Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following discussion and analysis of
our financial condition and results of operations together with our condensed consolidated financial statements and the related
notes appearing in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q. In addition to historical
information, some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report
on Form 10-Q, including information with respect to our plans and strategy for our business, future financial performance, expense
levels and liquidity sources, includes forward-looking statements that involve risks and uncertainties. You should read “Item
1A. Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results
to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion
and analysis.
We are an immuno-oncology company that has been focused on
the development and commercialization of individualized immunotherapies for the treatment of cancer and infectious diseases
based on our proprietary precision immunotherapy technology platform called Arcelis.
In April 2018, we terminated our development program for rocapuldencel-T, our lead product candidate, which
we had been developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. Additionally, in August
2018, we ceased our support for the development of our other clinical product candidate, AGS-004, which we were developing for
the eradication of HIV. We have ceased our research and development activities, reduced our workforce and expect to reduce our
workforce further. Based on a review of the status of our internal programs, resources and capabilities, we are exploring a wide
range of strategic alternatives that may include a potential merger or sale of our company, a strategic partnership with one or
more parties or the licensing, sale or divestiture of some or all of our assets or proprietary technologies, among other potential
alternatives. There can be no assurance that we will be able to enter into a strategic transaction or transactions on a timely
basis, on terms that are favorable to us, or at all. If we are unable to successfully conclude a strategic transaction in the near
future, we expect that we will seek protection under the bankruptcy laws in order to continue to pursue potential transactions
and conduct a wind-down of our company. If we decide to seek protection under the bankruptcy laws, and if we decide to wind down
the company under the bankruptcy laws or otherwise, it is unclear to what extent we will be able to pay our obligations to creditors,
and, whether and to what extent any resources will be available for distributions to our stockholders. However, based on our current
resources, we believe that it is unlikely that any resources will be available for distributions to our stockholders and that a
likely outcome of our wind-down and potential bankruptcy proceeding will be the cancellation or extinguishment of all outstanding
shares in the company without any payment or other distribution on account of those shares.
Prior to April 2018, we had been conducting a pivotal Phase
3 clinical trial of rocapuldencel-T in combination with sunitinib / standard of care for the treatment of newly diagnosed mRCC,
or the ADAPT trial. In February 2017, the independent data monitoring committee, or the IDMC, for the ADAPT trial recommended that
the trial be discontinued for futility based on its planned interim data analysis. The IDMC concluded that the trial was unlikely
to demonstrate a statistically significant improvement in overall survival in the combination treatment arm, utilizing the intent-to-treat
population at the pre-specified number of 290 events (deaths), the original primary endpoint of the study.
Notwithstanding the IDMC’s recommendation,
we determined to continue to conduct the trial while we analyzed interim data from the trial. Following a meeting with the U.S.
Food and Drug Administration, or FDA, we determined to continue the ADAPT trial until at least the pre-specified number of 290
events occurred, and to submit to the FDA a protocol amendment to increase the pre-specified number of events for the primary analysis
of overall survival in the trial beyond 290 events. In April 2018, we submitted a protocol amendment to the FDA that included an
amended primary endpoint analysis with four co-primary endpoints. Subsequently in April 2018, we conducted another interim analysis
of the data from the ADAPT trial, at which time 51 new events (deaths) had occurred subsequent to the February 2017 interim analysis.
Based upon review of the interim data from this analysis, we determined that the endpoints were unlikely to be achieved if the
trial were to be continued and decided to discontinue the ADAPT clinical trial.
We have also been developing AGS-004, also an Arcelis-based product candidate, for the treatment of HIV. We
have completed Phase 1 and Phase 2 trials funded by government grants and a Phase 2b trial that was funded in full by the National
Institutes of Health, or NIH, and the National Institute of Allergy and Infectious Diseases, or NIAID. More recently, we were supporting
an investigator-initiated clinical trial of AGS-004 in adult HIV patients evaluating the use of AGS-004 in combination with vorinostat,
a latency reversing drug, for HIV eradication. In connection with the cessation of our research and development activities, we
recently ceased our support for the trial, and enrollment was suspended.
