief Financial Officer used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in
Internal Control—Integrated Framework
. Based on that assessment and using the COSO criteria, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of December 31, 2016, our internal control over financial reporting was effective.
In our 2015 Annual Report on Form 10-K, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of December 31, 2015, our internal control over financial reporting was not effective because of the material weaknesses described below.
A material weakness is defined as “a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”
The ineffectiveness of our internal control over financial reporting at December 31, 2015, was due to the following material weaknesses which each reflect
our limited number of accounting and financial reporting personnel and high levels of turnover in our personnel responsible for performing activities related to our internal control over financial reporting
: (i) an inability to
complete our financial statement close process in a timely and accurate manner
; (ii) an insufficient degree of segregation of duties amongst our accounting and financial reporting personnel; and (iii) a lack of technical competency in review and approval of financial reporting processes.
During 2016, our management remediated the material weaknesses identified above by, among other things, (i) adding highly qualified accounting and financial reporting personnel and consultants, (ii) modifying our internal processes to ensure a proper segregation of duties and oversight, and (iii) establishing a formal disclosure committee comprised of managers from all functional areas of the Company who are now closely engaged in our quarterly and annual reporting and filing process.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to a transition period established by the Jumpstart Our Business Startups Act, or JOBS Act, for emerging growth companies.
Changes in Internal Control Over Financial Reporting
Other than as described above, there has been no change in our internal control over financial reporting during the quarter ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost‑benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision‑making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost‑effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The following table sets forth the names, ages and current positions of members of the Board of Directors, or the Board, of KaloBios Pharmaceuticals, Inc., or the Company or us
. Following the table is biographical information for each director, including information on specific experiences, qualifications and skills that support the conclusion that the director should currently serve on the Board.
|
|
|
|
|
|
Director
|
|
Name
|
|
Age
|
|
Principal Occupation
|
|
Since
|
|
Cameron Durrant, M.D., MBA,
|
|
56
|
|
Chairman and Chief Executive Officer, KaloBios Pharmaceuticals, Inc.
|
|
2016
|
|
Ronald Barliant, JD
|
|
71
|
|
Of Counsel, Goldberg Kohn, Ltd.
|
|
2016
|
|
Dale Chappell, M.D., MBA
|
|
46
|
|
Managing Member, Black Horse Capital Management LLC
|
|
2016
|
|
Timothy Morris, CPA
|
|
55
|
|
Chief Financial Officer, AcelRx Pharmaceuticals, Inc.
|
|
2016
|
|
Ezra Friedberg
|
|
47
|
|
General Partner, Multiplier Capital
|
|
2016
|
|
Cameron Durrant, M.D., MBA
, has served as a member and Chairman of our Board since January 2016, and as our Chief Executive Officer since March 2016. From May 2014 to January 2016, Dr. Durrant served as Founder and Director of Taran Pharma Limited, a private semi-virtual specialty pharma company developing and registering treatments in Europe for orphan conditions. Dr. Durrant served as President and Chief Executive Officer of ECR Pharmaceuticals Co., Inc., a subsidiary of Hi-Tech Pharmacal Co., Inc., from September 2012 to April 2014. From January 2010 to September 2012, Dr. Durrant served as a consultant to several biopharma companies, as the Founder, CEO, CFO and director of PediatRx, Inc. and on the boards of several privately-held healthcare companies. He previously served as CEO of PediaMed Pharmaceuticals and has been a senior executive at Johnson and Johnson, Pharmacia Corporation, GSK and Merck. Dr. Durrant has been a director of Immune Pharmaceuticals Inc. since July 2014 and serves on the boards of directors of several privately held healthcare companies. Dr. Durrant earned his medical degree from the Welsh National School of Medicine, Cardiff, UK, his DRCOG from the Royal College of Obstetricians and Gynecologists, London, UK, his MRCGP from the Royal College of General Practitioners, London, UK, his DipCH from the Melbourne Academy, Australia and his MBA from Henley Management College, Oxford, UK. Dr. Durrant brings to the Board extensive experience as a pharma/biotech entrepreneur, operating executive and board member, as well as his day to day operating experience as our Chief Executive Officer.
Ronald Barliant, JD,
has served as a member of our Board since January 2016. Mr. Barliant has been Of Counsel to Goldberg Kohn, Ltd. since January 2016, and immediately prior to that had served as a principal in Goldberg Kohn’s Bankruptcy & Creditors’ Rights Group since September 2002. He previously served as U.S. bankruptcy judge for the Northern District of Illinois from 1988 to 2002.
Mr. Barliant has represented debtors and creditors in complex bankruptcy cases, and counseled major financial institutions, business firms and boards of directors in connection with workouts.
He is a member of the board of directors of a closely held information technology company and the board of the estate representative supervising the liquidation of assets in the Global Crossing case. Mr. Barliant brings to the Board valuable experience gained from a distinguished career as a counselor to numerous boards, considered judgment and experience with bankruptcy in the bankruptcy setting, which continues to be relevant as we address the finalization of matters related to our emergence from bankruptcy.
Dale Chappell, M.D., MBA
, has served as a member of our Board since June 2016
. Dale Chappell is the managing member of Black Horse Capital Management LLC, a private investment manager that specializes in biopharmaceuticals with a particular focus on distressed and turn-around situations, a position he has held since 2002. Dr. Chappell has served as CEO, President and CFO of L’Isola US Holdings Inc., a
private investment company with holdings in the hospitality industry
, since April 2015 and also serves on the boards of directors of several private companies. Prior to his current position, Dr. Chappell was an associate with Chilton Investment Company, covering healthcare. Previously, Dr. Chappell was an analyst at W.P. Carey & Company, and before moving into the business sector, he was a Howard Hughes Medical Institute fellow at the National Cancer Institute where he studied tumor immunology. Dr. Chappell received his MD from Dartmouth Medical School and his MBA from Harvard Business School. Dr. Chappell brings to the Board his extensive experience in dealing with companies facing challenging situations in the biopharmaceuticals industry, as well as the perspective of a significant shareholder in the Company.
Timothy Morris, CPA
has served as a member of our Board since June 2016.
Mr. Morris has served as the Chief Financial Officer of AcelRx Pharmaceuticals, Inc. since March 2014. In April 2015, he also assumed the role of Head of Business Development for AcelRx. From November 2004 to December 2013, Mr. Morris served as Senior Vice President Finance and Global Corporate Development, Chief Financial Officer of VIVUS, Inc. a biopharmaceutical company. From September 2001 to November 2004, Mr. Morris was CFO, SVP Finance, Manufacturing and Administration for Questcor Pharmaceuticals, Inc., a specialty pharmaceutical company. He was a member of the Office of the President at Questcor from August 2004 to November 2004. Mr. Morris served as a non-executive director of PAION Inc., the US subsidiary of PAION AG, a publically traded company based in Germany. Mr. Morris received his BS in Business with an emphasis in Accounting from California State University, Chico, and is a Certified Public Accountant. Mr. Morris brings to the Board valuable operational experience with public companies in the biopharmaceutical industry, particularly in the areas of finance and corporate development.
Ezra Friedberg
has served as a member of our Board since June 2016
. Since 2012, Mr. Friedberg has served as general partner of Multiplier Capital, a fund he founded that focuses on lending opportunities to sponsor-backed growth companies, and is a member of the fund’s credit committee. Separately, Mr. Friedberg owns and operates other financial services business
es.
Since 2003, Mr. Friedberg has been the founder and manager of Key Recovery Group, a private equity investment firm, and the PUN Companies, a buyer of distressed debt.
Mr. Friedberg received his
Bachelor of Talmudic Law from Ner Israel Rabbinical College and his Masters of Administrative Science
from Johns Hopkins University. Mr. Friedberg brings to the Board his experience and perspective as a
seasoned investor with over twenty years of investing experience across public and private companies, with entities in the United States, Canada and a variety of other jurisdictions.
Upon the emergence from our bankruptcy on June 30, 2016, each of the above directors was designated (in the case of Dr. Durrant and Mr. Barliant) or appointed (in the case of each of the other directors) to serve on our Board pursuant to the terms of the Stock Purchase Agreement discussed in Item 13 below. Accordingly, Dr. Durrant continued to serve on the Board as a joint designee of Black Horse Capital Master Fund Ltd., or BHCMF, Black Horse Capital LP, or BHC, Cheval Holdings, Ltd., or Cheval (together with BHCMF and BHC, the Black Horse Entities), and Nomis Bay LTD, or Nomis, and Mr. Barliant was designated by the Black Horse Entities. Dr. Chappell was appointed by the Black Horse Entities, and Mr. Morris and Mr. Friedberg were appointed by Nomis.
Executive Officers
The following table sets forth the names, ages and current positions of
each of our executive officers.
Following the table is biographical information for each director, including information on specific experiences, qualifications and skills that support the conclusion that the director should currently serve on the Board.
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Cameron Durrant, M.D., MBA
|
|
56
|
|
Chief Executive Officer
|
David L. Tousley, MBA, CPA
|
|
61
|
|
Interim Chief Financial Officer
|
Morgan Lam
|
|
52
|
|
Chief Scientific Officer
|
Cameron Durrant, M.D
, MBA has served as our Chief Executive Officer since March 2016. See “-–Directors” for Dr. Durrant’s biographical information.
David L. Tousley, MBA, CPA
has served as our Interim Chief Financial Officer since October 2016. Mr. Tousley is currently the Principal of Stratium Consulting Services, assisting companies with strategic and financial planning and management. Most recently, Mr. Tousley served as the Chief Financial Officer for DARA Biosciences, a publicly traded specialty pharmaceutical company focused on oncology treatment and oncology supportive care. Mr. Tousley has over 35 years of business experience including biotech, specialty pharmaceuticals and full phase pharmaceutical companies. He has held President, Chief Operating Officer and Chief Financial Officer roles in companies such as Pasteur, Merieux, Connaught, (known today as Sanofi-Pasteur), AVAX Technologies, Inc., airPharma, LLC, and PediaMed Pharmaceuticals, Inc., and has led companies in all aspects of operations, including pharmaceutical development. He has managed in both the private and public company environment, taking companies public, raising in excess of one hundred million dollars in debt and equity financings and has led business development activities, including joint ventures, partnerships, acquisitions and divestitures in the U.S., Europe and Australia. Mr. Tousley is a Certified Public Accountant, a member of the American Institute of Certified Public Accountants, holds an undergraduate degree from Rutgers College and earned his MBA in accounting from Rutgers Graduate School of Business.
Mr. Tousley is serving as interim Chief Financial Officer pursuant to an engagement agreement between himself and us, or the Engagement Agreement. The engagement agreement expired in accordance with its terms in November 2016, but Mr. Tousley continues to perform services in accordance with the original terms. Under the Engagement Agreement as currently being performed, we pay Mr. Tousley at a rate of $225 per hour and reimburse him for travel and out of pocket expenses incurred in connection therewith. Mr. Tousley’s services may be discontinued at any time without penalty.
Morgan Lam
was
appointed as Chief Operating Officer in February 2016 and promoted to Chief Scientific Officer in September 2016. Prior to his appointment as Chief Operating Officer,
Mr. Lam previously served as our Head of Clinical Operations from May 2015 through January 2016. Mr. Lam served as Executive Director, Medical Affairs of Geron Corporation, a biopharmaceutical company, from May 2010 to May 2015 and as Clinical Program Leader at Genentech, Inc. from September 2005 through May 2010.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires our directors, executive officers and 10% stockholders to file reports of ownership of our equity securities. To our knowledge, based solely on review of the copies of such reports furnished to us related to the year ended December 31, 2016, all such reports were made on a timely basis.
Code of Ethics
We have adopted a Code of Business Conduct that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. The Code of Business Conduct is posted on our website at
http://ir.kalobios.com/corporate-governance.cfm
.
Audit Committee Matters
We have established an audit committee of the Board, which is currently comprised of Mr. Morris, as chair of the Committee, and Mr. Barliant and Mr. Friedberg. The Board has determined that Mr. Morris is an audit committee financial expert. Because we are not listed on a national securities exchange and there are no listing standards applicable to us, the Board makes determinations as to director independence based on the definition under the NASDAQ rules. Consistent with the discussion in Item 13 below regarding director independence, the Board has determined that each member of the Audit Committee is currently independent.
ITEM 1
1. EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table shows, for the fiscal years ended December 31, 2016 and December 31, 2015, information regarding the compensation awarded to, earned by or paid to our two most highly compensated executive officers and all individuals serving as our principal executive officer during the fiscal year ended December 31, 2016. We refer to these officers as our “named executive officers.”
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|
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All
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Other
|
|
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
|
($)
|
|
|
($)(4)
|
|
|
($)(5)
|
|
|
($)(6)
|
|
|
($)
|
|
Cameron Durrant, M.D., MBA (1)
|
|
2016
|
|
|
500,000
|
|
|
(7)
|
|
|
|
608,768
|
|
|
|
2,312,588
|
|
|
|
16,833
|
|
|
|
3,438,189
|
|
Chairman & Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Morgan Lam (2)
|
|
2016
|
|
|
357,500
|
|
|
|
70,000
|
|
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|
|
|
|
|
221,720
|
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|
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-
|
|
|
|
649,220
|
|
Chief Scientific Officer
|
|
|
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|
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|
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|
David L. Tousley, MBA, CPA (3)
|
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
333,788
|
|
|
|
333,788
|
|
Interim Chief Financial
Officer
|
|
|
|
|
|
|
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(1)
|
Appointed as Chairman January 7, 2016 and as Chief Executive Officer on March 1, 2016.
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(2)
|
Appointed as Chief Operating Officer on February 1, 2016 and promoted to Chief Scientific Officer on September 13, 2016.
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(3)
|
Appointed as Interim Chief Financial Officer on October 14, 2016.
|
|
(4)
|
The amounts in this column represent the aggregate grant date fair value of stock awards granted to Dr. Durrant
related to his service during bankruptcy proceedings
, computed in accordance with FASB ASC Topic 718. See Note
10
of the notes to our Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10‑K
for a discussion of all assumptions made by us in determining the grant date fair value of our equity awards.
|
|
(5)
|
The amounts in this column represent the aggregate grant date fair value of option awards granted to each named executive officer, computed in accordance with FASB ASC Topic 718. See Note
10
of the notes to our Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10‑K
for a discussion of all assumptions made by us in determining the grant date fair value of our equity awards.
|
|
(6)
|
Amounts reflected in this column for fiscal year 2016 are (a) for Dr. Durrant, $16,833 in Board fees paid to Dr. Durrant prior to his becoming Chairman and Chief Executive Officer and (b) for Mr. Tousley, $333,788 in consulting fees for services rendered in 2016, pursuant to his Engagement Agreement.
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|
(7)
|
The Board has not yet determined Dr. Durrant’s bonus for 2016. The Board expects to determine Dr. Durrant’s bonus during March 2017, and will file a Current Report on Form 8-K to report any bonus awarded, including the portion of any such bonus to be paid in shares of the Company’s common stock. Dr. Durrant has agreed to defer receipt of any bonus that may be approved by the Board pending completion of a fundraising transaction.
|
Narrative to Summary Compensation Table
Stock Awards
As compensation for Dr. Durrant’s service during the Company’s bankruptcy proceedings, on May 24, 2016, the Board approved a one-time equity award to Dr. Durrant in an amount equal to 0.80% of the value of the
Company’s common stock plus the equivalent of $100,000. Accordingly, on June 30, 2016, the Company granted
135,583
shares of common stock to Dr. Durrant. The shares underlying such equity awards are subject to a one-year holding
period before they may be sold. The equity awards were determined by the Board based upon an analysis by an independent consulting group of standard compensation data for private and pre-IPO companies in the life science industry and the role of the Board and its workload during the Company’s chapter 11 bankruptcy process, among other factors.
Stock Options
We offer stock options to our employees, including our named executive officers, as the long-term incentive component of our compensation program. Our stock options allow our employees to purchase shares of our common stock at a price equal to the fair market value of our common stock on the date of grant.
In 2016, we issued stock options to certain of our named executive officers. On September 13, 2016, Dr. Durrant was issued stock options to purchase 1,043,022 shares of the Company’s common stock at an exercise price of $3.38. The options will vest and become exercisable in 12 equal quarterly increments beginning on October 1
, 2016
. Dr. Durrant’s options were determined to have a grant date fair value of $2.3 million.
On September 13, 2016, Mr. Lam was issued stock options to purchase 100,000 shares of the Company’s common stock at an exercise price of $3.38. The options will vest and become exercisable in 12 equal quarterly increments beginning on October 1, 2016. Mr. Lam’s options were determined to have a grant date fair value of $221,720.
Outstanding Equity Awards at 2016 Fiscal Year End
The following table shows certain information regarding outstanding equity awards held by our named executive officers as of December 31, 2016.
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Option Awards
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
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|
|
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|
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Underlying
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Underlying
|
|
|
|
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Unexercised
|
|
|
Unexercised
|
|
|
Option
|
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Option
|
|
|
|
|
|
Options
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|
Options
|
|
|
Exercise
|
|
Expiration
|
Name
|
|
|
|
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Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
Date
|
Cameron Durrant, M.D., MBA
|
|
(1
|
)
|
|
|
86,918
|
|
|
|
956,104
|
|
|
$
|
3.38
|
|
9/13/2026
|
Morgan Lam
|
|
(2
|
)
|
|
|
1,875
|
|
|
|
3,125
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|
$
|
4.72
|
|
6/1/2025
|
|
|
(3
|
)
|
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|
8,333
|
|
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91,667
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|
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$
|
3.38
|
|
9/13/2026
|
|
(1)
|
On September 13, 2016, Dr. Durrant was issued stock options to purchase 1,043,022 shares of the Company’s common stock at an exercise price of $3.38. The options will vest and become exercisable in 12 equal quarterly increments beginning on October 1
, 2016
.
|
|
(2)
|
On June 1, 2015, Mr. Lam was issued stock options to purchase 5,000 shares of the Company’s common stock at an exercise price of $4.72. One quarter of the options vested on June 1, 2016 and the remaining options will vest and become exercisable in 36 equal monthly increments thereafter.
|
|
(3)
|
On September 13, 2016, Mr. Lam was issued stock options to purchase 100,000 shares of the Company’s common stock at an exercise price of $3.38. The options will vest and become exercisable in 12 equal quarterly increments beginning on October 1, 2016.
|
Retirement Benefits
We have established a 401(k) tax-deferred savings plan, which permits participants, including our named executive officers, to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. We are responsible for administrative costs of the 401(k) plan. We may, in our discretion, make matching contributions to the 401(k) plan. No employer contributions have been made to date.
Employment Agreement with Dr. Durrant
On September 13, 2016, we entered into a new employment agreement with Cameron Durrant, MD, the Company
’
s chairman and chief executive officer (the
“
Agreement
”
). The Agreement provides for an initial annual base salary for Dr. Durrant of $600,000 as well as eligibility for an annual bonus targeted at 60% of his salary based on the achievements of objectives set and agreed to by the Board. Such bonus may be a mix of cash and stock, as determined by the Board in its sole discretion. For calendar year 2016, Dr. Durrant
’
s bonus opportunity was pro-rated for the period commencing July 1, 2016 and ending on December 31, 2016 and shall be paid fifty percent in cash and fifty percent in shares of the Company’s common stock. The target bonus opportunity for calendar year 2016 would amount therefore to $180,000. While the Board has not yet determined Dr. Durrant’s bonus for 2016, we have recorded an accrual for this amount in the Consolidated Financial Statements for the year ended December 31, 2016. The Board expects to determine Dr. Durrant’s bonus during March 2017, and will file a Current Report on Form 8-K to report any bonus awarded, including the portion of any such bonus to be paid in shares of the Company’s common stock. Dr. Durrant has agreed to defer receipt of any bonus that may be approved by the Board pending completion of a fundraising transaction. Dr. Durrant is entitled to participate in the Company
’
s benefit plans available to other executives, including its retirement plan and health and welfare programs.
Under the Agreement, Dr. Durrant is entitled to receive certain benefits upon termination of employment under certain circumstances. If the Company terminates Dr. Durrant
’
s employment for any reason other than
“
Cause
”
, or if Dr. Durrant resigns for
“
Good Reason
”
(each as defined in the Agreement), Dr. Durrant will receive twelve months of base salary then in effect and the amount of the actual bonus earned by Dr. Durrant under the agreement for the year prior to the year of termination, pro-rated based on the portion of the year Dr. Durrant was employed by the Company during the year of termination.
The Agreement additionally provides that if Dr. Durrant resigns for Good Reason or the Company or its successor terminates his employment within the three month period prior to and the 12 month period following a Change in Control (as defined in the Agreement), the Company must pay or cause its successor to pay Dr. Durrant a lump sum cash payment equal to two times (a) his annual salary as of the day before his resignation or termination plus (b) the aggregate bonus received by Dr. Durrant for the year preceding the Change in Control or, if no bonus had been received, at minimum 50% of the target bonus. In addition, upon such a resignation or termination, all outstanding stock options held by Dr. Durrant will immediately vest and become exercisable.
Engagement Agreement with Mr. Tousley
Mr. Tousley is serving as interim Chief Financial Officer pursuant to an engagement agreement between himself and the Company, or the Engagement Agreement. The engagement agreement expired in accordance with its terms in November 2016, but Mr. Tousley continues to perform services in accordance with the original terms. Under the Engagement Agreement as currently being performed, we pay Mr. Tousley at a rate of $225 per hour and reimburse him for all travel and out of pocket expenses incurred in connection therewith. Mr. Tousley’s services may be discontinued at any time without penalty.
2012 Equity Incentive Plan
On September 13, 2016, the Board approved an amendment to our 2012 Equity Plan to increase the number of shares of our common stock available for issuance under the 2012 Equity Plan by 3,000,000 shares and to increase the annual maximum aggregate number of shares subject to stock option awards that may be granted to any one person under the Equity Plan from 125,000 to 1,100,000.
Director Compensation
Pursuant to our Director Compensation Program, each member of our Board of Directors during 2016 who was not our employee was eligible to receive an annual cash retainer and annual equity compensation. The annual cash retainer amounts payable to our eligible directors during 2016 were as follows:
|
·
|
Board of Directors member: $40,000;
|
|
·
|
Audit committee member: $10,000;
|
|
·
|
Audit committee chair: $20,000;
|
|
·
|
Compensation committee member: $6,000;
|
|
·
|
Compensation committee chair: $12,000;
|
|
·
|
Nominating and corporate governance committee member: $4,000; and
|
|
·
|
Nominating and corporate governance committee chair: $8,000.
|
The equity compensation component of our Directors Compensation Program during 2016 provided that newly appointed directors would be granted an initial option to purchase 100,000 shares of our common stock and continuing directors are eligible to receive an annual option to purchase 50,000 shares of our common stock. Initial Stock Option Grants are granted as soon as reasonably practicable following appointment to the Board and vest ratably over 36 months of continuous service following the date on which the director is appointed to our Board of Directors. The following table shows for the fiscal year ended December 31, 2016 certain information with respect to the compensation of our non-employee directors:
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Paid
|
|
|
Option
|
|
|
Stock
|
|
|
All Other
|
|
|
|
|
|
|
in Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
($)(2)
|
|
|
($)(3)
|
|
|
($)(4)
|
|
|
($)
|
|
|
($)
|
|
Timothy Morris, CPA
|
|
|
36,000
|
|
|
|
221,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
257,720
|
|
Ronald Barliant, JD
|
|
|
64,000
|
|
|
|
221,720
|
|
|
|
421,099
|
|
|
|
-
|
|
|
|
706,819
|
|
David Moradi (1)
|
|
|
25,000
|
|
|
|
-
|
|
|
|
421,099
|
|
|
|
-
|
|
|
|
446,099
|
|
Dale Chappell, M.D., MBA
|
|
|
20,000
|
|
|
|
221,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241,720
|
|
Ezra Friedberg
|
|
|
27,000
|
|
|
|
221,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
248,720
|
|
(1)
|
Mr. Moradi resigned from the Board of Directors upon emergence from bankruptcy on June 30, 2016.
|
(2)
|
The amounts in this column reflect retainers earned under the Board of Directors Compensation Program for fiscal year 2016.
|
(3)
|
The amounts in this column represent the aggregate grant date fair value of option awards
to purchase 100,000 shares of our common stock
granted to each director on September 13, 2016, computed in accordance with FASB ASC Topic 718. See Note 10 of the notes to our
Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10‑K for a discussion of all assumptions made by us in determining the grant date fair value of our equity awards. As of December 31, 2016, Messrs. Morris, Barliant, Chappell and Friedberg held outstanding options to purchase 100,000 shares of our common stock. Mr. Moradi held no options to purchase shares of common stock.
|
(4)
|
On June 30, 2016 Ronald Barliant and David Moradi were granted 93,786 shares of common stock each related to their service during bankruptcy proceedings. The closing market price on June 30, 2016 was $4.49 per share. The amounts in this column represent the aggregate grant date fair value of such stock awards, computed in accordance with FASB ASC Topic 718.
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership Information
The following table presents information regarding beneficial ownership of our common stock as of March 7, 2017 by:
|
·
|
each stockholder or group of stockholders known by us to be the beneficial owner of more than 5% of our common stock;
|
|
·
|
each of our named executive officers; and
|
|
·
|
all of our current directors and executive officers as a group.
|
Beneficial ownership is determined in accordance with the rules of the SEC, and thus represents voting or investment power with respect to our securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
Percentage ownership of our common stock is based on 14,977,397 shares of our common stock outstanding as of March 7, 2017.
Shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of March 7, 2017 are deemed to be outstanding and to be beneficially owned by the person holding the options but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each of the individuals and entities named below is c/o KaloBios Pharmaceuticals, Inc., 1000 Marina Boulevard, Suite 250, Brisbane, CA 94005.
|
|
Shares of
|
|
|
Percentage of
|
|
|
|
Common
|
|
|
Shares
|
|
|
|
Stock Beneficially
|
|
|
Beneficially
|
|
Name and Address of Beneficial Owner
|
|
Owned
|
|
|
Owned
|
|
5% Stockholders
|
|
|
|
|
|
|
Entities affiliated with Black Horse Capital LP
(1)
|
|
|
4,948,758
|
|
|
|
33.0
|
%
|
Nomis Bay LTD
(2)
|
|
|
3,719,006
|
|
|
|
24.8
|
%
|
Nantahala Capital Management, LLC
(3)
|
|
|
1,450,000
|
|
|
|
9.7
|
%
|
Cortleigh Limited
(4)
|
|
|
949,752
|
|
|
|
6.3
|
%
|
Named Executive Officers and Directors
|
|
|
|
|
|
|
|
|
Cameron Durrant, M.D., MBA
(5)
|
|
|
396,338
|
|
|
|
2.6
|
%
|
Morgan Lam
(6)
|
|
|
19,061
|
|
|
|
*
|
|
David L. Tousley, MBA, CPA
(7)
|
|
|
100,000
|
|
|
|
*
|
|
Ronald Barliant, JD
(8)
|
|
|
118,785
|
|
|
|
*
|
|
Dale Chappell, M.D., MBA
(9)(12)
|
|
|
4,973,758
|
|
|
|
33.2
|
%
|
Timothy Morris, CPA
(10)
|
|
|
25,000
|
|
|
|
*
|
|
Ezra Friedberg
(11)
|
|
|
25,000
|
|
|
|
*
|
|
All current executive officers and directors as a group (7 persons)
(13)
|
|
|
5,557,942
|
|
|
|
37.1
|
%
|
(1)
|
Number of shares based solely on information reported on the Schedule 13D filed with the SEC on July 11, 2016, reporting beneficial ownership as of June 30, 2016, by BHC, BHCMF, Cheval, Black Horse Capital Management LLC, or BH Management, and Dale Chappell. According to the report, BHC has sole voting and dispositive power with respect to 872,977 shares, BHCMF has shared voting and dispositive power with respect to 2,040,463 shares, Cheval has shared voting and dispositive power with respect to 2,035,318 shares, BH Management has sole voting and dispositive power with respect to 2,908,295 shares and Dr. Chappell has shared voting and dispositive power with respect to 4,948,758 shares. The business address of each of BHC, BHCMF, BH Management and Dr. Chappell is c/o Opus Equum, Inc. P.O. Box 788, Dolores, Colorado 81323. The business address of Cheval is P.O Box 309G, Ugland House, Georgetown, Grand Cayman, Cayman Islands KY1-1104.
|
(2)
|
Number of shares based solely on information reported on the Schedule 13D filed with the SEC on July 13, 2016, reporting beneficial ownership as of July 7, 2016, by Nomis. Nomis has sole voting and dispositive power over all 3,719,006 shares. The business address of Nomis is Penboss Building 50 Parliament St., Hamilton, Bermuda HM12.
|
(3)
|
Number of shares based solely on information reported on the Schedule 13G filed with the SEC on February 14, 2017. Nantahala Capital Management, LLC (“Nantahala”) and its managing members, Wilmot B. Harkey and Daniel Mack, share voting and dispositive power with respect to the shares. The business address of each of Nantahala, Mr. Harkey and Mr. Mack is 19 Old Kings Highway South, Suite 200, Darien, Connecticut 06820.
|
(4)
|
Number of shares based solely on information reported on the Schedule 13G filed with the SEC on August 16, 2016, reporting beneficial ownership as of June 30, 2016 by Kapil Dhar, Sable Fiduciary Limited, or Sable, and Cortleigh Limited, or Cortleigh. Mr. Dhar, Sable and Cortleigh have shared voting and dispositive power with respect to the shares. The business address of each of Mr. Dhar, Sable and Cortleigh is 4th Floor, Rodus Building, Road Reef, Road Town, Tortola, British Virgin Islands.
|
(5)
|
Includes options to purchase 260,755 shares of common stock that may be exercised within 60 days of
March 7
, 2017.
|
(6)
|
Includes options to purchase 19,061 shares of common stock that may be exercised within 60 days of
March 7
, 2017.
|
(7)
|
Includes options to purchase 100,000 shares of common stock that may be exercised within 60 days of
March 7
, 2017.
|
(8)
|
Includes options to purchase 25,000 shares of common stock that may be exercised within 60 days of
March 7
, 2017.
|
(9)
|
Includes options to purchase 25,000 shares of common stock that may be exercised within 60 days of
March 7
, 2017.
|
(10)
|
Includes options to purchase 25,000 shares of common stock that may be exercised within 60 days of
March 7
, 2017.
|
(11)
|
Includes options to purchase 25,000 shares of common stock that may be exercised within 60 days of
March 7
, 2017.
|
(12)
|
Dr. Chappell is the managing member of BH Management, which is the managing member of BHC, and the controlling person of BHCMF. By virtue of these relationships, each of BH Management and Dr. Chappell may be deemed to beneficially own the Shares owned directly by each of BHC and Cheval and Dr. Chappell may be deemed to beneficially own the Shares owned directly by BHCMF.
|
(13)
|
Includes options to purchase 496,482 shares of common stock that may be exercised within 60 days of
March 7
, 2017.
|
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2016 with respect to shares of common stock that may be issued under our existing equity compensation plans.
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Number of
|
|
Weighted-
|
|
|
Available for
|
|
|
|
Securities to be
|
|
Average
|
|
|
Issuance Under
|
|
|
|
Issued Upon
|
|
Exercise
|
|
|
Equity
|
|
|
|
Exercise of
|
|
Price of
|
|
|
Compensation
|
|
|
|
Outstanding
|
|
Outstanding
|
|
|
Plans (Excluding
|
|
|
|
Options,
|
|
Options,
|
|
|
Securities
|
|
|
|
Warrants
|
|
Warrants
|
|
|
Reflected in
|
|
|
|
and Rights
|
|
and Rights
|
|
|
Column (a))
|
|
Plan Category
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders(1)
|
|
|
816,036
|
|
|
$
|
5.13
|
|
|
|
-
|
|
Equity compensation plans not approved by security holders
|
|
|
1,019,799
|
|
|
|
3.38
|
|
|
|
1,980,201
|
|
Total
|
|
|
1,835,835
|
|
|
$
|
4.15
|
|
|
|
1,980,201
|
|
|
(1)
|
Represents shares reserved for issuance under the 2001 Stock Plan and the 2012 Equity Incentive Plan, as amended and restated.
On September 13, 2016, the Board approved an amendment to the 2012 Equity Incentive Plan (the “Equity Plan Amendment”) to increase the number of shares of our common stock available for issuance under the 2012 Equity Plan by 3,000,000 shares. The Equity Plan Amendment was not approved by our stockholders. See Note 10 of the notes to our
Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10‑K for a discussion of the material features of the 2012 Equity Incentive Plan.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
December 2015 Private Placement
On December 3, 2015, we entered into a Securities Purchase Agreement, which was subsequently amended, for a private placement by the Company of shares of our common stock. The purchasers in the private placement identified in the table below were at the time of the private placement directors of the Company and they purchased the number of shares set forth opposite their names for the dollar amounts indicated.
Name
|
|
Number of Shares
|
|
|
Aggregate Dollar Amount
at $29.32 per share
|
|
David Moradi
as beneficial owner through
Anthion Partners II LLC
|
|
|
3,410
|
|
|
$
|
100,000
|
|
Marek Biestek
|
|
|
10,000
|
|
|
$
|
293,200
|
|
Michael Harrison
|
|
|
1,705
|
|
|
$
|
50,000
|
|
Thomas Fernandez
|
|
|
6,821
|
|
|
$
|
200,000
|
|
Services Arrangement
On December 3, 2015, we entered into a Services Agreement, or the Services Agreement, with Turing Pharmaceuticals LLC, or Turing, a life sciences company. Our then Chairman and Chief Executive Officer, Martin Shkreli, was also the chief executive officer and a member of the board of directors of Turing. Pursuant to the Services Agreement, Turing was to provide certain employees to us, to utilize on a part-time basis, including Christopher Thorn, who was appointed as our interim chief financial officer on December 3, 2015. The Services Agreement provided that Turing would charge us for Mr. Thorn’s services an hourly rate of $151.92 per hour, and Mr. Thorn would remain employed and compensated by Turing during the term of the Services Agreement. No amounts were paid by us to Turing, and Mr. Thorn resigned on December 21, 2015.
Bankruptcy Related Financing Transactions
As a result of challenges facing us at the time, on December 29, 2015, we filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On June 30, 2016, or the Effective Date, our plan of reorganization, or the Plan, became effective, and we emerged from Chapter 11 bankruptcy proceedings.
During the pendency of our bankruptcy proceedings, we entered into a Debtor-in-Possession Credit and Security Agreement, or the Credit Agreement, and a
Securities Purchase Agreement, or the SPA, with the Black Horse Entities and Nomis, or the Lenders. As described further below, as a result of the issuance of shares of common stock on the Effective Date pursuant to the terms of the Credit Agreement and the SPA, each of the Lenders became a holder of greater than 5% of the outstanding common stock. In addition, pursuant to the terms of the SPA, Dr. Chappell, who is the managing member of the managing general partner of BHC, the controlling person of BHCMF, and a director of Cheval, was appointed to the Board on the Effective Date. Dr. Chappell and his wife Mary Chappell are the sole owners of Cheval.