On March 3, 2017, we entered into a payoff letter with Horizon
Technology Finance Corporation and Fortress Credit Co LLC, or the Lenders, under our venture loan and security agreement, or the
Loan Agreement, pursuant to which we paid, on March 6, 2017, a total of $23.1 million to the Lenders, representing the principal
balance and accrued interest outstanding under the Loan Agreement in repayment of our outstanding obligations under the Loan Agreement.
In addition, we issued to the Lenders five year warrants to purchase an aggregate of 5,000 shares of common stock at an exercise
price of $26.00 per share in consideration of the Lenders acceptance of $23.1 million as payment in full. Upon the payment of the
$23.1 million and the issuance of the warrants pursuant to the payoff letter, all of our outstanding indebtedness and obligations
to the Lenders under the Loan Agreement were paid in full, and the Loan Agreement and the notes thereunder were terminated.
In March 2017, we announced that our board of directors approved
a workforce action plan designed to streamline operations and reduce operating expenses. During the year ended December 31, 2017,
we recognized $1.2 million in severance costs, all of which was paid as of December 31, 2017. We also recognized $3.2 million in
stock-based compensation expense from the acceleration of vesting of stock options and restricted stock held by the terminated
employees during the year ended December 31, 2017.
In June 2017, we raised net proceeds of $6.0 million through
the issuance of a secured convertible note to Pharmstandard International S.A., or Pharmstandard, a collaborator and our largest
stockholder, in the aggregate principal amount of $6.0 million.
In August 2017, we entered into an agreement with Medpace, Inc.,
or Medpace, regarding $1.5 million in deferred fees that we owed Medpace for contract research and development services. Under
the agreement we paid $0.85 million of the amount during the third quarter of 2017 and paid the balance in April 2018.
In September 2017, we entered into a satisfaction and release
agreement, or the Invetech Satisfaction and Release Agreement, with Invetech Pty Ltd, or Invetech. Under the Invetech Satisfaction
and Release Agreement, we agreed to make, issue and deliver to Invetech (i) a cash payment of $0.5 million, (ii) 57,142 shares
of our common stock and (iii) an unsecured convertible promissory note in the original principal amount of $5.2 million on account
of and in full satisfaction and release of all of our payment obligations to Invetech arising under our development agreement with
Invetech, or the Invetech Development Agreement, prior to the date of the Invetech Satisfaction and Release Agreement, including
our obligation to pay Invetech up to a total of $8.3 million in deferred fees, bonus payments and accrued interest.
In November 2017, we entered into a satisfaction and release
agreement, or the Saint-Gobain Satisfaction and Release Agreement, with Saint-Gobain Performance Plastics Corporation, or Saint-Gobain.
Under the Saint Gobain Satisfaction and Release Agreement, we agreed to make, issue and deliver to Saint-Gobain (i) a cash payment
of $0.5 million, (ii) 34,499 shares of our common stock, (iii) an unsecured convertible promissory note in the original principal
amount of $2.4 million, and (iv) certain specified equipment originally provided to us by Saint-Gobain under the development agreement
with Saint-Gobain, or the Saint-Gobain Development Agreement, on account of and in full satisfaction and release of all of our
payment obligations to Saint-Gobain arising under the Saint-Gobain Development Agreement, prior to the date of the Saint-Gobain
Satisfaction and Release Agreement, including the development fees and charges. In connection with entering into the Saint-Gobain
Satisfaction and Release Agreement, we and Saint-Gobain entered into an amendment to the Saint-Gobain Development Agreement to
extend the term to December 31, 2019.
From June 2017 through December 31, 2017, we raised proceeds of $15.5 million through the issuance of common
stock in an at-the-market offering under our original sales agreement with Cowen & Company, LLC, or Cowen. In February 2018,
we amended and restated the original sales agreement with Cowen to increase the maximum aggregate offering price of the shares
of our common stock which we may sell under the agreement from $30 million to up to $45 million. From December 31, 2017 through
June 30, 2018, we raised an additional $7.5 million of proceeds. However, upon the delisting of our common stock from The Nasdaq
Capital Market in April 2018, we ceased to sell any additional shares under the sales agreement.