Credit Agreement
On April 1, 2016, we entered into the Credit Agreement with the Lenders and BHCMF, as administrative agent and lender, or Agent. The Credit Agreement provided for a debtor-in-possession credit facility in the original principal amount of $3,000,000, or the Term Loan, that bore interest at a rate per annum equal to 12.00%. The Credit Agreement provided that the Term Loan was made by the Lenders with a fee equal to $191,000, or the Upfront Fee, required the payment by us to the Lenders of a commitment fee equal to $150,000, or the Commitment Fee. In accordance with the terms of the Credit Agreement, we used the proceeds of the Term Loan for working capital, bankruptcy-related costs, costs related to our plan of reorganization, the payment of certain fees and expenses owed to the Agent and the Lenders in connection with the Credit Agreement and other costs incurred in the ordinary course of business. In accordance with the bidding procedures order entered by the Bankruptcy Court, the Term Loan and the SPA were together subject to competing, higher and better offers.
Our obligations under the Credit Agreement were represented by promissory notes and were secured, in connection with which the parties also entered into an Intellectual Property Security Agreement.
The Credit Agreement provided that the outstanding principal balance of the Term Loan, plus accrued and unpaid interest, plus the Upfront Fee, plus the Commitment Fee and all other non-contingent obligations would mature on the earlier of an event of default under the Credit Agreement or the effective date of our plan of reorganization. The maturity date was deemed to occur simultaneously with the Effective Date and, accordingly, on June 30, 2016, 2,350,480 shares of Common Stock were issued to the Lenders in repayment of our debt obligations under the Credit Agreement, including 201,436 shares to BHC, 470,096 shares to BHCMF, 503,708 shares to Cheval, 940,192 shares to Nomis and 235,048 shares to Cortleigh Limited or Cortleigh. Pursuant to the terms of the Credit Agreement, we also paid $405,145 to BHC in payment of its fees and expenses and $283,132 to Nomis in payment of its fees and expenses.
2016 Securities Purchase Agreement
On April 1, 2016, we entered into the SPA with the Lenders. The SPA provided for the sale to the Lenders on the closing date of an aggregate of 5,885,000 shares of our common stock, subject to adjustment as provided in the SPA, in respect of exit financing in the amount of $11,000,000, or the Exit Financing, plus an exit financing commitment fee of $770,000 payable by us to the Lenders, plus payment to the Lenders of their fees and expenses incurred in connection with the Exit Financing and the SPA. Nomis subsequently assigned twenty percent (20%) of its interest in the shares of Common Stock to be purchased by Nomis under the Credit Agreement and the SPA to Cortleigh or collectively with the Lenders, the Purchasers.
The consummation of the transactions contemplated by the SPA were contingent upon, among other things, our Board, upon the effectiveness of the confirmed plan of reorganization, consisting of (i) one director to be designated by Nomis; (ii) one director to be jointly designated by BHC, BHCF, and Cheval; (iii) our Chief Executive Officer to be designated jointly and unanimously by the Lenders; and (iv) two independent directors to be designated jointly and unanimously by the Lenders.
As discussed above, Dr. Chappell,
an affiliate of each of BHCMF, BHC and Cheval
, was appointed to the Board on the Effective Date.
In addition, Dr. Durrant continued to serve on the Board as a joint designee of the Black Horse Entities and Nomis and Mr. Barliant was designated by the Black Horse Entities.
The issuance of the shares contemplated by the SPA was consummated on the Effective Date, and we issued to the purchasers an aggregate of 7,147,035 shares of our common stock for an aggregate purchase price of $11,000,000, including 612,501 shares to BHC, 1,429,407 shares to BHCMF, 1,531,610 shares to Cheval, 2,858,814 shares to Nomis and 714,703 shares to Cortleigh. Pursuant to the terms of the SPA, we paid $427,383 to BHC in payment of its fees and expenses and $240,773 to Nomis in payment of its fees and expenses.
Under the terms of the SPA, the Company was required to use commercially reasonable efforts to cause a registration statement registering the resale by the Purchasers of the shares issuable under the SPA to be declared effective by the SEC no later than December 27, 2016. The Company was obligated to keep the registration statement effective until all of the shares issued pursuant to the SPA are eligible for resale by the Purchasers without volume restrictions under an exemption from registration under the Securities Act. If the registration statement was not declared effective by December 27, 2016 and any of the shares issued pursuant to the SPA were not eligible to be sold under Rule 144, then during each subsequent thirty day period (or portion thereof) until the registration statement is declared effective, the Company agreed to issue additional shares of common stock to the Purchasers in an amount equivalent to 10.0% of the shares originally purchased under the SPA that are then held by the Purchasers. On October 28, 2016, the SPA was amended to require the Company to file a registration statement by January 10, 2017 with effectiveness to be no later than March 31, 2017.
On December 19, 2016, the Company and the Purchasers entered into a second amendment to the SPA, which requires the Company to file a resale registration statement by March 17, 2017 and cause it to become effective no later than June 19, 2017. The requirement to issue additional shares to the Purchasers if effectiveness of the resale registration statement is delayed beyond June 19, 2017 would not be implicated until June 20, 2017.
Governance Agreement
On the Effective Date, we entered into a Corporate Governance Agreement with Mr. Shkreli, or the Governance Agreement, which provides for certain terms and conditions regarding the acquisition, disposition, holding and voting of our securities by Mr. Shkreli. The Governance Agreement applies to all of our common stock owned by Mr. Shkreli or affiliates he controls.
Under the terms of the Governance Agreement, for 180 days following the Effective Date, Mr. Shkreli could not sell his shares at a price per share that was less than the greater
of (x) $2.50 and (y) a 10% discount to the prior two week volume-weighted average price, or the Market Discount Price. In addition, for 180 days following the 61st day after the Effective Date, we had a right to purchase any or all of Mr. Shkreli’s shares at a purchase price per share equal to the Market Discount Price. For a limited time, we also had a right of first refusal to purchase shares that Mr. Shkreli proposed to sell. Mr. Shkreli was also prohibited from transferring any shares to his affiliates or associates unless such transferee agreed to be subject to the terms of the Governance Agreement. Transfers of shares by Mr. Shkreli not made in compliance with the Governance Agreement would be null and void.
Under the terms of the Governance Agreement, Mr. Shkreli will not have any right to nominate directors to the Board and agrees in connection with any shareholder vote to vote his shares in proportion to the votes of our public stockholders. The Governance Agreement also prohibits Mr. Shkreli or his affiliates for a period of 24 months after the date of the Governance Agreement, from, among other things: p
urchasing any of our stock or assets; participating in any proposal for any merger, tender offer or other business combination, or similar extraordinary transaction involving us or any of our subsidiaries; seeking to control or influence the management, our Board or our policies; or submitting any proposal to be considered by our stockholders.
In addition, any material transaction between Mr. Shkreli or his associates and us, or relating to the Governance Agreement, cannot be taken without the prior approval of our Board.
The Governance Agreement provides for a mutual release between us and Mr. Shkreli of all claims and liabilities existing as of the date of execution.
On August 25 and August 26, 2016, Mr. Shkreli sold all of his shares of the Company to third party investors in private transactions.
December 2016 Term Loan
On December 21, 2016, we entered into a Credit and Security Agreement (the “December Term Loan”) with BHCMF, as administrative agent and lender, BHC, as a lender, Cheval, as a lender and Nomis, as a lender (collectively, the “Lenders”). The December Term Loan provides for a credit facility in the original principal amount of $3,315,217, provides that the Term Loan will be made by the Lenders at an original discount equal to $265,217.00 (the “Upfront Fee”) and requires the payment by us to the Lenders of a commitment fee equal to $152,500.00 (the “Commitment Fee”). In accordance with the terms of the Credit Agreement, we will use the proceeds of the Term Loan for general working capital, the payment of certain fees and expenses owed to BHCMF and the Lenders in connection with the Credit Agreement and other costs incurred in the ordinary course of business.
Dr. Chappell, one of the Company’s directors, is an affiliate of each of BHCMF, BHC and Cheval. At the time of the December Term Loan, each of the Lenders beneficially owned more than 5% of our outstanding common stock.
Pursuant to the terms of the agreement, the December Term Loan will bear interest at a rate per annum equal to 9.00% and is subject to certain customary representations, warranties and covenants.
The outstanding principal balance of the December Term Loan, plus accrued and unpaid interest, plus the Commitment Fee and all other non-contingent obligations (the “Outstanding Obligations”), will mature on the earlier of acceleration after an event of default under the agreement, or October 31, 2017 (the “Maturity Date”). However, to the extent we raise capital through any SEC-registered stock offering, 50% of such offering’s proceeds (net of costs) must be used to pay down the December Term Loan.
Upon the occurrence of any event of default set forth in the agreement, BHCMF has the option of terminating the agreement and declaring all of our obligations immediately payable. The occurrence of an event of default will cause the December Term Loan to bear interest at a rate per annum equal to 14.00%.
Our obligations under the December Term Loan are secured by a first priority security interests in all of the Company’s real and personal property, subject only to certain carve outs and permitted liens, as set forth in the agreement. We have and will, at the request of BHCMF, enter into additional documents further documenting the December Term Loan and securing our obligations under the December Term Loan in favor of BHCMF and for the benefit of the Lenders.
Director Independence
We are not currently a listed issuer. However, we use the definition of “independent” set forth in NASDAQ Marketplace rules in determining whether a director is independent in the capacity of director. Consistent with NASDAQ’s independence criteria, our Board has affirmatively determined that each of our current directors, and all of our directors who served in 2016, other than Dr. Chappell and Dr. Durrant, our Chief Executive Officer, is independent. NASDAQ's independence criteria include a series of objective tests, such as that the director is not an employee of the Company and has not engaged in various types of business dealings with us. In addition, as further required by NASDAQ rules, our Board has subjectively determined as to each independent director that no relationship exists that, in the opinion of the board of directors, would interfere with each such person's exercising independent judgment in carrying out his or her responsibilities as a director. In making these determinations on the independence of our directors, our Board considered the relationships that each such director has with us and all other facts and circumstances the board deemed relevant in determining independence, including the beneficial ownership of our capital stock by each such person.
We have established an audit committee, a compensation committee and a nominating and corporate governance committee. Dr. Durrant, who our Board has determined is not independent, was a member of each committee during portions of 2016.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm’s Fees
The following table represents aggregate fees billed to us for the years ended December 31, 2016 and 2015 by our independent registered accounting firm, HORNE LLP.
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Annual audit fees(1)
|
|
$
|
250,140
|
|
|
$
|
223,037
|
|
Audit-related fees
|
|
|
-
|
|
|
|
-
|
|
Tax fees (2)
|
|
|
12,000
|
|
|
|
-
|
|
All other fees
|
|
|
-
|
|
|
|
-
|
|
Total fees
|
|
$
|
262,140
|
|
|
$
|
223,037
|
|
|
(1)
|
Audit fees in 2016 and 2015 include fees billed or incurred by HORNE LLP for professional services rendered in connection with the annual audit of our
Consolidated Financial Statements
for each year and the review of our quarterly reports on Form 10-Q and consents associated with registration statements.
|
|
(2)
|
Fees for services consist of tax compliance, including the preparation and review of federal and state tax returns.
|
The following table represents aggregate fees billed to us for the year ended December 31, 2015 by our former independent registered accounting firm, Ernst & Young LLP, or E&Y.
|
|
Year ended
|
|
|
|
December 31, 2015
|
|
Annual audit fees(1)
|
|
$
|
424,075
|
|
Audit-related fees
|
|
|
-
|
|
Tax fees (2)
|
|
|
20,000
|
|
All other fees
|
|
|
1,820
|
|
Total fees
|
|
$
|
445,895
|
|
(1)
|
Audit fees in 2015 include fees billed or incurred by E&Y for professional services rendered in connection with the review of our 2015 quarterly reports on Form 10-Q and a progress payment towards a 2015 audit, not completed before E&Y's resignation.
|
(2)
|
Tax fees related to Internal Revenue Code Section 382 analysis.
|
On December 8, 2015, we were notified by E&Y that it had resigned as our independent registered public accounting firm not due to any reason related to our reporting or accounting operations, policies or procedures. Between December 8, 2015 and December 21, 2015, Marcum LLP served as our independent registered public accounting firm. Marcum’s resignation was not due to any reason related to our reporting or accounting operations, policies or procedures.
We paid Marcum a retainer of $45,000 as an advance for work related to the 2015 audit.
All fees described above were pre-approved by the audit committee in accordance with the requirements of Regulation S-X under the Exchange Act.
Pre-Approval Policies and Procedures
The audit committee’s policy is to pre-approve all audit and permissible non-audit services rendered by our independent registered public accounting firm. The audit committee can pre-approve specified services in defined categories of audit services, audit-related services and tax services up to specified amounts, as part of the audit committee’s approval of the scope of the engagement of our independent registered public accounting firm or on an individual case-by-case basis before our independent registered public accounting firm is engaged to provide a service. The audit committee has determined that the rendering of tax-related services by our independent registered public accounting firm is compatible with maintaining the principal accountant’s independence for audit purposes. Our independent registered public accounting firm has not been engaged to perform any non-audit services other than tax-related services and as indicated above.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
|
The following documents are filed as part of this report:
|
|
(1)
|
Financial Statements—See Index to Consolidated Financial Statements at Part I, Item 8 on page F-1 of this Annual Report on Form 10-K.
|
|
(2)
|
All financial statement schedules have been omitted because they are not applicable or not required or because the information is included elsewhere in the financial statements or the Notes thereto.
|
|
(3)
|
See the accompanying Index to Exhibits filed as a part of this Annual Report, which list is incorporated by reference in this Item.
|
(b)
|
See the accompanying Index to Exhibits filed as a part of this Annual Report.
|
(c)
|
Other schedules are not applicable.
|
ITEM 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
KaloBios Pharmaceuticals, Inc.
|
|
|
|
|
|
By:
|
/s/ Cameron Durrant, M.D., MBA
|
|
Cameron Durrant, M.D., MBA
Chief Executive Officer and Chairman of the Board
of Directors
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/ Cameron Durrant, M.D., MBA
|
|
Chairman of the Board of Directors and Chief
|
|
|
Cameron Durrant, M.D., MBA
|
|
Executive Officer (Principal Executive Officer)
|
|
March 9, 2017
|
|
|
|
|
|
/s/ David L. Tousley, MBA, CPA
|
|
Interim Chief Financial Officer (Principal
|
|
|
David L. Tousley, MBA, CPA
|
|
Financial Officer and Principal Accounting Officer)
|
|
March 9, 2017
|
|
|
|
|
|
/s/ Ronald Barliant, JD
|
|
|
|
|
Ronald Barliant, JD
|
|
Director
|
|
March 9, 2017
|
|
|
|
|
|
/s/ Dale Chappell, M.D., MBA
|
|
|
|
|
Dale Chappell, M.D., MBA
|
|
Director
|
|
March 9, 2017
|
|
|
|
|
|
/s/ Timothy Morris, CPA
|
|
|
|
|
Timothy Morris, CPA
|
|
Director
|
|
March 9, 2017
|
|
|
|
|
|
/s/ Ezra Friedberg
|
|
|
|
|
Ezra Friedberg
|
|
Director
|
|
March 9, 2017
|
Index to Consolidated Financial Statements
Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
KaloBios Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of KaloBios Pharmaceuticals, Inc. (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Ridgeland, Mississippi
March 9, 2017
KaloBios Pharmaceuticals, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,906
|
|
|
$
|
8,431
|
|
Prepaid expenses and other current assets
|
|
|
1,643
|
|
|
|
1,963
|
|
Total current assets
|
|
|
4,549
|
|
|
|
10,394
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
68
|
|
|
|
288
|
|
Restricted cash
|
|
|
101
|
|
|
|
193
|
|
Other assets
|
|
|
-
|
|
|
|
271
|
|
Total assets
|
|
$
|
4,718
|
|
|
$
|
11,146
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,072
|
|
|
$
|
-
|
|
Accrued expenses
|
|
|
736
|
|
|
|
-
|
|
Term loan payable
|
|
|
3,016
|
|
|
|
-
|
|
Total current liabilities
|
|
|
7,824
|
|
|
|
-
|
|
Liabilities subject to compromise
|
|
|
-
|
|
|
|
5,414
|
|
Notes payable to vendors
|
|
|
1,273
|
|
|
|
-
|
|
Total liabilities
|
|
|
9,097
|
|
|
|
5,414
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: 85,000,000 shares authorized at December
31, 2016 and 2015; 14,977,397 and 4,450,994 shares issued and outstanding at
December 31, 2016 and 2015, respectively
|
|
|
15
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
236,216
|
|
|
|
219,319
|
|
Accumulated deficit
|
|
|
(240,610
|
)
|
|
|
(213,591
|
)
|
Total stockholders’ equity (deficit)
|
|
|
(4,379
|
)
|
|
|
5,732
|
|
Total liabilities and stockholders’ equity (deficit)
|
|
$
|
4,718
|
|
|
$
|
11,146
|
|
See accompanying notes.
KaloBios Pharmaceuticals, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
|
$
|
10,449
|
|
|
$
|
16,721
|
|
General and administrative
|
|
|
8,376
|
|
|
|
14,296
|
|
Litigation accrual expense
|
|
|
-
|
|
|
|
3,335
|
|
Total operating expenses
|
|
|
18,825
|
|
|
|
34,352
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(18,825
|
)
|
|
|
(34,352
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(131
|
)
|
|
|
(842
|
)
|
Interest income
|
|
|
-
|
|
|
|
29
|
|
Other income (expense), net
|
|
|
125
|
|
|
|
(213
|
)
|
Reorganization items, net
|
|
|
(8,188
|
)
|
|
|
-
|
|
Net loss
|
|
|
(27,019
|
)
|
|
|
(35,378
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Net unrealized gains on marketable securities
|
|
|
-
|
|
|
|
8
|
|
Comprehensive loss
|
|
$
|
(27,019
|
)
|
|
$
|
(35,370
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(2.78
|
)
|
|
$
|
(8.57
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used to
|
|
|
|
|
|
|
|
|
calculate basic and diluted net loss per common share
|
|
|
9,707,877
|
|
|
|
4,125,009
|
|
See accompanying notes.