In January 2018, we entered into a stock purchase agreement with Lummy (Hong Kong), Ltd., or Lummy HK, under
which we agreed to issue and sell to Lummy HK in a private financing 375,000 shares of common stock for an aggregate purchase price
of $1.5 million. In March 2018, we and Lummy HK amended the stock purchase agreement to reduce the aggregate price for the shares
to $450,000. Concurrent with such amendment, we entered into a third amendment to our license agreement with Lummy HK pursuant
to which Lummy HK agreed to pay us a $1.05 million milestone payment. The $450,000 payment for the shares of common stock and the
$1.05 million milestone payment were received in April 2018.
On April 23, 2018, we received a notification from The Nasdaq
Stock Market LLC indicating that, because we had indicated that we would be unable to meet the stockholders’ equity requirement
for continued listing as of the April 24, 2018 deadline that had been set by the Nasdaq Hearing Panel, the Nasdaq Hearing Panel
determined to delist our common stock from The Nasdaq Capital Market and to suspend trading in our common stock effective at the
open of business on April 25, 2018. Following such delisting, we transferred our common stock to the OTCQB® Venture Market.
As of June 30, 2018, we had cash and cash equivalents of $12.1 million. We do not currently have sufficient
cash resources to pay all of our accrued obligations in full or to continue our business operations beyond the end of 2018. As
a result, in order to continue to operate our business beyond that time, we will need to raise additional funds. However, there
can be no assurance that we will be able to generate funds on terms acceptable to us, on a timely basis, or at all.
Our consolidated financial statements have been prepared assuming
that we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments
in the normal course of business. As of June 30, 2018, our current assets totaled $14.2 million compared with current liabilities
of $9.5 million, and we had cash and cash equivalents of $12.1 million. Based upon our current and projected cash flow, we note
there is substantial doubt about our ability to continue as a going concern within one year after the date that these financial
statements are issued. The financial statements for the three and six months ended June 30, 2018 do not include any adjustments
to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from uncertainty related to our ability to continue as a going concern.
We have devoted substantially all of our resources to our drug
development efforts, including advancing our Arcelis precision immunotherapy technology platform, conducting clinical trials of
our product candidates, protecting our intellectual property and providing general and administrative support for these operations.
We have not generated any revenue from product sales and, to date, have funded our operations primarily through public offerings
of our common stock and warrants, a venture loan, private placements of common stock, preferred stock and warrants, convertible
debt financings, government contracts, government and other third party grants and license and collaboration agreements. From inception
in May 1997 through June 30, 2018, we have raised a total of $525.9 million in cash, including:
|
•
|
$360.7 million from the sale of our common stock, convertible debt, warrants and preferred stock;
|
|
•
|
$32.9 million from the licensing of our technology;
|
|
•
|
$107.3 million from government contracts, grants and license and collaboration agreements; and
|
|
•
|
$25.0 million from the Loan Agreement with the Lenders.
|
We have incurred losses in each year since our inception in May 1997. Our net loss was $53.0 million and
$40.6 million for the years ended December 31, 2016, and 2017, respectively and $8.6 million for the six months ended June 30,
2018. As of June 30, 2018, we had an accumulated deficit of $381.2 million. Substantially all of our operating losses have resulted
from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.
In light of the termination of the development of rocapuldencel-T,
cessation of our research and development activities and our cash resources, and based on a review of the status of our internal
programs, resources and capabilities, we are exploring a wide range of strategic alternatives that may include a potential merger
or sale of our company, a strategic partnership with one or more parties or the licensing, sale or divestiture of some or all
of our assets or proprietary technologies, among other potential alternatives. There can be no assurance that we will be able
to enter into a strategic transaction or transactions on a timely basis, on terms that are favorable to us, or at all. If we are
unable to successfully conclude a strategic transaction in the near future, we expect that we will seek protection under the bankruptcy
laws in order to continue to pursue potential transactions and conduct a wind-down of our company. If we decide to seek protection
under the bankruptcy laws, and if we decided to wind down the company under the bankruptcy laws or otherwise, it is unclear to
what extent we will be able to pay our obligations to creditors, and, whether and to what extent any resources will be available
for distributions to our stockholders. However, based on our current resources, we believe that it is unlikely that any resources
will be available for distributions to our stockholders and that a likely outcome of our wind-down and potential bankruptcy proceeding
will be the cancellation or extinguishment of all outstanding shares in the company without any payment or other distribution
on account of those shares.
If
we determine to continue
our business operations or resume our research and development activities, we would need to raise additional capital prior to
the commercialization of AGS-004 or any other product candidates. If we seek to and are able to raise the capital necessary to
resume the development of our product candidates, we anticipate that our expenses will increase substantially if and as we
:
|
•
|
support any future investigator-initiated clinical trials of AGS-004 and initiate and conduct additional clinical trials of AGS-004 for the treatment of HIV;
|
|
•
|
establish a facility for the commercial manufacture of our products based on our Arcelis-based precision immunotherapy technology platform;
|
|
•
|
establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;
|
|
•
|
maintain, expand and protect our intellectual property portfolio;
|
|
•
|
continue our other research and development efforts;
|
|
•
|
hire additional clinical, quality control, scientific and management personnel; and
|
|
•
|
add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.
|
NIH Funding
In September 2006, we entered into a multi-year research contract
with the NIH and NIAID to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic
immune responses. We have used funds from this contract to develop AGS-004, including to fund in full our Phase 2b clinical trial
of AGS-004. On June 29, 2016, a contract modification was agreed to that extended the NIH and NIAID’s commitment under the
contract to July 31, 2018. We have agreed to a statement of work under the contract, and are obligated to furnish all the services,
qualified personnel, material, equipment, and facilities not otherwise provided by the U.S. government needed to perform the statement
of work. This contract expired as of July 31, 2018.
Under this contract, as amended, the NIH and NIAID committed
to fund up to a total of $39.8 million, including reimbursement of direct expenses and allocated overhead and general and administrative
expenses of up to $38.4 million and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified
development milestones. This amount includes a September 2014 modification of the contract under which the NIH and NIAID agreed
to fund up to an additional $0.5 million to cover a portion of the manufacturing costs of the planned Phase 2 clinical trial of
AGS-004 for long-term viral control in pediatric patients. Since September 2010, we have received reimbursement of our allocated
overhead and general and administrative expenses at provisional indirect cost rates equal to negotiated provisional indirect cost
rates agreed to with the NIH and NIAID in September 2010. These provisional indirect cost rates were subject to adjustment based
on our actual costs pursuant to the agreement with the NIH and NIAID.
We have recorded revenue of $38.1 million through June 30,
2018 under the NIH and NIAID contract. This contract is the only arrangement under which we have generated substantial revenue.
Development and Commercialization Agreements
An important part of our business strategy has been to enter
into arrangements with third parties both to assist in the development and commercialization of our product candidates, particularly
in international markets, and to in-license product candidates in order to expand our pipeline.
Pharmstandard
. In August 2013, in connection with
the purchase of shares of our series E preferred stock by Pharmstandard, we entered into an exclusive royalty-bearing license agreement
with Pharmstandard. Under this license agreement, we granted Pharmstandard and its affiliates a license, with the right to sublicense,
to develop, manufacture and commercialize rocapuldencel-T and other products for the treatment of human diseases, which are developed
by Pharmstandard using our individualized immunotherapy platform, in the Russian Federation, Armenia, Azerbaijan, Belarus, Georgia,
Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, which we refer to as the Pharmstandard Territory.
We also provided Pharmstandard with a right of first negotiation for development and commercialization rights in the Pharmstandard
Territory to specified additional products we may develop.