KaloBios Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
Balances at December 31, 2014
|
|
|
4,124,004
|
|
|
$
|
4
|
|
|
$
|
202,830
|
|
|
$
|
(8
|
)
|
|
$
|
(178,213
|
)
|
|
$
|
24,613
|
|
Issuance of common stock, net of issuance costs
|
|
|
326,698
|
|
|
|
-
|
|
|
|
8,218
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,218
|
|
Issuance of common stock upon ESPP conversion
|
|
|
750
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Obligation to issue common stock in settlement of litigation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,835
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,835
|
|
Issuance of warrants in exchange for services
|
|
|
-
|
|
|
|
-
|
|
|
|
2,507
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,507
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,971
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,971
|
|
Modification of stock options related to executive retirement
|
|
|
-
|
|
|
|
-
|
|
|
|
479
|
|
|
|
-
|
|
|
|
-
|
|
|
|
479
|
|
Modification of stock options related to restructuring activities
|
|
|
-
|
|
|
|
-
|
|
|
|
480
|
|
|
|
-
|
|
|
|
-
|
|
|
|
480
|
|
Settlement of fractional shares upon reverse split
|
|
|
(458
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
(35,378
|
)
|
|
|
(35,370
|
)
|
Balances at December 31, 2015
|
|
|
4,450,994
|
|
|
$
|
4
|
|
|
$
|
219,319
|
|
|
$
|
-
|
|
|
$
|
(213,591
|
)
|
|
$
|
5,732
|
|
Issuance of common stock to officer and directors
|
|
|
323,155
|
|
|
|
1
|
|
|
|
1,451
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,452
|
|
Issuance of common stock, net of issuance costs
|
|
|
7,147,035
|
|
|
|
7
|
|
|
|
10,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,132
|
|
Issuance of common stock in settlement of litigation
|
|
|
631,358
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock for services
|
|
|
65,000
|
|
|
|
-
|
|
|
|
198
|
|
|
|
-
|
|
|
|
-
|
|
|
|
198
|
|
Issuance of common stock upon exercise of options
|
|
|
5,625
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
Issuance of common stock upon vesting of restricted stock units
|
|
|
3,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of warrants in connection with acquisition of licenses
|
|
|
-
|
|
|
|
-
|
|
|
|
361
|
|
|
|
-
|
|
|
|
-
|
|
|
|
361
|
|
Issuance of warrants in exchange for services
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
Conversion of notes payable and related accrued interest and fees to common stock
|
|
|
2,350,480
|
|
|
|
2
|
|
|
|
3,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,387
|
|
Beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
484
|
|
|
|
-
|
|
|
|
-
|
|
|
|
484
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
844
|
|
|
|
-
|
|
|
|
-
|
|
|
|
844
|
|
Comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,019
|
)
|
|
|
(27,019
|
)
|
Balances at December 31, 2016
|
|
|
14,977,397
|
|
|
$
|
15
|
|
|
$
|
236,216
|
|
|
$
|
-
|
|
|
$
|
(240,610
|
)
|
|
$
|
(4,379
|
)
|
See accompanying notes.
KaloBios Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,019
|
)
|
|
$
|
(35,378
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
102
|
|
|
|
197
|
|
Gain on lease termination
|
|
|
(227
|
)
|
|
|
-
|
|
Noncash interest expense
|
|
|
69
|
|
|
|
190
|
|
Financing derivative
|
|
|
-
|
|
|
|
252
|
|
Reorganization items related to debtor-in-possession financing
|
|
|
1,627
|
|
|
|
-
|
|
Amortization of premium on marketable securities
|
|
|
-
|
|
|
|
130
|
|
Stock based compensation expense
|
|
|
844
|
|
|
|
1,971
|
|
Gain on extinguishment of long-term debt
|
|
|
-
|
|
|
|
(61
|
)
|
Loss (gain) on sale of property and equipment
|
|
|
22
|
|
|
|
(56
|
)
|
Modification of stock options related to executive retirement
|
|
|
-
|
|
|
|
479
|
|
Modification of stock options related to restructuring activities
|
|
|
-
|
|
|
|
480
|
|
Issuance of warrants in exchange for services
|
|
|
40
|
|
|
|
2,507
|
|
Issuance of warrants in connection with acquisition of licenses
|
|
|
361
|
|
|
|
-
|
|
Issuance of common stock in exchange for services
|
|
|
198
|
|
|
|
-
|
|
Issuance of common stock to officer and directors
|
|
|
1,452
|
|
|
|
-
|
|
Obligation to issue common stock in settlement of litigation
|
|
|
-
|
|
|
|
2,835
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
592
|
|
|
|
(674
|
)
|
Accounts payable
|
|
|
4,474
|
|
|
|
2,465
|
|
Accrued expenses
|
|
|
(25
|
)
|
|
|
(4,400
|
)
|
Liabilities subject to compromise
|
|
|
(3,471
|
)
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(20,961
|
)
|
|
|
(29,063
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
-
|
|
|
|
(3,703
|
)
|
Proceeds from maturities of marketable securities
|
|
|
-
|
|
|
|
33,371
|
|
Purchases of property and equipment
|
|
|
-
|
|
|
|
(136
|
)
|
Proceeds from sale of property and equipment
|
|
|
11
|
|
|
|
121
|
|
Changes in restricted cash
|
|
|
92
|
|
|
|
444
|
|
Net cash provided by investing activities
|
|
|
103
|
|
|
|
30,097
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Increase in restricted cash for notes payable
|
|
|
-
|
|
|
|
(8,291
|
)
|
Net proceeds from issuance of common stock
|
|
|
10,132
|
|
|
|
8,219
|
|
Net proceeds of stock option exercise
|
|
|
10
|
|
|
|
-
|
|
Net proceeds from notes payable
|
|
|
2,993
|
|
|
|
-
|
|
Net proceeds from convertible notes payable
|
|
|
2,198
|
|
|
|
-
|
|
Principal payments under notes payable
|
|
|
-
|
|
|
|
(3,452
|
)
|
Settlement of fractional shares upon reverse split
|
|
|
-
|
|
|
|
(2
|
)
|
Net cash provided by (used in) financing activities
|
|
|
15,333
|
|
|
|
(3,526
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(5,525
|
)
|
|
|
(2,492
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
8,431
|
|
|
|
10,923
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,906
|
|
|
$
|
8,431
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
685
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Principal payments under notes payable from restricted cash
|
|
$
|
-
|
|
|
$
|
7,337
|
|
Conversion of notes payable and related accrued interest and fees to common stock
|
|
$
|
3,387
|
|
|
$
|
-
|
|
Obligation to issue common stock in settlement of litigation
|
|
$
|
-
|
|
|
$
|
2,835
|
|
Issuance of warrants in connection with acquisition of licenses
|
|
$
|
361
|
|
|
$
|
-
|
|
Issuance of warrants in exchange for services
|
|
$
|
40
|
|
|
$
|
2,507
|
|
Issuance of common stock in exchange for services
|
|
$
|
198
|
|
|
|
-
|
|
Issuance of common stock to officer and directors
|
|
$
|
1,452
|
|
|
$
|
-
|
|
Issuance of notes payable to vendors
|
|
$
|
1,273
|
|
|
$
|
-
|
|
See accompanying notes.
1. Organization and Description of Business
Description of the Business
KaloBios Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company focused on developing medicines for patients with neglected and rare diseases, with an ancillary focus on pediatric conditions, and on executing its Responsible Pricing Model in the commercialization of the Company’s product candidates that may be approved. The Company’s lead product candidate is benznidazole for the treatment of Chagas disease, a parasitic illness that can lead to long-term heart, intestinal and neurological problems. As more fully described in Note 6, the Company acquired certain worldwide rights to benznidazole on June 30, 2016. The Company is developing one of its proprietary monoclonal antibodies, lenzilumab (formerly known as KB003), for the treatment of chronic myelomonocytic leukemia, and potentially for the treatment of juvenile myelomonocytic leukemia (JMML), both of which are rare hematologic cancers with high unmet medical need. The Company is exploring partnering opportunities to enable development of another of its proprietary monoclonal antibodies, ifabotuzumab (formerly known as KB004), for the treatment of certain rare solid and hematologic cancers. With a focus on neglected, rare and orphan diseases, the Company believes that it has the opportunity to benefit from various regulatory incentives, such as orphan drug exclusivity, breakthrough therapy designation, fast track designation, accelerated approval, priority review and priority review vouchers, where available, that provide for certain periods of exclusivity, expedited review and/or other benefits.
Liquidity and Going Concern
The Company has undergone a significant transformation in the last year. As a result of challenges facing it at the time, on December 29, 2015, the Company filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On June 30, 2016, the Company’s Second Amended Plan of Reorganization, dated May 9, 2016, as amended (the “Plan”), became effective and the Company emerged from its Chapter 11 bankruptcy proceedings. Refer to Note 2 for additional details regarding the Company’s bankruptcy proceedings.
The Company was incorporated on March 15, 2000 in California and reincorporated as a Delaware corporation in September 2001. All of the Company’s assets are located in California.
The Company has incurred significant losses and had an accumulated deficit of $240.6 million as of December 31, 2016. The Company has financed its operations primarily through the sale of equity securities, debt financings, interest income earned on cash and cash equivalents, grants and the payments received under its agreements with Novartis Pharma AG and Sanofi Pasteur S.A. (“Sanofi”). The Company completed its initial public offering (“IPO”) in February 2013. To date, none of the Company’s product candidates have been approved for sale and therefore the Company has not generated any revenue from product sales. Management expects operating losses to continue for the foreseeable future. As a result, the Company will continue to require additional capital through equity offerings, debt financing and/or payments under new or existing licensing or collaboration agreements. If sufficient funds are not available on acceptable terms when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm its business, financial condition and results of operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
T
he
Consolidated Financial Statements as of and
for the year ended December 31, 2016 were prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its total liabilities of $9.1 million at December 31, 2016, and to continue as a going concern is dependent upon the availability of future funding.
The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Delisting of Common Stock
On January 13, 2016, the Company’s common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the KBIOQ symbol. On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of the common stock, and the delisting was effective on February 5, 2016. On June 30, 2016, upon emergence from bankruptcy, the ticker symbol for the trading of the Company’s common stock on the over-the-counter market reverted back to KBIO.
2. Chapter 11 Filing
On December 29, 2015, the Company filed a voluntary petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The filing was made in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) (Case No. 15-12628 (LSS)).
In connection with financing efforts related to the Company’s bankruptcy proceedings, on April 1, 2016, the Company entered into a Debtor-in-Possession Credit and Security Agreement (the “Credit Agreement”) with a group of lenders (the “DIP Lenders”), pursuant to which the Company received $3 million in funds for working capital, bankruptcy-related costs, costs related to its plan of reorganization, payment of certain fees to the DIP Lenders and other costs associated with the ordinary course of business. Funds received under the Credit Agreement bore interest at a rate of 12% and were due and payable upon the Effective Date of the Plan, as defined below. Payment due under the Credit Agreement was convertible into shares of the Company’s common stock, with share amounts subject to calculation as provided in the Credit Agreement.
On April 1, 2016, the Company also entered into a Securities Purchase Agreement (the “SPA”) with the DIP Lenders. The SPA provided for the sale of the Company’s common stock, with share amounts subject to calculation as provided in the SPA, in respect of exit financing in the amount of $11,000,000 to be received upon the Effective Date of the Plan, as defined below.
Plan of Reorganization
On May 9, 2016, the Company filed with the Bankruptcy Court the Plan and related amended disclosure statement pursuant to Chapter 11 of the Bankruptcy Code. On June 16, 2016, the Bankruptcy Court entered an order confirming the Plan.
The Plan became effective on June 30, 2016 (the “Effective Date”) and the Company emerged from its Chapter 11 bankruptcy proceedings. In connection with such emergence, the Company consummated the transactions and other items described below.
·
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Pursuant to the SPA and in repayment of its obligations under the Credit Agreement, the Company issued an aggregate of 9,497,515 shares of its common stock to the DIP Lenders.
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·
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The Company became obligated to issue 327,608 shares of common stock to the plaintiffs in litigation related to the Company’s 2015 private financing transaction in accordance with the settlement stipulation discussed below. The Company recorded an obligation in stockholders’ equity to issue the related shares and recorded the related expense of approximately $1.5 million as of December 31, 2015. As of December 31, 2016, all of the shares of common stock related to this settlement stipulation had been issued.
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·
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The Company reserved 300,000 shares of common stock for issuance to the plaintiffs in class action litigation related to the events surrounding the Company’s former Chairman and Chief Executive Officer. The Company recorded an obligation in stockholders’ equity to issue the related shares and recorded the related expense of approximately $1.3 million as of December 31, 2015. As of December 31, 2016, all of the shares related to this settlement stipulation had been issued.
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·
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The Company became obligated to issue 3,750 shares of common stock to a former director in satisfaction of claims against the Company. The Company recorded an obligation in stockholders’ equity to issue the related shares and recorded the related expense of approximately $16,000 as of December 31, 2015. As of December 31, 2016, all of the shares related to this settlement stipulation had been issued.
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·
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The Company reserved for issuance shares of common stock in an amount as yet to be determined in connection with the settlement of certain other claims and interests as set forth in the Plan. As of December 31, 2016, management does not believe the issuance of additional common stock for any such claims is probable. As such, no accrual has been made in the Consolidated Financial Statements.
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·
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The Company issued promissory notes in an aggregate principal amount of approximately $1.2 million to certain vendors in accordance with the Plan. The notes are unsecured, bear interest at 10% per annum and are due and payable in full, including principal and accrued interest on June 30, 2019. As of December 31, 2016, the Company has accrued $61,000 in interest expense related to these promissory notes.
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·
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The Company issued an aggregate of 323,155 shares of common stock to Cameron Durrant, Ronald Barliant, and David Moradi pursuant to an order by the Bankruptcy Court approving a one-time equity award for the Company’s Chief Executive Officer and two other directors. The Company recorded a charge of $1,451,000 representing the fair value of the shares issued and classified $700,000 and $751,000 as Reorganization items, net and General and administrative expenses, respectively.
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Bankruptcy Claims Administration
On February 29, 2016, the Company filed its schedules of assets and liabilities and statement of financial affairs (the “Schedules”) with the Bankruptcy Court. The Bankruptcy Court entered an order setting April 1, 2016 as the deadline for filing proofs of claim for creditors other than governmental units and June 27, 2016 as the bar date for filing proofs of claim by governmental units (together, the “Bar Date”). The Bar Date is the date by which non-government claims against the Company relating to the period prior to the commencement of the Company's Chapter 11 case were required to be filed if such claims were not listed in liquidated, non-contingent and undisputed amounts in the Schedules, or if the claimant disagrees with the amount, characterization or classification of its claim as reflected in the Schedules. Claims that are subject to the Bar Date and that were not filed on or prior to the Bar Date are barred from participating in any distribution that may be made under the Plan.
As of the Effective Date, approximately 195 proofs of claim were outstanding (including claims that were previously identified on the Schedules) totaling approximately $32 million. Prior to the Bar Date, certain investors filed a class action claim in the amount of $20 million in connection with events surrounding the Company’s former Chairman and Chief Executive Officer. On June 15, 2016, a settlement stipulation related to the class action suit was approved under order of the Bankruptcy Court. The settlement stipulation required the Company to issue 300,000 shares of common stock and submit a payment of $250,000 to the claimants. See Note 14 for additional information on this matter and settlement.
Separately, a claim was filed by certain investors in the Company’s 2015 private financing transaction totaling approximately $6.9 million. On May 9, 2016, a settlement stipulation related to this suit was approved under order of the Bankruptcy Court. The settlement stipulation required the Company to issue 327,608 shares of common stock and submit a payment of $250,000 to an escrow account on behalf of the claimants. See Note 14 for additional information on this matter and settlement.
As of December 31, 2015, the Company recorded an obligation in Additional paid-in capital to issue the related shares totaling approximately $2.8 million and recorded the cash liability of $500,000 in Liabilities subject to compromise in the accompanying Condensed Consolidated Balance Sheets. Excluding these stipulated claims, all other proofs of claim amount to approximately $5.1 million. As of December 31, 2015, the Company recorded a liability of approximately $4.5 million, which represents its estimate of the amount expected to be allowed by the Bankruptcy Court, in Liabilities subject to compromise in the accompanying Consolidated Balance Sheet. In addition, the Company also had liabilities related to accrued compensation and deferred rent, totaling approximately $0.4 million, included in Liabilities subject to compromise in the accompanying Consolidated Balance Sheet, as of December 31, 2015.
As of June 30, 2016, the Company emerged from bankruptcy. The Company expects the amounts remaining in Liabilities subject to compromise as of the Effective Date to be paid in accordance with the Plan. Accordingly, as of December 31, 2016, Liabilities subject to compromise have been reduced to zero and reclassified according to their payment terms.
In March 2016, the Company entered into a termination agreement (the “Lease Termination Agreement”) related to the lease of its prior facility in South San Francisco, California. The Lease Termination Agreement, approved by order of the Bankruptcy Court issued March 15, 2016, waived all damages related to early termination of the lease, relieved the Company of March rental expenses and set an effective termination date of March 31, 2016. In accordance with the termination of the lease, the Company wrote off remaining deferred rent liabilities of approximately $312,000 and disposed of certain leasehold improvements and furniture and fixtures with a net book value of approximately $85,000. The resulting gain of $227,000 is included in Reorganization items, net in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2016. Concurrent with the termination of its prior lease, the Company entered into a lease agreement for a new office facility in Brisbane, California. The new lease commenced in April 2016 and expires in March 2017. On February 16, 2017, the Company amended the lease to extend the term of the lease for an additional period of eighteen months such that the lease will expire on September 30, 2018.
The reconciliation of certain proofs of claim filed against the Company in the Bankruptcy Case, including certain General Unsecured Claims, Convenience Class Claims and Other Subordinated Claims, is ongoing. As a result of its examination of the claims, the Company may ask the Bankruptcy Court to disallow, reduce, reclassify or otherwise adjudicate certain claims the Company believes are subject to objection or otherwise improper. Under the terms of the Plan, the Company had until December 27, 2016 to file additional objections to disputed claims, subject to the Company’s right to seek an extension of this deadline from the Bankruptcy Court. By Order, dated February 6, 2017, the Bankruptcy Court extended the claims objection deadline to June 26, 2017. The Company may compromise certain claims with or without specific prior approval of the Bankruptcy Court as set forth in the Plan and may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise. The resolution of such claims could result in material adjustments to the Company’s financial statements.
As of December 31, 2016, approximately $850,000 in claims remain subject to review and reconciliation by the Company. The Company may file objections to these claims after it completes the reconciliation process. As of December 31, 2016, the Company has recorded $130,000 and $124,000 related to these claims in Accounts payable and Notes payable to vendors, respectively, which represents management’s best estimate of claims to be allowed by the Bankruptcy Court.
Although the Bankruptcy Case remains open, other than with respect to certain matters relating to the implementation of the Plan, the administration of certain claims, or over which the Bankruptcy Court may have otherwise retained jurisdiction, the Company is no longer operating under the direct supervision of the Bankruptcy Court. The Company anticipates that the Bankruptcy Case will be closed following the completion of the claims reconciliation process.
Bankruptcy Related Financing Arrangements
On April 1, 2016, the Company entered into the Credit Agreement with Black Horse Capital Master Fund Ltd., as administrative agent and lender (“BHCMF” or “Agent”), Black Horse Capital LP, as a lender (“BHC”), Cheval Holdings, Ltd., as a lender (“Cheval”) and Nomis Bay LTD, as a lender (“Nomis” and, together with BHCMF, BHC and Cheval, the “Lenders”). The Credit Agreement provided for a debtor-in-possession credit facility in the original principal amount of $3,000,000 (the “Term Loan”). The Credit Agreement provided that the Term Loan will be made by the Lenders at an original discount equal to $191,000 (the “Upfront Fee”) and required the payment by the Company to the Lenders of a commitment fee equal to $150,000 (the “Commitment Fee”). In accordance with the terms of the Credit Agreement, the Company used the proceeds of the Term Loan for working capital, bankruptcy-related costs, costs related to the Company’s plan of reorganization, the payment of certain fees and expenses owed to the Agent and the Lenders in connection with the Credit Agreement and other costs incurred in the ordinary course of business.
Pursuant to the terms of the Credit Agreement, the Term Loan bore interest at a rate per annum equal to 12.00%.
In accordance with the bidding procedures order entered by the Bankruptcy Court, the Term Loan and the SPA were together subject to competing, higher and better offers.
In connection with the Company’s obligations under the Credit Agreement, the Company executed in favor of the Agent an Intellectual Property Security Agreement, dated as of April 1, 2016 (the “IP Security Agreement”). Under the terms of the IP Security Agreement, the Company pledged all of its intellectual property to the Agent for the ratable benefit of the Lenders, as collateral for its obligations under the Credit Agreement.
The Credit Agreement provided that the outstanding principal balance of the Term Loan, plus accrued and unpaid interest, plus the Upfront Fee, plus the Commitment Fee and all other non-contingent obligations would mature on the earlier of an event of default under the Credit Agreement or the effective date of the Company’s plan of reorganization. The Maturity Date was deemed to occur simultaneously with the Effective Date and, accordingly, on June 30, 2016, 2,350,480 shares of common stock were issued to the Lenders in repayment of the Company’s debt obligations under the Credit Agreement, including 201,436 shares to BHC, 470,096 shares to BHCMF, 503,708 shares to Cheval, 940,192 shares to Nomis and 235,048 shares to Cortleigh Limited (“Cortleigh”). Pursuant to the terms of the Credit Agreement, the Company also paid $406,000 to BHC in payment of its fees and expenses and $285,000 to Nomis in payment of its fees and expenses.
The Company records discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the fair value of the underlying common stock at the commitment date of the note transaction exceeding the effective conversion price embedded in the note. The Company evaluated the Credit Agreement for beneficial conversion features and calculated a value of approximately $484,000, all of which was expensed as of the Effective Date.
In conjunction with the Credit Agreement, during the year ended December 31, 2016, the Company incurred the following expenses which have been charged to Reorganization items, net in the accompanying Consolidated Statements of Operations and Comprehensive Loss:
|
|
Year ended
|
|
(in thousands)
|
|
December 31, 2016
|
|
Upfront fee
|
|
$
|
191
|
|
Commitment fee
|
|
|
150
|
|
Beneficial conversion feature
|
|
|
484
|
|
Legal fees
|
|
|
802
|
|
Total Credit Agreement expense
|
|
$
|
1,627
|
|
On April 1, 2016, the Company also entered into the SPA with the Lenders. The SPA provides for the sale to the Lenders on the closing date of an aggregate of 5,885,000 shares of common stock, subject to adjustment as provided in the SPA, in respect of exit financing in the amount of $11,000,000 (the “Exit Financing”) plus an exit financing commitment fee of $770,000 payable by the Company to the Lenders, plus payment to the Lenders of their fees and expenses incurred in connection with the Exit Financing and the SPA. Nomis subsequently assigned twenty percent (20%) of its interest in the shares of common stock to be purchased by Nomis under the SPA and the Credit Agreement to Cortleigh (collectively with the Lenders, the “Purchasers”).
The consummation of the transactions contemplated by the SPA were contingent on, among other things, the funding of the Term Loan, the approval of the Bankruptcy Court of the Company’s plan of reorganization, and the simultaneous closing of the Company’s transaction with Savant. In addition, the closing of the transactions under the SPA were contingent upon the board of directors of the Company, upon the effectiveness of the confirmed plan of reorganization, consisting of (i) one director to be designated by Nomis; (ii) one director to be jointly designated by BHC, BHCF, and Cheval; (iii) the Chief Executive Officer of the Company to be designated jointly and unanimously by the Lenders; and (iv) two independent directors to be designated jointly and unanimously by the Lenders.
The issuance of the shares contemplated by the SPA was consummated on the Effective Date, and the Company issued to the Purchasers an aggregate of 7,147,035 shares of common stock for an aggregate purchase price of $11,000,000, including 612,501 shares to BHC, 1,429,407 shares to BHCMF, 1,531,610 shares to Cheval, 2,858,814 shares to Nomis and 714,703 shares to Cortleigh. Pursuant to the terms of the SPA, the Company paid $427,000 to BHC in payment of its fees and expenses and $304,000 to Nomis in payment of its fees and expenses.
Under the terms of the SPA, the Company was required to use commercially reasonable efforts to cause a registration statement registering the resale by the Purchasers of the shares issuable under the SPA to be declared effective by the SEC no later than December 27, 2016. The Company was obligated to keep the registration statement effective until all of the shares issued pursuant to the SPA are eligible for resale by the Purchasers without volume restrictions under an exemption from registration under the Securities Act. If the registration statement has not been declared effective by December 27, 2016 and any of the shares issued pursuant to the SPA are not eligible to be sold under Rule 144, then during each subsequent thirty day period (or portion thereof) until the registration statement is declared effective, the Company agrees to issue additional shares of common stock to the Purchasers in an amount equivalent to 10.0% of the shares originally purchased under the SPA that are then held by the Purchasers. On October 28, 2016, the SPA was amended to require the Company to file a registration statement by January 10, 2017 with effectiveness to be no later than March 31, 2017. On December 19, 2016, the SPA was amended again to require the Company to file a registration statement by March 17, 2017 with effectiveness to be no later than June 20, 2017.
Governance Arrangements
On the Effective Date, the Company and Martin Shkreli, the Company’s former Chief Executive Officer, former Chairman and former controlling stockholder, entered into a Corporate Governance Agreement (the “Governance Agreement”), which provides for certain terms and conditions regarding the acquisition, disposition, holding and voting of securities of the Company by Mr. Shkreli. The Governance Agreement applies to all common stock owned by Mr. Shkreli or affiliates he controls.
Under the terms of the Governance Agreement, for 180 days following the Effective Date, Mr. Shkreli could not sell his shares of common stock at a price per share that was less than the greater of (x) $2.50 and (y) a 10% discount to the prior two week volume-weighted average price (the “Market Discount Price”). In addition, for 180 days following the 61st day after the Effective Date, the Company had a right to purchase any or all of Mr. Shkreli’s shares at a purchase price per share equal to the Market Discount Price. For a limited time, the Company also had a right of first refusal to purchase shares that Mr. Shkreli proposed to sell. Mr. Shkreli was also prohibited from transferring any shares to his affiliates or associates unless such transferee agreed to be subject to the terms of the Governance Agreement. Transfers of shares by Mr. Shkreli not made in compliance with the Governance Agreement would be null and void.
Under the terms of the Governance Agreement, Mr. Shkreli will not have any right to nominate directors to the Board of Directors of the Company and agreed in connection with any stockholder vote to vote his shares in proportion to the votes of the Company’s public stockholders. The Governance Agreement also prohibits Mr. Shkreli or his affiliates for a period of 24 months after the date of the Governance Agreement, from, among other things:
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purchasing any stock or assets of the Company;
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·
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participating in any proposal for any merger, tender offer or other business combination, or similar extraordinary transaction involving the Company or any of its subsidiaries;
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·
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seeking to control or influence the management, the Company’s Board or the policies of the Company; or
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·
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submitting any proposal to be considered by the stockholders of the Company.
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In addition, any material transaction between Mr. Shkreli or his associates and the Company, or relating to the Governance Agreement, cannot be taken without the prior approval of the Company’s Board.
The Governance Agreement provides for a mutual release between the Company and Mr. Shkreli of all claims and liabilities existing as of the date of execution.
On August 25 and August 26, 2016, Mr. Shkreli sold all of his shares of the Company to third party investors in private transactions.
Board Changes
On the Effective Date, in accordance with the Plan, Cameron Durrant, current Chief Executive Officer of the Company, as joint designee of BHCMF, BHC and Cheval (the "Black Horse Entities") and Nomis, continued as a director, Ronald Barliant, current member of the Board, continued as a director as the designee of the Black Horse Entities, Dale Chappell became a director as a designee of Nomis, and Timothy Morris and Ezra Friedberg became directors as joint designees of the Black Horse Entities and Nomis.
Financial Reporting in Reorganization
The Company applied Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852,
Reorganizations
, which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. It requires that the financial statements for periods subsequent to the Chapter 11 filing distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be subject to a plan of reorganization must be reported at the amounts expected to be allowed in the Company’s Chapter 11 case, even if they may be settled for lesser amounts as a result of the plan of reorganization or negotiations with creditors.
As of December 31, 2015, the Company had approximately $5.4 million recorded as Liabilities subject to compromise. In conjunction with the Company’s exit from bankruptcy, the Company reclassified remaining Liabilities subject to compromise totaling approximately $2.8 million, $0.8 million and $1.2 million to Accounts payable, Accrued expenses and Notes payable to vendors, respectively. For year ended December 31, 2016, the Company paid approximately $3.4 million related to Liabilities subject to compromise, issued $1.2 million in promissory notes to vendors and wrote off approximately $0.3 million in deferred rent liabilities related to its lease termination and reversed approximately $0.1 million in accrued expenses related to a claim that has been denied by the court, which as discussed above, were previously included in Liabilities subject to compromise. As of December 31, 2016, approximately $0.4 million and $1.2 million remain in Accounts payable and Notes payable to vendors, respectively. Remaining amounts will be paid based on terms of the Plan.
For the year ended December 31, 2016, Reorganization items, net consisted of the following charges:
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|
Year ended
|
|
(in thousands)
|
|
December 31, 2016
|
|
Legal fees
|
|
$
|
4,870
|
|
Professional fees
|
|
|
1,218
|
|
Debtor-in-possession financing costs
|
|
|
1,143
|
|
Beneficial conversion on debtor-in-possession financing
|
|
|
484
|
|
Fair value of shares issued to officer and directors for service in bankruptcy
|
|
|
700
|
|
Gain on lease termination
|
|
|
(227
|
)
|
Total reorganization items, net
|
|
$
|
8,188
|
|
Cash payments for reorganization items totaled $5.0 million for the year ended December 31, 2016.
3. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments necessary for the presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared on a basis that assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The Company believes judgment is involved in determining the valuation of the financing derivative, the fair value‑based measurement of stock‑based compensation, accruals, liabilities subject to compromise and warrant valuations. The Company evaluates its estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the Consolidated Financial Statements.
Concentration of Credit Risk
Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration of credit risk in the event of a default by the related financial institution holding the securities, to the extent of the value recorded in the balance sheet. The Company invests cash that is not required for immediate operating needs primarily in highly liquid instruments with lower credit risk. The Company has established guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk.
Fair Value of Financial Instruments
Cash, accounts payable and accrued liabilities are carried at cost, which approximates fair value given their short‑term nature. Marketable securities and cash equivalents are carried at fair value.
The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company measures the fair value of financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets (marketable securities) that are measured at fair value, and the classification by level of input within the fair value hierarchy:
|
|
Fair Value Measurements as of
December 31, 2016
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101
|
|
Total assets measured at fair value
|
|
$
|
101
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
101
|
|
|
|
Fair Value Measurements as of
December 31, 2015
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196
|
|
Total assets measured at fair value
|
|
$
|
196
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
196
|
|
The estimated fair value of the December Term Loan payable and the Notes payable to vendors as of December 31, 2016, based upon current market rates for similar borrowings, as measured using Level 3 inputs, approximate the carrying amounts as presented in the Consolidated Balance Sheet. There were no notes payable as of December 31, 2015.
Cash, Cash Equivalents, and Marketable Securities
The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits with commercial banks in checking, interest‑bearing and demand money market accounts. The Company invests in marketable securities consisting primarily of certificates of deposit, money market funds, corporate securities, commercial paper, U.S. government‑backed securities and U.S. treasury notes. These securities are classified as available‑for‑sale and carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income (loss), a separate component of stockholders’ equity.
Realized gains and losses from the sale of marketable securities are calculated using the specific‑identification method. Realized gains and losses and declines in value judged to be other‑than‑temporary are included in Other expense, net in the Consolidated Statements of Operations and Comprehensive Loss. To date, the Company has not recorded any impairment charges on its marketable securities related to other‑than‑temporary declines in market value. In determining whether a decline in market value is other‑than‑temporary, various factors are considered, including whether the decline is attributed to a change in credit risk and whether it is more likely‑than‑not that the Company will hold the security for a period of time sufficient to allow for an anticipated recovery in market value. The Company recognized a net gain from the sale of marketable securities of $8,000 for the year ended December 31, 2015. The Company had no realized gains or losses from the sale of marketable securities for the year ended December 31, 2016.
Restricted Cash
Restricted cash at December 31, 2016 consisted of $101,000 related to a standby letters of credit in the amount of $50,000 issued in connection with certain insurance policy coverage maintained by the Company and restricted cash related to a credit card facility in the amount of $51,000.
Restricted cash at December 31, 2015 consisted of $193,000 related to standby letters of credit issued in connection with an operating lease for the Company’s corporate headquarters and certain insurance policy coverage maintained by the Company.
Property and Equipment, Net
Property and equipment is stated at cost, less accumulated depreciation and amortization, and depreciated over the estimated useful lives of the respective assets of three years using the straight‑line method. Leasehold improvements are amortized on a straight‑line basis over the shorter of the useful lives or the non-cancelable term of the related lease. Maintenance and repair costs are charged as expense in the Statements of Operations and Comprehensive Loss as incurred.
Long‑Lived Assets
The Company evaluates the carrying value of its long‑lived assets, including intangible assets, whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset, including disposition, are less than the carrying value of the asset. To date, the Company has not recorded any impairment charges on its long‑lived assets.
Debt Issue Costs
As of January 1, 2016, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-03 and No. 2015-15, which require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
As a result of our adoption of the guidance, as of December 31, 2016, $460,000 of deferred financing costs were reclassified to reduce the Term loan payable in the Consolidated Balance Sheet. The guidance did not have a material impact on the consolidated financial statements.
Research and Development Expenses
Development costs incurred in the research and development of new product candidates are expensed as incurred, including expenses that may or may not be reimbursed under research and development collaboration arrangements. Research and development costs include, but are not limited to, salaries, benefits, stock‑based compensation, laboratory supplies, allocated overhead, fees for professional service providers and costs associated with product development efforts, including preclinical studies and clinical trials. Research and development expenses under collaborative agreements approximate or exceed the revenue recognized under such agreements.
The Company estimates preclinical study and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.
The Company records upfront and milestone payments made to third parties under licensing arrangements as an expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.
Research and Development Services
Internal and external research and development costs incurred in connection with collaboration agreements are recognized as revenue in the same period as the costs are incurred and are presented on a gross basis when the Company acts as a principal, has the discretion to choose suppliers, bears credit risk, and performs at least part of the services.
Revenue Recognition
The Company recognizes revenue when: (i) persuasive evidence of an arrangement exists, (ii) transfer of technology has been completed, delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. Payments received in advance of work performed are recorded as deferred revenue and recognized when earned. All revenue recognized to date under the Company’s collaborative agreements has been nonrefundable.