Under the terms of the license agreement, Pharmstandard licensed
us rights to clinical data generated by Pharmstandard under the agreement and granted us an option to obtain an exclusive license
outside of the Pharmstandard Territory to develop and commercialize improvements to our Arcelis technology generated by Pharmstandard
under the agreement, a non-exclusive worldwide royalty-free license to Pharmstandard improvements to manufacture products using
our Arcelis technology and a license to specified follow-on licensed products generated by Pharmstandard outside of the Pharmstandard
Territory, each on terms to be negotiated upon our request for a license. In addition, Pharmstandard agreed to pay us pass-through
royalties on net sales of all licensed products in the low single digits until it has generated a specified amount of aggregate
net sales. Once the net sales threshold is achieved, Pharmstandard will pay us royalties on net sales of specified licensed products,
including rocapuldencel-T, in the low double digits below 20%. These royalty obligations last until the later of the expiration
of specified licensed patent rights in a country or the twelfth anniversary of the first commercial sale in such country on a country
by country basis and no further royalties on specified other licensed products. After the net sales threshold is achieved, Pharmstandard
has the right to offset a portion of the royalties Pharmstandard pays to third parties for licenses to necessary third party intellectual
property against the royalties that Pharmstandard pays to us.
The agreement will terminate upon expiration of the royalty
term, upon which all licenses will become fully paid up perpetual exclusive licenses. Either party may terminate the agreement
for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency
or bankruptcy and we may terminate the agreement if Pharmstandard challenges or assists a third party in challenging specified
patent rights of ours. If Pharmstandard terminates the agreement upon our material breach or bankruptcy, Pharmstandard is entitled
to terminate our licenses to improvements generated by Pharmstandard, upon which we may come to rely for the development and commercialization
of rocapuldencel-T and other licensed products outside of the Pharmstandard Territory, and Pharmstandard is entitled to retain
its licenses from us and to pay us substantially reduced royalty payments following such termination.
In November 2013, we entered into an agreement with Pharmstandard
under which Pharmstandard purchased shares of our series E preferred stock. Under this agreement, we agreed to enter into a manufacturing
rights agreement for the European market with Pharmstandard and that the manufacturing rights agreement would provide for the issuance
of warrants to Pharmstandard to purchase 24,989 shares of our common stock at an exercise price of $116.40 per share. As of May
8, 2018, we had not entered into this manufacturing rights agreement or issued the warrants.
Pharmstandard and Actigen
.
On February 1, 2018, we entered into an option agreement with Pharmstandard and Actigen Limited, or Actigen, under which we obtained
an exclusive option to license certain patent rights and know-how related to a group of fully human PD1 monoclonal antibodies and
related technology held by Actigen. Actigen previously granted Pharmstandard an option to exclusively license these patent rights.
Under the option agreement, Pharmstandard granted to us an exclusive license for evaluation purposes only to make, have made, use
and import the PD1 monoclonal antibodies covered by these patent rights (but not offer to sell or sell products and processes covered
by or incorporating the patent rights) for a period of one year from the date of the agreement and an option exercisable during
the option exercise period to obtain an exclusive license (with the right to sublicense) under the patent rights to make, have
made, use, offer for sale, sell and import (with a right to grant sublicenses) the PD1 monoclonal antibodies for all prophylactic,
therapeutic and diagnostic uses and for all human diseases and conditions in the United States and Canada. The parties have agreed
that, if we exercise the option during the option exercise period, the parties will negotiate in good faith a license agreement,
on the terms and conditions outlined in the option agreement, including payments by us to Pharmstandard of an upfront license fee
of $3.6 million, payable upon execution of the license agreement in our common stock, various development and regulatory milestone
payments totaling $8.5 million, and upper single digit percentage royalties on net sales of any pharmaceutical product or therapeutic
regimen incorporating the licensed PD1 monoclonal antibodies that will apply on a country-by-country basis until the later of the
last to expire patent or ten years from the date of first commercial sale, against which the first $5.0 million of our development
expenditures will be credited as prepaid royalties.