Multiple Element Arrangements
The Company evaluates revenue from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. Management considers whether components of an arrangement represent separate units of accounting based upon whether certain criteria are met, including whether the delivered element has stand‑alone value to the customer. To date, all of the Company’s research and development collaboration and license agreements have been assessed to have one unit of accounting. Up‑front and license fees received for a combined unit of accounting are deferred and recognized ratably over the projected performance period. Nonrefundable fees where the Company has no continuing performance obligations are recognized as revenue when collection is reasonably assured and all other revenue recognition criteria have been met.
Stock‑Based Compensation Expense
The Company measures employee and director stock‑based compensation expense for stock awards at the grant date, based on the fair value‑based measurement of the award, and the expense is recorded over the related service period, generally the vesting period, net of estimated forfeitures. The Company calculates the fair value‑based measurement of stock options using the Black‑Scholes valuation model and the single‑option method and recognizes expense using the straight‑line attribution approach.
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505,
Equity
, using a fair-value approach and the provisions of ASC 815-40,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.
The equity instruments are valued using the Black-Scholes valuation model. Measurement of share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and performance conditions are satisfied. The related expense is recognized as an expense over the term services are received.
Income Taxes
The Company accounts for income taxes under an asset‑and‑liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for tax and financial reporting purposes measured by applying enacted tax rates and laws that will be in effect when the differences are expected to reverse, net operating loss carryforwards and tax credits. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for income taxes.
Comprehensive Loss
Comprehensive loss represents net loss adjusted for the change during the periods presented in unrealized gains and losses on available‑for‑sale securities less reclassification adjustments for realized gains or losses included in net loss. The unrealized gains or losses are reported on the Consolidated Statements of Operations and Comprehensive Loss.
Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted‑average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted‑average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury‑stock and if‑converted methods. For purposes of the diluted net loss per share calculation, stock options, restricted stock units and common stock warrants are considered to be potentially dilutive securities but are excluded from the calculation of diluted net loss per share because their effect would be anti‑dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.
The Company’s potential dilutive securities, which include stock options, restricted stock units and warrants have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per common share and be antidilutive. Therefore, the denominator used to calculate both basic and diluted net loss per common share is the same in all periods presented.
The following shares subject to outstanding potentially dilutive securities have been excluded from the computations of diluted net loss per common share as the effect of including such securities would be antidilutive:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common stock
|
|
|
1,835,835
|
|
|
|
465,401
|
|
Warrants to purchase common stock
|
|
|
356,193
|
|
|
|
131,193
|
|
Restricted stock units
|
|
|
-
|
|
|
|
3,750
|
|
|
|
|
2,192,028
|
|
|
|
600,344
|
|
Deferred Rent
The Company records its costs under facility operating lease agreements as rent expense. Rent expense is recognized on a straight‑line basis over the non‑cancelable term of the operating lease. The difference between the actual amounts paid and amounts recorded as rent expense is recorded to deferred rent.
Segment Reporting
The Company determines its segment reporting based upon the way the business is organized for making operating decisions and assessing performance. The Company operates in only one segment, which is related to the development of pharmaceutical products.
Recent Accounting Pronouncements
The Company qualifies as an “emerging growth company” (“EGC”) pursuant to the provisions of the JOBS Act and has elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act which permits EGCs to defer compliance with new or revised accounting standards (the “EGC extension”) until non-issuers are required to comply with such standards. Accordingly, so long as the Company continues to qualify as an EGC, the Company will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.
In May 2014, the FASB issued ASU
2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2017.
EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2018.
Early application is not permitted and entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company's Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which defines management’s responsibility to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about the company’s ability to continue as a going concern within one year after the issuance date. Disclosures are required if conditions give rise to substantial doubt. This standard is effective for all companies in the first annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company adopted this standard at December 31, 2016 and the adoption had no impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires lessees to recognize on the balance sheet a right-of use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply.
EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early application is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued Accounting Standards Update 2016-09,
Stock Compensation – Improvements to
Employee Share-Based Payment Accounting
. This new accounting standard simplifies accounting for share-based payment transactions, including income tax consequences and the classification of the tax impact on the statement of cash flows. EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2017. Early application is permitted. We are assessing the potential impact to our financial statements and disclosures.
4. Investments
At December 31, 2016, the amortized cost and fair value of investments, with gross unrealized gains and losses, were as follows:
|
|
Amortized
|
|
|
Gross
Unrealized
|
|
|
Gross
Unrealized
|
|
|
|
|
(in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Money market funds
|
|
$
|
101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101
|
|
Total investments
|
|
$
|
101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101
|
|
At December 31, 2015, the amortized cost and fair value of investments, with gross unrealized gains and losses, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
(in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Money market funds
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196
|
|
Total investments
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3
|
|
Restricted cash, long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
196
|
|
5. Property and Equipment
Property and equipment consists of the following:
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Computer equipment and software
|
|
$
|
216
|
|
|
$
|
330
|
|
Leasehold improvements, furniture and fixtures
|
|
|
—
|
|
|
|
189
|
|
|
|
|
216
|
|
|
|
519
|
|
Accumulated depreciation and amortization
|
|
|
(148
|
)
|
|
|
(231
|
)
|
Property and equipment, net
|
|
$
|
68
|
|
|
$
|
288
|
|
Depreciation and amortization expense for the years ended December 31, 2016 and December 31, 2015 was $102,000 and $197,000, respectively.
6. Savant Arrangements
On February 29, 2016, the Company entered into a binding letter of intent (the “LOI”) with Savant
Neglected Diseases, LLC (“Savant”). The LOI provided that the Company would acquire certain worldwide rights relating to benznidazole (the “Compound”) from Savant
. Under the LOI, the Company made a non-refundable deposit to Savant of $500,000, which was credited towards the Initial Payment (as defined below), and agreed to make monthly payments to Savant equal to $87,500 for development services performed by Savant relating to the
Compound
.
The LOI provided that in consideration for the assets to be acquired, the Company would provide consideration to Savant, including:
|
·
|
$3,000,000 (the “Initial Payment”) payable as soon as practicable but in no event later than the Company emerging from its Chapter 11 bankruptcy pursuant to a plan of reorganization (the “Bankruptcy Exit”);
|
|
·
|
a five-year warrant from the date of the Bankruptcy Exit to purchase up to 200,000 shares of common stock at a per share price of $2.25, exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain milestones related to regulatory approval of the
Compound
; and
|
|
·
|
certain additional payments to be further specified in the definitive agreements.
|
On the Effective Date, as authorized by the Plan and the Confirmation Order, the Company and Savant entered into an Agreement for the Manufacture, Development and Commercialization of Benznidazole for Human Use (the “MDC Agreement”), pursuant to which the Company acquired certain worldwide rights relating to the Compound. The MDC Agreement consummates the transactions contemplated by the LOI.
Under the terms of the MDC Agreement, the Company acquired certain regulatory and non-intellectual property assets relating to the Compound and any product containing the Compound and an exclusive license of certain intellectual property assets related to the Compound. Savant will retain the right to use the licensed intellectual property for veterinary uses. The MDC Agreement provides that the Company and Savant will jointly conduct research and development activities with respect to the
Compound
, while the Company will be solely responsible for commercializing the
Compound
. The Company will fund the development program for the
Compound
and will reimburse Savant for its development program costs.
As required by the MDC Agreement, on the Effective Date, the Company made payments to Savant totaling $2,687,500, consisting of the remaining portion of the Initial Payment less the deposit in the amount of $2,500,000, an initial monthly Joint Development Program Cost payment of $87,500, and reimbursement of Savant’s legal fees capped at $100,000. The MDC Agreement provides for milestone payments, including payments related to U.S. and foreign regulatory submissions of up to $21 million and certain other contingent payments. Additionally, the Company will pay Savant royalties on any net sales of the
Compound
, which royalty would increase if a PRV is granted subsequent to regulatory approval of the
Compound
. The MDC Agreement also provides that Savant is entitled to a portion of the amount the Company receives upon the sale, if any, of a PRV relating to the
Compound
.
In addition, on the Effective Date the Company and Savant also entered into a Security Agreement (the “Security Agreement”), pursuant to which the Company granted Savant a continuing senior security interest in the assets and rights acquired by the Company pursuant to the MDC Agreement and certain future assets developed from those acquired assets.
On the Effective Date, the Company issued to Savant a five year warrant (the “Warrant”) to purchase 200,000 shares of the Company’s Common Stock, at an exercise price of $2.25 per share, subject to adjustment. The Warrant is exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain regulatory related milestones. In addition, pursuant to the MDC Agreement, the Company has granted Savant certain “piggyback” registration rights for the shares issuable under the Warrant.
The Company determined the fair value of the Warrant to be approximately $670,000 and recorded expense of approximately $244,000 during the three months ended June 30, 2016, which is included in Research and development expenses in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.
The Company reevaluated the performance conditions and expected vesting of the Warrant as of September 30 and December 31, 2016 and recorded total expense of approximately $361,000 during the year ended December 31, 2016, which is included in Research and development expenses in the accompanying Consolidated Statement of Operations and Comprehensive Loss. The Company will continue to reevaluate the performance conditions and expected vesting of the Warrant on a quarterly basis until all performance conditions have been met.
Before a compound receives regulatory approval, the Company records upfront and milestone payments made to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.
The Company has determined that the acquisition of the Compound should be treated as a purchase of in-process research and development. Accordingly, during the nine months ended September 30, 2016, the Company recorded $3,250,000, which includes an additional $250,000 payment made in 2015 to Savant, as Research and development expense in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss. In addition, during the year ended December 31, 2016, the Company recorded $262,500 in connection with the Joint Development Program and recorded $100,000 in legal fee reimbursement as Research and development expense in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.
7. Notes Payable
Loan and Security Agreement
In September 2012, the Company entered into the Loan and Security Agreement with MidCap Financial, which provided for the borrowing of up to $15 million. The Loan and Security Agreement originally provided for the loan to be issued in three tranches: the first tranche of $5 million was issued in September 2012; the second tranche of $5 million was issued in December 2012; and, prior to the First Amendment described below, the final tranche of $5 million was available to be drawn at the option of the Company by no later than June 2013. The loan had a monthly variable interest rate, reset each month, if applicable, as determined by adding to 600 basis points the greater of: (a) one month LIBOR or (b) 3%. Interest on amounts outstanding were payable monthly in arrears. An interest only period to December 31, 2013 was followed by straight‑line principal payments over thirty‑six months until December 31, 2016. Under the terms of the Loan and Security Agreement, at the time of final payment, the Company was required to pay an exit fee of 3% of the drawn amount. If the Company chose to prepay the loan, or if the loan was determined to be in default and early repayment was required, the Company would also have had to pay a fee ranging from 1% to 2% of the outstanding loan balance at the date of default. Pursuant to the Loan and Security Agreement, the Company also provided a first priority security interest in all existing and after‑acquired assets, excluding intellectual property.
In June 2013, the Company entered into an amendment to the Loan and Security Agreement (“the First Amendment”) to extend the draw down date for the final tranche of $5.0 million from June 2013 to May 2014, and to require the Company to draw that amount, which it did in May 2014. In connection with the First Amendment, the Company issued a warrant to purchase up to 6,193 shares of the Company’s common stock with an exercise price of $96.88 per share. The warrant expires on the tenth anniversary of its issuance date and had an initial fair value of $130,000, which represents financing fees, was included in Other assets and was being amortized as non‑cash Interest expense over the remaining term of the Loan and Security Agreement using the effective interest method. The Company estimated the fair value of this warrant using the Black‑Scholes option‑pricing model, based on the inputs for the estimated fair value of the underlying common stock at the valuation measurement date, the contractual term of the warrant, risk‑free interest rates, expected dividend rates and expected volatility of the price of the underlying common stock.
The Company recorded interest expense related to the borrowings of $842,000 for the year ended December 31, 2015. Included in Interest expense for this period was interest on principal, amortization of the debt issuance costs, accretion of debt discount, and the accretion of the final exit fee. For the year ended December 31, 2015, the effective interest rate on the amounts borrowed under the Loan and Security Agreement, including the accretion of the debt discount and the accretion of the final payment, was 10%.
In August 2015, the Company entered into Amendment No. 2 to the Loan and Security Agreement, whereby the Company agreed to maintain, in a separate account with a financial institution (held in the Company’s name), an amount equal to the aggregate of the remaining future principal, interest and exit fee due under the Loan and Security Agreement, equating to $8.3 million as of the date of Amendment No. 2. Under the terms of the Loan and Security Agreement, as amended, MidCap Financial was permitted to draw payments from this account as they become due, and upon such draws, there would be a corresponding reduction in the amount owed to MidCap Financial by the Company. MidCap Financial had exclusive control to withdraw funds from that account at any time. The account was to be maintained either until the debt has been repaid in full, or until MidCap Financial determined that the Company satisfied certain capital requirements related to the Company’s future operating plans.
In November 2015, the Company elected to exercise its prepayment right to repay the loan in full and paid MidCap Financial $6.6 million in full settlement of the remaining outstanding principal balance, accrued interest, the exit fee and a reduced prepayment fee of 1%. The prepayment resulted in a gain on extinguishment of debt of $61,000 in the fourth quarter of 2015, which is included in Other expense, net in the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Notes Payable to Vendors
On June 30, 2016, the Company issued promissory notes in an aggregate principal amount of approximately $1,212,000 to certain claimants in accordance with the Plan. The notes are unsecured, bear interest at 10% per annum and are due and payable in full, including principal and accrued interest on June 30, 2019. As of December 31, 2016, the Company has accrued $61,000 in interest related to these promissory notes.
December Term Loan
On December 21, 2016, the Company entered into a Credit and Security Agreement (the “December Term Loan”) with Black Horse Capital Master Fund Ltd., as administrative agent and lender (“BHCMF” or “Agent”), Black Horse Capital LP, as a lender (“BHC”), Cheval Holdings, Ltd., as a lender (“Cheval”) and Nomis Bay LTD, as a lender (“Nomis” and, together with BHCMF, BHC and Cheval, the “Lenders”). The December Term Loan provides for a credit facility in the original principal amount of $3,315,000, provides an original discount equal to $265,000 (the “Upfront Fee”) and requires the payment by the Company to the Lenders of a commitment fee equal to $153,000 (the “Commitment Fee”). In accordance with the terms of the December Term Loan, the Company will use the proceeds for general working capital, the payment of certain fees and expenses owed to the Agent and the Lenders and other costs incurred in the ordinary course of business.
The December Term Loan bears interest at 9.00% and is subject to certain customary representations, warranties and covenants.
The outstanding principal balance of the December Term Loan, plus accrued interest and fees, are due on the earlier of acceleration after an event of default under the agreement, or October 31, 2017. However, to the extent the Company raises capital through any SEC-registered stock offering, 50% of such offering’s proceeds (net of costs) must be used to pay down the December Term Loan.
Upon the occurrence of any event of default set forth in the agreement, the Agent has the option of terminating the agreement and declaring all of the Company’s obligations immediately payable. The occurrence of an event of default will cause the December Term Loan to bear interest at a rate per annum equal to 14.00%.
The Company’s obligations under the December Term Loan are secured by a first priority interest in all of the Company’s real and personal property, subject only to certain carve outs and permitted liens, as set forth in the agreement.
The Company recorded the original principal amount of the loan reduced by the Upfront Fee and costs incurred in putting the loan in place for a net principal amount of $2,993,000. As of December 31, 2016 the Company has accrued interest expense of $23,000 in the
accompanying Consolidated Statements of Operations and Comprehensive Loss
, consisting of $8,000 interest and loan cost accretion of $15,000 and has recorded such against the principal balance resulting in a loan balance of $3,016,000 in the accompanying Consolidated Balance Sheets.
8. Warrants to Purchase Common Stock
On December 4, 2015, the Company issued a warrant to purchase up to an aggregate of 125,000 shares of common stock at an exercise price of $29.32 per share. The warrant expires on the fifth anniversary of its issuance and had an initial fair value of $2,507,000 which is included in General and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2015. The warrant provides that if the Company declares a dividend, or makes any other distribution of its assets, to holders of common stock, then the warrant holder shall be entitled to participate in such dividend or distribution to the same extent that the holder would have participated had it held the number of shares of common stock acquirable upon complete exercise of the warrant.
The Company estimated the fair value of this warrant using the Black‑Scholes option‑pricing model, based on the inputs for the estimated fair value of the underlying common stock at the valuation measurement date, the contractual term of the warrant, risk‑free interest rates, expected dividend rates and expected volatility of the price of the underlying common stock.
The warrant was issued in connection with a November 18, 2015 financing the Company elected not to pursue.
On October 31, 2015, warrants issued in 2005 to purchase an aggregate of 4,874 shares of common stock at $41.04 per share expired.
On June 30, 2016, in connection with the benznidazole acquisition the Company issued to Savant a five year warrant (the “Savant Warrant”) to purchase 200,000 shares of the Company’s Common Stock, at an exercise price of $2.25 per share, subject to adjustment. The Savant Warrant is exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain regulatory related milestones. In addition, pursuant to the MDC Agreement, the Company has granted Savant certain “piggyback” registration rights for the shares issuable under the Warrant.
The Company determined the initial fair value of the Savant Warrant to be approximately $670,000 as of June 30, 2016. The Company reevaluated the performance conditions and expected vesting of the Savant Warrant as of September 30 and December 31, 2016 and recorded total expense of approximately $361,000 during the year ended December 31, 2016, which is included in Research and development expenses in the accompanying Consolidated Statement of Operations and Comprehensive Loss.
The Company will continue to reevaluate the performance conditions and expected vesting of the Savant Warrant on a quarterly basis until all performance conditions have been met.
On December 1, 2016
the Company issued a warrant to purchase up to an aggregate of 25,000 shares of common stock at an exercise price of $4.00 per share. The warrant expires on the one year anniversary of its issuance and had a fair value of approximately $40,000 which is included in General and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss. The warrant provides that if the Company declares a dividend, or makes any other distribution of its assets, to holders of common stock, then the warrant holder shall be entitled to participate in such dividend or distribution to the same extent that the holder would have participated had it held the number of shares of common stock acquirable upon complete exercise of the warrant. The warrant was issued in connection with the engagement agreement related to certain investor relations activities.
9. Commitments and Contingencies
Operating Leases
In December 2013, the Company entered into a lease agreement for a facility in South San Francisco, California. The lease commenced in July 2014 and was set to expire in 2019. Per the terms of the lease agreement, the Company had the option to terminate the lease after 36 months, subject to additional fees and expenses. Deferred rent applicable to this lease totaled $311,000 at December 31, 2015 which is included in Liabilities subject to compromise in the accompanying Consolidated Balance Sheet. In March 2016, the Company entered into a termination agreement (the “Lease Termination Agreement”) related to the lease of this facility. The Lease Termination Agreement, approved by order of the Bankruptcy Court issued March 15, 2016, waived all damages related to early termination of the lease, relieved the Company of March rental expenses and set an effective termination date of March 31, 2016.
Concurrent with the termination of this lease, the Company entered into a lease agreement for a new facility in Brisbane, California. The new lease commenced in April 2016 and was to expire on March 31, 2017. On February 16, 2017, the Company amended the lease to extend the term of the lease for an additional period of eighteen months such that the lease will expire on September 30, 2018.
As of December 31, 2016, future minimum lease payments due under the Company’s lease, including the lease amendment executed on February 16, 2017, are as follows:
|
|
|
|
(in thousands)
|
|
|
|
2017
|
|
$
|
240
|
|
2018
|
|
|
202
|
|
Total
|
|
$
|
442
|
|
Rent expense was $0.3 million and $0.7 million for the years ended December 31, 2016 and 2015, respectively.
Indemnification
The Company has certain agreements with service providers with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third‑party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. As the Company has not incurred any indemnification losses to date, there were no accruals for or expenses related to indemnification issues for any period presented.
10. Stockholders’ Equity
Bankruptcy Related Common Stock Issuances
As more fully described in Note 2, on June 30, 2016, pursuant to the SPA and in repayment of its obligations under the Credit Agreement, the Company issued an aggregate of 9,497,515 shares of its common stock to the DIP Lenders.
As more fully described in Note 2, on June 30, 2016, the Company issued 327,608 shares of common stock to the plaintiffs in litigation related to the Company’s 2015 private financing transaction in accordance with the settlement stipulation. The Company recorded an obligation to issue the related shares in stockholders’ equity and recorded the related expense of approximately $1.5 million in the attached Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2015.
As more fully described in Note 2, on June 30, 2016, the Company issued 3,750 shares of common stock to a former director in satisfaction of claims against the Company. The Company recorded an obligation to issue the related shares in stockholders’ equity and recorded the related expense of approximately $16,000 in the attached Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2015.
As more fully described in Note 2, on June 30, 2016, the Company issued 300,000 shares of common stock for issuance to the plaintiffs in a class action litigation related to the events surrounding the Company’s former Chairman and Chief Executive Officer. The Company recorded an obligation to issue the related shares in stockholders’ equity and recorded the related expense of approximately $1.3 million in the attached Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2015.
Common Stock
In June 2014, the Company amended and restated its certificate of incorporation to increase the authorized common stock to 85,000,000 shares.
On July 13, 2015, the Company effected a one-for-eight reverse stock split of its outstanding common stock pursuant to an amendment to the Company’s certificate of incorporation. As a result of the reverse stock split, each eight shares of the Company’s common stock were combined into one share of common stock. The reverse stock split was effective with respect to stockholders of record at the close of business on July 13, 2015, and trading of the Company’s common stock on the Nasdaq Global Market began on a split-adjusted basis on July 14, 2015. Holders of common stock who would have otherwise received fractional shares of the Company’s common stock pursuant to the reverse stock split received cash in lieu of the fractional share. The reverse stock split reduced the total number of shares of the Company’s common stock outstanding from approximately 33.0 million shares to approximately 4.1 million shares. In addition, the number of shares of common stock subject to outstanding options, restricted stock units and warrants issued by the Company and the number of shares reserved for future issuance under the Company’s stock plans were reduced by a factor of eight to proportionately reflect the reverse stock split, and per share exercise prices were increased by a factor of eight. The reverse stock split was accounted for retroactively and is reflected in the Company’s common stock, warrant, stock option and restricted stock activity as of and for the years ended December 31, 2016 and 2015. Unless stated otherwise, all share data in the financial statements and accompanying notes have been adjusted, as appropriate, to reflect the reverse stock split.
On December 3, 2015, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investors (the “Purchasers”) relating to a private placement of up to an aggregate 511,596 shares of common stock at a purchase price of $29.32 per share, or up to $15 million (the “Private Placement”).
On December 15, 2015 the Securities Purchase Agreement was amended resetting the share price for all Purchasers other than those Purchasers who were directors, officers, employees or consultants of the Company to $24.86. Upon closing of the Private Placement, the Company issued to the Purchasers 326,698 shares of common stock for an aggregate of $8.2 million.
On November 7, 2016, the Company issued 25,000 shares of restricted common stock to an investor relations consultant. The fair value of the shares issued based on the closing price on November 7, 2016 was $77,500 and was recorded as stock based compensation in the attached Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2016.
On November 15, 2016, the Company issued 40,000 shares of restricted common stock to a financial advisor in return for services. The fair value of the shares issued based on the closing price on November 15, 2016 was $120,000 and was recorded as stock based compensation in the attached Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2016.
The Company had reserved the following shares of common stock for issuance as of December 31, 2016:
Warrants to purchase common stock
|
|
|
356,193
|
|
Options:
|
|
|
|
|
Outstanding under the 2012 Equity Incentive Plan
|
|
|
1,826,548
|
|
Outstanding under the 2001 Equity Incentive Plan
|
|
|
9,287
|
|
Available for future grants under the 2012 Equity Incentive Plan
|
|
|
1,980,201
|
|
Total common stock reserved for future issuance
|
|
|
4,172,229
|
|
2012 Equity Incentive Plan
Under the Company’s 2012 Equity Incentive Plan, the Company may grant shares, stock units, stock appreciation rights, performance cash awards and/or options to employees, directors, consultants, and other service providers. For options, the per share exercise price may not be less than the fair market value of a Company common share on the date of grant. Awards generally vest and become exercisable over three to four years and expire 10 years from the date of grant. Options generally become exercisable as they vest following the date of grant.
In general, to the extent that awards under the 2012 Plan are forfeited or lapse without the issuance of shares, those shares will again become available for awards.
The 2012 Plan will continue in effect for 10 years from its adoption date, unless the Company’s board of directors decides to terminate the plan earlier.
On September 13, 2016, the Board of Directors of the Company approved an amendment to the Company’s 2012 Equity Incentive Plan to increase the number of shares of the Company’s common stock available for issuance under the Plan by 3,000,000 shares and to increase the annual maximum aggregate number of shares subject to stock option awards that may be granted to any one person under the Plan from 125,000 to 1,100,000.
As of December 31, 2016, there were 1,980,201 shares available for grant under the 2012 Equity Incentive Plan.
2001 Equity Incentive Plan
Under the Company’s 2001 Stock Plan (the “2001 Plan”), the Company was able to grant shares and/or options to purchase up to 426,030 shares of common stock to employees, directors, consultants, and other service providers. In connection with the 2012 Plan taking effect, the 2001 Plan was terminated in August 2012. However, the awards under the 2001 Plan outstanding as of the termination of the 2001 Plan continued to be governed by their existing terms. As of December 31, 2015, there were no shares available for grant under the 2001 Plan.
2012 Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “ESPP”) provided eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions, based on a six-month look-back period, at a price equal to the lesser of 85% of the fair market value of the ordinary shares at either the beginning of the offering period, or the fair market value on the purchase date. The ESPP was structured as a qualified employee stock purchase plan under Section 423 stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and was not subject to the provisions of the Employee Retirement Income Security Act of 1974. There were 21,058 shares initially authorized for issuance under the plan, and the first offering period commenced on June 1, 2014 and ended on October 31, 2014. The second offering period commenced on November 1, 2014 and ended on April 30, 2015. Offerings subsequent to the second offering commence on May 1 and November 1 and end on April 30 and October 31 each year. On May 3, 2016, the ESPP was terminated.
Stock Option Activity
The following table summarizes stock option activity for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price
|
|
|
Term
|
|
|
Intrinsic Value
|
|
|
|
Shares
|
|
|
(Per Share)(1)
|
|
|
(in years)
|
|
|
(in thousands)(2)
|
|
Balances at December 31, 2014
|
|
|
334,686
|
|
|
$
|
34.00
|
|
|
|
|
|
|
|
Options granted
|
|
|
321,020
|
|
|
|
3.46
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(176,764
|
)
|
|
|
17.58
|
|
|
|
|
|
|
|
Options expired
|
|
|
(13,541
|
)
|
|
|
24.32
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Balances at December 31, 2015
|
|
|
465,401
|
|
|
$
|
19.29
|
|
|
|
|
|
|
|
Options granted
|
|
|
1,778,022
|
|
|
|
3.38
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(3,416
|
)
|
|
|
5.86
|
|
|
|
|
|
|
|
Options expired
|
|
|
(398,547
|
)
|
|
|
18.38
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(5,625
|
)
|
|
|
1.77
|
|
|
|
|
|
|
|
Balances at December 31, 2016
|
|
|
1,835,835
|
|
|
$
|
4.15
|
|
|
|
9.50
|
|
|
$
|
947,896
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest
|
|
|
1,829,593
|
|
|
$
|
4.15
|
|
|
|
9.50
|
|
|
$
|
944,673
|
|
Exercisable
|
|
|
287,041
|
|
|
$
|
8.35
|
|
|
|
8.46
|
|
|
$
|
133,792
|
|
(1)
|
The weighted average price per share is determined using exercise price per share for stock options.
|
(2)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the option and the fair value of the Company’s common stock for in‑the‑money options at December 31, 2016.
|
The stock options outstanding and exercisable by exercise price at December 31, 2016 are as follows:
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Contractual
Life
|
|
Exercise
Price
|
|
|
Number of
|
|
Exercise
Price
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
In Years
|
|
Per Share
|
|
|
Shares
|
|
Per Share
|
|
$1.91 - $1.91
|
|
|
8,500
|
|
|
|
8.76
|
|
|
$
|
1.91
|
|
|
|
2,479
|
|
|
$
|
1.91
|
|
$2.11 - $3.30
|
|
|
51,800
|
|
|
|
9.74
|
|
|
|
3.26
|
|
|
|
50,562
|
|
|
|
3.29
|
|
$3.38 - $3.38
|
|
|
1,678,022
|
|
|
|
9.71
|
|
|
|
3.38
|
|
|
|
139,831
|
|
|
|
3.38
|
|
$3.40 - $4.72
|
|
|
55,712
|
|
|
|
9.63
|
|
|
|
3.52
|
|
|
|
52,430
|
|
|
|
3.45
|
|
$8.24 - $17.36
|
|
|
9,200
|
|
|
|
1.13
|
|
|
|
9.78
|
|
|
|
9,200
|
|
|
|
9.78
|
|
$42.88 - $48.00
|
|
|
32,601
|
|
|
|
1.08
|
|
|
|
45.52
|
|
|
|
32,539
|
|
|
|
45.52
|
|
|
|
|
1,835,835
|
|
|
|
9.50
|
|
|
$
|
4.15
|
|
|
|
287,041
|
|
|
$
|
$8.35
|
|
The total fair value of options vested for the years ended December 31, 2016 and 2015 was $0.8 million and $2.9 million, respectively.
Stock Option Modifications
During the year ended December 31, 2015, the Company’s Board of Directors approved modifications to certain stock options in connection with the Company’s restructuring activities. The modifications included both the acceleration of the vesting of options in connection with terminations of certain employees, as well as the extension of the exercise period post termination from the standard 90 day period to one year. The Company accounted for the option modification under ASC Topic 718,
Compensation – Stock Compensation
, and as a result, recognized $959,000 in incremental compensation expense during the year ended December 31, 2015.
In addition, the vesting on certain options was accelerated upon termination based upon terms of the employment agreements with certain individuals.
Stock‑Based Compensation
The Company’s stock‑based compensation expense for stock options is estimated at the grant date based on the award’s fair value as calculated by the Black‑Scholes option pricing model and is recognized as expense over the requisite service period. The Black‑Scholes option pricing model requires various highly judgmental assumptions including expected volatility and expected term. The expected volatility is based on the historical stock volatilities of several of the Company’s publicly listed peers over a period equal to the expected terms of the options as the Company does not have a sufficient trading history to use the volatility of its own common stock. To estimate the expected term, the Company has opted to use the simplified method, which is the use of the midpoint of the vesting term and the contractual term. If any of the assumptions used in the Black‑Scholes option pricing model changes significantly, stock‑based compensation expense may differ materially in the future from that recorded in the current period. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience and its expectations regarding future pre‑vesting termination behavior of employees. The Company reviews its estimate of the expected forfeiture rate annually, and stock‑based compensation expense is adjusted accordingly.
The weighted‑average fair value‑based measurement of stock options granted under the Company’s stock plans in the years ended December 31, 2016 and 2015 was $2.41 and $2.15 per share, respectively. The fair value‑ based measurement of stock options granted under the Company’s stock plans was estimated at the date of grant using the Black‑Scholes model with the following assumptions:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
2015
|
Expected term
|
|
5-6 years
|
|
5-6 years
|
Expected volatility
|
|
|
85 - 90%
|
|
|
|
67 - 78%
|
|
Risk-free interest rate
|
|
|
1.3 - 1.4%
|
|
|
|
1.5 - 1.8%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Total stock‑based compensation expense recognized was as follows:
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
General and administrative
|
|
$
|
547
|
|
|
$
|
1,134
|
|
Research and development
|
|
|
297
|
|
|
|
837
|
|
|
|
$
|
844
|
|
|
$
|
1,971
|
|
At December 31, 2016, the Company had $3.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted‑average period of 2.5 years.
11. Restructuring Charges
Restructuring charges incurred during the nine months ended September 30, 2015 primarily consist of severance and other post-termination benefit costs resulting from the cost reduction program implemented by the Company in January 2015. These activities primarily consisted of 20% reduction of the Company’s workforce. Restructuring charges incurred during the three months ended December 31, 2015 primarily relates to a board-approved restructuring plan announced in November 2015 to reduce costs and extend the cash runway in order to allow the Company to evaluate strategic alternatives for the products and the Company. As part of the restructuring plan, the Company elected to exercise its right to prepay the Loan and Security Agreement and paid MidCap Financial $6.6 million in full settlement of the remaining outstanding principal balance, accrued interest, the exit fee and a reduced prepayment fee of 1%. In addition, the Company undertook a reduction in force that eliminated the positions of 17 employees or more than 60% of the Company’s workforce.
Per ASC 420-10-05-1, Exit or Disposal Cost Obligations, include, but are not limited to, involuntary termination benefits provided to employees under the terms of a one-time benefit arrangement that, in substance, is not an ongoing benefit arrangement or a deferred compensation contract, and certain contract termination costs. Restructuring costs are expensed during the period in which the Company determines it will incur those costs and all requirements of accrual are met.
A summary of the activity is presented below:
(in thousands)
|
|
Contract
termination
costs - R&D
|
|
|
Salaries and
benefits - R&D
|
|
|
Salaries and
benefits - G&A
|
|
|
Total
|
|
Balance as of December 31, 2014
|
|
$
|
1,185
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,185
|
|
Accrued
|
|
|
-
|
|
|
|
1,167
|
|
|
|
1,011
|
|
|
|
2,178
|
|
Adjustments
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(78
|
)
|
Paid
|
|
|
(1,107
|
)
|
|
|
(1,167
|
)
|
|
|
(1,000
|
)
|
|
|
(3,274
|
)
|
Balance as of December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11
|
|
|
$
|
11
|
|
Accrued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As disclosed in Note 10, in addition to the restructuring charges in the table above, the Company recorded stock based compensation expense
of $959,000
during the twelve months ended December 31, 2015
related to the fair value of stock options of former employees which were modified such that they did not expire upon termination. The Company classified $542,000 and $417,000 as general and administrative expenses and research and development expenses, respectively.
12. Income Taxes
No provision for federal income taxes has been recorded for the years ended December 31, 2016 and 2015 due to net losses and the valuation allowance established.
Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryovers and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
57,903
|
|
|
$
|
49,145
|
|
Research & other credits
|
|
|
2,121
|
|
|
|
1,978
|
|
Stock based compensation
|
|
|
2,164
|
|
|
|
1,047
|
|
In-Process R&D
|
|
|
1,246
|
|
|
|
—
|
|
Accrued bankruptcy settlement
|
|
|
—
|
|
|
|
1,328
|
|
Other
|
|
|
761
|
|
|
|
222
|
|
Total deferred tax assets
|
|
|
64,195
|
|
|
|
53,720
|
|
Valuation allowance
|
|
|
(64,195
|
)
|
|
|
(53,720
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 2016 and 2015 is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Valuation allowance
|
|
|
(34.8
|
)
|
|
|
(31.1
|
)
|
Nondeductible stock compensation
|
|
|
(0.1
|
)
|
|
|
(2.9
|
)
|
Other
|
|
|
0.9
|
|
|
|
-
|
|
Effective tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $10.5 million during 2016 and increased by $12.3 million during 2015.
At December 31, 2016, the Company had federal net operating loss carryforwards of approximately $146.8 million, which expire in the years 2021 through 2036, and state net operating loss carryforwards of approximately $137.0 million, which expire in the years 2017 through 2036.