In consideration for the rights granted under the option agreement,
we issued 169,014 shares of our common stock to Pharmstandard the value of which will be creditable against the upfront license
fee of $3.6 million payable under the option agreement if we enter into a license agreement. Unless earlier terminated by any party
for uncured material breach or by us without cause upon thirty days prior written notice, the option agreement will terminate upon
the later of the end of the option exercise period if we decide not to exercise the option or sixty days after we exercise the
option.
Green Cross
. In July 2013, in connection with
the purchase of our series E preferred stock by Green Cross Corp., or Green Cross, we entered into an exclusive royalty-bearing
license agreement with Green Cross. Under this agreement we granted Green Cross a license to develop, manufacture and commercialize
rocapuldencel-T for mRCC in South Korea. We also provided Green Cross with a right of first negotiation for development and commercialization
rights in South Korea to specified additional products we may develop.
Under the terms of the license, Green Cross has agreed to pay
us $0.5 million upon the initial submission of an application for regulatory approval of a licensed product in South Korea, $0.5
million upon the initial regulatory approval of a licensed product in South Korea and royalties ranging from the mid-single digits
to low double digits below 20% on net sales until the fifteenth anniversary of the first commercial sale in South Korea. In addition,
Green Cross has granted us an exclusive royalty free license to develop and commercialize all Green Cross improvements to our licensed
intellectual property in the rest of the world, excluding South Korea, except that, as to such improvements for which Green Cross
makes a significant financial investment and that generate significant commercial benefit in the rest of the world, we are required
to negotiate in good faith a reasonable royalty that we will be obligated to pay to Green Cross for such license. Under the terms
of the agreement, we are required to continue to develop and to use commercially reasonable efforts to obtain regulatory approval
for rocapuldencel-T in the United States.
The agreement will terminate upon expiration of the royalty
term, which is 15 years from the first commercial sale, upon which all licenses will become fully paid up perpetual non-exclusive
licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions
occur relating to the other party’s insolvency or bankruptcy and we may terminate the agreement if Green Cross challenges
or assists a third party in challenging specified patent rights of ours. If Green Cross terminates the agreement upon our material
breach or bankruptcy, Green Cross is entitled to terminate our licenses to improvements and retain its licenses from us and to
pay us substantially reduced milestone and royalty payments following such termination.
Medinet
.
In December 2013, we entered
into a license agreement with Medinet. Under this agreement, we granted Medinet an exclusive, royalty-free license to manufacture
in Japan rocapuldencel-T and other products using our Arcelis technology solely for the purpose of the development and commercialization
of rocapuldencel-T and these other products for the treatment of mRCC. We refer to this license as the manufacturing license. In
addition, under this agreement, we granted Medinet an option to acquire a nonexclusive, royalty-bearing license under our Arcelis
technology to sell in Japan rocapuldencel-T and other products for the treatment of mRCC. We refer to the option as the sale option
and the license as the sale license.
The sale option expired on April 30, 2016. As a result, Medinet
has only retained the manufacturing license and may only manufacture rocapuldencel-T and these other products for us or our designee.
We have agreed to negotiate in good faith a supply agreement under which Medinet would supply us or our designee with rocapuldencel-T
and these other products for development and sale for the treatment of mRCC in Japan. During the term of the manufacturing license,
we may not manufacture rocapuldencel-T or these other products for us or any designee for development or sale for the treatment
of mRCC in Japan.
In consideration for the manufacturing license, Medinet paid
us $1.0 million. Medinet also loaned us $9.0 million in connection with us entering into the agreement. We have agreed to use these
funds in the development and manufacturing of rocapuldencel-T and the other products. Medinet also agreed to pay us milestone payments
of up to a total of $9.0 million upon the achievement of developmental and regulatory milestones and $5.0 million upon the achievement
of a sales milestone related to rocapuldencel-T and these products.
We borrowed the $9.0 million pursuant to an unsecured promissory
note that bears interest at a rate of 3.0 % per annum. The principal and interest under the note are due and payable on December 31,
2018. Under the terms of the note and the manufacturing license agreement, any milestone payments related to the developmental
and regulatory milestones that become due will be applied first to the repayment of the loan. We have achieved $5.0 million in
milestones. As a result, the outstanding principal of the loan as of February 1, 2018 has been reduced to $4.0 million. We have
the right to prepay the loan at any time. If we have not repaid the loan by December 31, 2018, then we have agreed to grant
to Medinet a non-exclusive, royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer. In
such event, the amounts owing under the loan as of December 31, 2018 may constitute pre-paid royalties under the license or
would be due and payable. We do not expect to pay the amounts owing under the loan by December 31, 2018. Royalties under this license
would be paid until the expiration of the licensed patent rights in Japan at a rate to be negotiated. If we cannot agree on the
royalty rate, we have agreed to submit the matter to arbitration.
Under the agreement, we had the right to revoke both the manufacturing
license and the sale license to be granted to Medinet or the sale license only. In February 2018, we notified Medinet that we irrevocably
agreed to have no further right to exercise our right under the license agreement to revoke the manufacturing and the sale license,
or the sale license only. As a result of our decision to forego these revocation rights, during the three months ended March 31,
2018, we recognized as revenue $5.8 million of milestone payments that had previously been received and recorded as deferred revenue.
The agreement will terminate upon expiration of the royalty
term, upon which all licenses will become fully paid up, perpetual non-exclusive licenses. Either party may terminate the agreement
for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency
or bankruptcy, and we may terminate the agreement if Medinet challenges or assists a third party in challenging specified patent
rights of ours. If Medinet terminates the agreement upon our material breach or bankruptcy, Medinet is entitled to terminate our
licenses to improvements and retain its royalty-bearing licenses from us.
Lummy
.
On April 7, 2015, we and Lummy HK, entered into a license agreement pursuant to which we granted to Lummy HK an exclusive license
under the Arcelis technology, including patents, know-how and improvements to manufacture, develop and commercialize products for
the treatment of cancer in China, Hong Kong, Taiwan and Macau. Lummy HK also has a right of first negotiation with respect
to a license under the Arcelis technology for the treatment of infectious diseases in China, Hong Kong, Taiwan and Macau. This
agreement was subsequently amended in December 2016, October 2017 and March 2018.
Under the terms of the license agreement, the parties will share
relevant data, and we will have a right to reference Lummy HK data for purposes of its development programs under the Arcelis technology.
In addition, Lummy HK has granted to us an exclusive, royalty-free license under and to any and all Lummy HK improvements to the
Arcelis technology conceived or reduced to practice by Lummy HK and Lummy HK data to develop and/or commercialize products outside
China, Hong Kong, Taiwan and Macau, an exclusive, royalty-free license under and to any and all investigational new drugs, or INDs,
and other regulatory approvals and Lummy HK trademarks used for an Arcelis-based product to develop and/or commercialize an Arcelis-based
product outside China, Hong Kong, Taiwan and Macau and a non-exclusive, worldwide, royalty-free license under any Lummy HK improvements
and Lummy HK data to manufacture Arcelis-based products anywhere in the world. Lummy HK has the right to reference our data, INDs
and other regulatory filings and submissions for the purpose of developing and obtaining regulatory approval of licensed products
in China, Hong Kong, Taiwan and Macau.
Pursuant to the license agreement, Lummy HK will pay us royalties
on net sales and an aggregate of up to $22.3 million upon the achievement of manufacturing, regulatory and commercial milestones. On
October 18, 2017, we entered into a second amendment to the license agreement and Lummy HK paid us $1.5 million upon the achievement
of a manufacturing milestone in October 2017. On March 23, 2018, we entered into a third amendment to the license agreement pursuant
to which Lummy agreed to pay us a $1.05 million milestone. Lummy also agreed to purchase 375,000 shares of our common stock for
a purchase price of $450,000 pursuant to an amended stock purchase agreement. We received payments for the achievement of this
milestone and for the purchase of these shares of common stock in April 2018.