At December 31, 2016, the Company had federal research and development credit carryforwards of approximately $1.5 million, which expire in the years 2022 through 2036 and state research and development credit carryforwards of approximately $2.3 million. The state research and development credit carryforwards can be carried forward indefinitely.
During 2013, the Company completed a Section 382 study in accordance with the Internal Revenue Code of 1986, as amended, and similar state provisions. The study concluded that the Company has experienced several ownership changes since inception. This causes the Company's utilization of its net operating loss and tax credit carryforwards to be subject to substantial annual limitations. These results are reflected in the above carryforward amounts and deferred tax assets. The Company's ability to utilize its net operating loss and tax credit carryforwards may be further limited as a result of subsequent ownership changes. All such limitations could result in the expiration of carryforwards before they are utilized. An ownership change may have occurred during 2015 and 2016. As a result, tax attributes such as net operating losses and research and development credits may be subject to further limitation.
The Company adopted FASB Interpretation ASC 740, Income Taxes (previously Accounting for Uncertainties in Income Taxes - an interpretation of FASB Statement No. 48 ("FIN 48") effective January 1, 2009. FASB ASC 740 requires that the Company recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at December 31, 2014
|
|
$
|
856
|
|
Additions based on tax positions related to prior year
|
|
|
-
|
|
Additions based on tax positions related to current year
|
|
|
212
|
|
Balance at December 31, 2015
|
|
|
1,068
|
|
Reduction based on tax positions related to prior year
|
|
|
(9
|
)
|
Additions based on tax positions related to current year
|
|
|
68
|
|
Balance at December 31, 2016
|
|
$
|
1,127
|
|
There were no interest or penalties related to unrecognized tax benefits. Substantially all of the unrecognized tax benefit, if recognized to offset future taxable income would affect the Company’s tax rate. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Because of net operating loss carryforwards, substantially all of the Company’s tax years remain open to federal tax and state tax examination.
The Company files income tax returns in the U.S. federal jurisdiction and California. Federal and California corporation income tax returns beginning with the 2001 tax year remain subject to examination by the Internal Revenue Service and the California Franchise Tax Board, respectively.
13. Employee Benefit Plan
The Company has established a 401(k) tax‑deferred savings plan (the “401(k) Plan”), which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. The Company is responsible for administrative costs of the 401(k) Plan. The Company may, at its discretion, make matching contributions to the 401(k) Plan. No employer contributions have been made to date.
14. Litigation
Bankruptcy Proceeding
The Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code on December 29, 2015. See Note 2 for additional information related to the bankruptcy.
Securities Class Action Litigation
On December 18, 2015, a putative class action lawsuit (captioned
Li v. KaloBios Pharmaceuticals, Inc. et al.
, 5:15-cv-05841-EJD)
was filed against the Company in the
United States District Court for the Northern District of California (the “Class Action Court”), alleging violations of the federal securities laws by the Company, Herb Cross and Martin Shkreli, the Company’s former Chairman and Chief Executive Officer. On December 23, 2015, a putative class action lawsuit was filed against the Company in the Class Action Court (captioned
Sciabacucchi v. KaloBios Pharmaceuticals, Inc. et al.
, 3:15-cv-05992-CRB), similarly alleging violations of the federal securities laws by the Company and Mr. Shkreli. On December 31, 2015, a putative class action lawsuit was filed against the Company in the Class Action Court (captioned
Isensee v. KaloBios Pharmaceuticals, Inc. et al.
, Case No. 15-cv-06331-EJD) also alleging violation of the federal securities laws by the Company, a former officer and Mr. Shkreli. On April 18, 2016, and amended complaint was filed in the
Isensee
suit, adding Herb Cross and Ronald Martell as defendants. On April 28, 2016, the Class Action Court consolidated these cases (the “Securities Class Action Litigation”) and appointed certain plaintiffs as the lead plaintiffs. The lead plaintiffs in the Securities Class Action Litigation were seeking damages of $20.0 million on behalf of all the affected members of the class represented in the Securities Class Action Litigation, (the “Securities Class Action Members”).
On June 15, 2016, a settlement stipulation (the “Securities Class Action Settlement”), was approved by the Bankruptcy Court. Subject to the approval of the Class Action Court, the Securities Class Action Settlement required the Company to issue 300,000 shares of common stock and submit a payment of $250,000 to the Securities Class Action Members and advance insurance proceeds of $1.25 million to the Securities Class Action Members (collectively, the consideration is the “Securities Class Action Settlement Consideration”). On January 20, 2017, the Class Action Court preliminarily approved the Securities Class Action Settlement and set a final settlement approval hearing for May 11, 2017. Subject to the final approval of the Securities Class Action Settlement, any Securities Class Action Member is entitled to share in the Securities Class Action Settlement Consideration. The Securities Class Action Settlement provides for releases and related injunctions to be granted
for the benefit of, among others, the Company, Ronald Martell, Herb Cross and all of the Company’s past, present and future directors, officers and employees, excluding Mr. Shkreli.
Alternatively, Securities Class Action Members may exclude themselves from the Securities Class Action Settlement and are thereby not bound by the terms of the Securities Class Action Settlement nor entitled to receive any amount of the Securities Class Acton Settlement Consideration. Such Securities Class Action Members, to the extent they properly exclude themselves from the Securities Class Action Settlement and have timely and properly filed a proof of claim in the bankruptcy case, may have certain rights under the Plan with respect to such claims. Pursuant to the Plan and Confirmation Order, such claims are subordinated to the level of the Company’s common stock that was issued and outstanding when the Company’s bankruptcy case was filed. Such claims are also subject to the Company’s objection.
The Company’s agreement to the Securities Class Action Settlement was not in any way an admission of the Company’s wrongdoing or liability. As of December 31, 2016, the 300,000 shares have been issued and the $250,000 payment has been made.
PIPE Litigation
On January 7, 2016, certain investors (the “PIPE Claimants”),
commenced an adversary proceeding (captioned
Gregory Rea, et al. v. KaloBios Pharmaceuticals, Inc.
, Adv. Pro. No. 16-50001 (LSS)) in the Bankruptcy Court against the Company alleging implied trust theories, breach of contract, fraud and violations of the federal securities laws in connection with the PIPE Claimants’ purchase of the Company’s common stock in the Private Placement (the “PIPE Litigation”). The PIPE Claimants also raised certain other objections to the Company’s bankruptcy proceeding. The PIPE Claimants sought an aggregate total of approximately $6.9 million in damages.
On May 9, 2016, the Bankruptcy Court entered an order approving a settlement stipulation between the Company and the PIPE Claimants (the “Settlement Stipulation”). Under the Settlement Stipulation, in connection with the effectiveness of the Plan, and per the terms of the Settlement Stipulation, the Company became obligated to issue 327,608 shares to the PIPE Claimants and make a payment of $250,000 to the PIPE Claimants for the purpose of satisfying expenses related to the PIPE Litigation. As of December 31, 2016, the 327,608 shares have been issued and the $250,000 payment has been made.
Claim by Marek Biestek
Marek Biestek was a director of the Company who, while not a plaintiff in the above described PIPE Litigation, filed a proof of claim alleging damages from the PIPE transaction and filed an objection to the confirmation of the Plan. To resolve his objection to the Plan and his proof of claim, the Company settled with him individually by issuing him 3,750 additional shares of common stock. Mr. Biestek, as a former director of the Company, was excluded from the Securities Class Action Members and therefore received nothing from the Securities Class Action Litigation.
As of December 31, 2015, the Company recorded an obligation in stockholders’ equity to issue the shares related to the above claims totaling approximately $2.8 million and recorded the cash liability of $500,000 in Liabilities subject to compromise in the accompanying Consolidated Balance Sheet. As of December 31, 2016, all of the above claims have been satisfied and shares issued.
15. Related Party Transactions
On December 3, 2015, the Company entered into a Services Agreement (the “Services Agreement”) with Turing Pharmaceuticals LLC (“Turing”), a life sciences company. The Company’s then Chairman and Chief Executive Officer, Martin Shkreli, was also the chief executive officer and a member of the board of directors of Turing. Pursuant to the Services Agreement, Turing was to provide certain employees to the Company, to utilize on a part-time basis, including Christopher Thorn, who was appointed as the Company’s interim chief financial officer on December 3, 2015. The Services Agreement provided that Turing would charge the Company for Mr. Thorn’s services an hourly rate of $151.92 per hour, and Mr. Thorn would remain employed and compensated by Turing during the term of the Services Agreement. No amounts have been, or will be, paid by the Company to Turing, and Mr. Thorn resigned on December 21, 2015.
On December 3, 2015, the Company entered into the Securities Purchase Agreement, as defined in Note 7, for the private placement (the “Private Placement”) by the Company of shares of the Company’s common stock. At the time of the Private Placement, certain participants were serving as directors of the Company. These participants purchased a total of 21,936 shares of the Company’s common stock at a per share price of $29.32 for a total of $643,200.
On May 24, 2016, the board of directors approved a one-time equity award (the “Equity Award”) to each of Cameron Durrant, Ronald Barliant and David Moradi. On June 30, 2016, in accordance with the Plan, the Company issued an aggregate of 323,155 shares of common stock under the Equity Award. The Company recorded a charge of $1,451,000 representing the fair value of the shares issued and classified $700,000 and $751,000 as Reorganization items, net and General and administrative expenses, respectively.
On June 30, 2016, in connection with the settlement of the Term Loan, as defined in Note 2, 2,115,432 shares of common stock were issued to certain Lenders in repayment of the Company’s debt obligations who were deemed to be affiliates of the Company.
On December 21, 2016, the Company entered into the December Term Loan, as more fully described in Note 7, with certain lenders who were deemed to be affiliates of the Company.
EXHIBIT INDEX
Exhibit
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Description
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2.1
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Findings of Fact, Conclusions of Law, and Order Confirming Second Amended Chapter 11 Plan of Reorganization of the Registrant (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on June 22, 2016).
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3.1
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Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on July 6, 2016).
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3.2
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Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-184299) filed on January 15, 2013).
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3.3
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Amendment to Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on December 28, 2015).
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4.1
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Specimen of Stock Certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-184299) filed on January 15, 2013).
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4.2
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Warrant to Purchase Stock, by and between the Registrant and MidCap Financial SBIC, LP, dated as of June 19, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on June 24, 2013).
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4.3
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Registration Rights Agreement, dated December 3, 2015, between the Registrant and each of the several purchasers signatory thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on December 9, 2015).
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4.4
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Common Stock Purchase Warrant, by and between the Registrant and Armistice Capital Fund, dated as December 4, 2015 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on December 9, 2015).
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4.5†
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Common Stock Purchase Warrant, dated June 30, 2016, by and between the Registrant and Savant Neglected Diseases, LLC (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-035798) filed on September 23, 2016, as amended by Amendment No. 1 filed on December 30, 2016).
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10.1*
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2012 Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35798) filed on August 10, 2015).
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10.2*
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Amendment to the 2012 Equity Incentive Plan, dated as of September 13, 2016 (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-214110) filed on October 14, 2016).
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10.3*
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Form of Notice of Grant and Stock Option Agreement under the 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form 10-12G (File No. 000-54735) filed on June 12, 2012).
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10.4*
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Form of Notice of Grant and Stock Option Agreement under the 2012 Equity Incentive Plan (Outside Directors) (incorporated by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K (File No. 001-35798) filed on March 13, 2014).
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10.5*
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Form of Notice of Stock Unit Award under the 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on April 24, 2015).
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10.6*
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Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form 10-12G (File No. 000-54735) filed on June 12, 2012).
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10.7
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Development, Commercialization, Collaboration and License Agreement, dated January 8, 2010, by and between the Registrant and Sanofi Pasteur S.A. (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form 10-12G/A (File No. 000-54735) filed on September 12, 2012).
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10.8
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Development and License Agreement, dated May 11, 2004, by and between the Registrant and the Ludwig Institute for Cancer Research (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form 10-12G/A (File No. 000-54735) filed on August 7, 2012).
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10.9
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License Agreement, dated April 7, 2006, by and between the Registrant and the Ludwig Institute for Cancer Research (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form 10-12G/A (File No. 000-54735) filed on August 7, 2012).
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10.10
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Amendment to License Agreement, dated October 9, 2008, by and between the Registrant and the Ludwig Institute for Cancer Research (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35798) filed on May 8, 2014).
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10.11
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Amendment to License Agreement, dated June 8, 2011, by and between the Registrant and the Ludwig Institute for Cancer Research (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35798) filed on May 8, 2014).
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10.12
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Exclusive License Agreement, dated April 6, 2004, by and between the Registrant and The Regents of the University of California (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form 10-12G/A (File No. 000-54735) filed on August 7, 2012).
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10.13†
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Non-Exclusive License Agreement, dated October 15, 2010, by and between the Registrant, BioWa, Inc. and Lonza Sales AG (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form 10-12G/A (File No. 000-54735) filed on September 12, 2012).
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10.14†
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License Agreement, dated March 16, 2007, by and between the Registrant and Novartis International Pharmaceutical Ltd. (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form 10-12G/A (File No. 000-54735) filed on August 7, 2012).
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10.15†*
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Incentive Bonus Plan (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K (File No. 001-35798) filed on March 13, 2014).
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10.16
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Termination Agreement, by and between the Registrant and Sanofi Pasteur S.A., dated as of July 24, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35798) filed on November 6, 2014).
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10.17
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Amendment to Termination Agreement, by and between the Registrant and Sanofi Pasteur S.A., dated as of July 24, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35798) filed on May 11, 2015).
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10.18†
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Securities Purchase Agreement, dated as of December 3, 2015, between the Registrant and each purchaser identified on the signature pages thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on December 9, 2015).
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10.19†
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Amendment No. 1 to Securities Purchase Agreement, dated as of December 15, 2015, between the Registrant and each purchaser identified on the signature pages thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on December 16, 2015).
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10.20†
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Services Agreement, dated December 3, 2015, by and between Turing Pharmaceuticals, LLC and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on December 9, 2015).
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10.21*
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Employment Offer Letter, dated May 28, 2015, by and between the Registrant and Ronald A. Martell (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35798) filed on August 10, 2015).
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10.22†
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Binding Letter of Intent, dated February 29, 2016, between the Registrant and Savant Neglected Diseases, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35798) filed on September 23, 2016).
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10.23
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Debtor in Possession Credit and Security Agreement, dated as of April 1, 2016, by and among the Registrant, Black Horse Capital Master Fund Ltd., Black Horse Capital LP, Cheval Holdings, Ltd. and Nomis Bay LTD (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on April 7, 2016).
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10.24
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Intellectual Property Security Agreement, dated April 1, 2016, by the Registrant in favor of Black Horse Capital Master Fund Ltd., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on April 7, 2016).
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10.25
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Debtor In Possession Term Loan Note, dated April 1, 2016, by the Registrant in favor of Black Horse Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on April 7, 2016).
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10.26
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Debtor In Possession Term Loan Note, dated April 1, 2016, by the Registrant in favor of Black Horse Capital LP (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on April 7, 2016).
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10.27
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Debtor In Possession Term Loan Note, dated April 1, 2016, by the Registrant in favor of Cheval Holdings, Ltd. (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on April 7, 2016).
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10.28
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Debtor In Possession Term Loan Note, dated April 1, 2016, by the Registrant in favor of Nomis Bay LTD (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on April 7, 2016).
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10.29
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Securities Purchase Agreement, dated as of April 1, 2016, by and among the Registrant, Black Horse Capital Master Fund Ltd., Black Horse Capital LP, Cheval Holdings, Ltd. and Nomis Bay LTD (incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on April 7, 2016).
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10.30
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Corporate Governance Agreement, dated as of June 29, 2016, between the Registrant and Martin Shkreli (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on July 6, 2016).
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10.31†
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Agreement for the Manufacture, Development and Commercialization of Benznidazole for Human Use, dated as of June 30, 2016, between the Registrant and Savant Neglected Diseases, LLC (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-035798) filed on September 23, 2016, as amended by Amendment No. 1 filed on December 30, 2016).
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10.32*
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Letter Agreement, dated March 1, 2016, between the Registrant and Cameron Durrant, M.D. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-035798) filed on September 23, 2016).
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10.33*
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Employment Agreement, dated as of September 13, 2016, by and between the Registrant and Cameron Durrant, MD (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-035798) filed on November 10, 2016).
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10.34
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Credit and Security Agreement, dated as of December 21, 2016, by and among the Registrant, Black Horse Capital Master Fund Ltd., Black Horse Capital LP, Cheval Holdings, Ltd. and Nomis Bay LTD (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on December 23, 2016).
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10.35
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Intellectual Property Security Agreement, dated December 21, 2016, by the Registrant in favor of Black Horse Capital Master Fund Ltd., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on December 23, 2016).
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10.36
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Term Loan Note, dated December 21, 2016, by the Registrant in favor of Black Horse Capital Master Fund Ltd (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on December 23, 2016).
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10.37
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Term Loan Note, dated December 21, 2016, by the Registrant in favor of Black Horse Capital LP (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on December 23, 2016).
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10.38
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Term Loan Note, dated December 21, 2016, by the Registrant in favor of Cheval Holdings, Ltd. (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on December 23, 2016).
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10.39
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Term Loan Note, dated December 21, 2016, by the Registrant in favor of Nomis Bay LTD (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on December 23, 2016).
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10.40*
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Engagement Agreement, dated as of May 24, 2016, by and between the Registrant and David L. Tousley.
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21.1
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List of Subsidiaries
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23.1
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Consent of Horne LLP
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended.
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31.2
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Certification of Interim Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended.
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32.1**
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350.
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32.2**
|
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Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. §1350.
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101.INS
|
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XBRL Instance Document
|
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101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
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101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
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101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
|
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XBRL Taxonomy Extension Presentation Linkbase Document
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†Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
*Indicates management contract or compensatory plan
**The certifications attached as Exhibits 32.1 and 32.2 that accompanies this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.