Of the potential $22.3 million in milestone payments, to date
we have earned $2.55 million, of which we received $1.5 million as of March 31, 2018, and $1.05 million in April 2018. The license
agreement will terminate upon expiration of the last to expire royalty term for all Arcelis-based products, with each royalty term
being the longer of the expiration of the last valid patent claim covering the applicable Arcelis-based product and 10 years from
the first commercial sale of such Arcelis-based product. Either party may terminate the license agreement for the other party’s
uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy. We
may terminate the license agreement if Lummy HK challenges or assists a third party in challenging specified patent rights of ours.
If Lummy HK terminates the license agreement upon our material breach or bankruptcy, Lummy HK is entitled to terminate the licenses
it granted to us and retain its licenses from us with respect to Arcelis-based products then in development or being commercialized,
subject to Lummy HK’s continued obligation to pay royalties and milestones with respect to such Arcelis-based products.
Invetech
.
In October 2014, we entered into
the Invetech Development Agreement. Under the Invetech Development Agreement, Invetech had agreed to continue to develop and provide
prototypes of the automated production system to be used for the manufacture of our Arcelis-based products. Subsequent to
signing the Invetech Development Agreement, Invetech agreed to defer 30% of its fees, up to $5.0 million subject to payments by
us in installments over 2017 and 2018.
On September 22, 2017, we entered into the Invetech Satisfaction
and Release Agreement. Under the Invetech Satisfaction and Release Agreement, we agreed to make, issue and deliver to Invetech
(i) a cash payment of $0.5 million (ii) 57,142 shares of our common stock and (iii) an unsecured convertible promissory note in
the original principal amount of $5.2 million on account of and in full satisfaction and release of all of our payment obligations
to Invetech arising under the Invetech Development Agreement prior to the date of the Invetech Satisfaction and Release Agreement,
including our obligation to pay Invetech up to a total of $8.3 million in deferred fees, bonus payments and accrued interest.
Although we currently have no ongoing activities under the Invetech
Development Agreement, the term of the Invetech Development Agreement will continue until the completion of the development of
the production systems. The Invetech Development Agreement can be terminated early by either party because of a technical
failure or by us without cause. We own all intellectual property arising from the development services with the exception of existing
Invetech intellectual property incorporated therein-under which we have a license.
Saint-Gobain
.
In January 2015, we
entered into the Saint-Gobain Development Agreement, that was subsequently amended in 2015, 2016 and 2017. Under the Saint-Gobain
Development Agreement, Saint-Gobain agreed to develop a range of disposables for use in our automated production systems to be
used for the manufacture of our Arcelis-based products. The Saint-Gobain agreement requires the parties to execute a commercial
supply agreement under which Saint-Gobain would become the exclusive supplier of disposables for the manufacture of our products
treating solid tumors for no less than fifteen years. The Saint-Gobain agreement will continue until December 31, 2019, but can
be terminated by written agreement of the parties because of a material default, including the failure to execute the commercial
supply agreement, or a failure to achieve a performance milestone.
On November 22, 2017, we entered into the Saint-Gobain Satisfaction
and Release Agreement. Under the Saint-Gobain Satisfaction and Release Agreement, we agreed to make, issue and deliver to Saint-Gobain
(i) a cash payment of $0.5 million, (ii) 34,499 shares of our common stock (iii) an unsecured convertible promissory note in the
original principal amount of $2.4 million, and (iv) certain specified equipment originally provided to us under the development
agreement, on account of and in full satisfaction and release of all payment obligations to Saint-Gobain arising under the development
agreement, including the development fees and charges owed by us to Saint-Gobain.
Cellscript
.
In December 2015, we entered
into a development and supply agreement with Cellscript, LLC, or Cellscript. Under the agreement, Cellscript has agreed to develop
cGMP processes for the manufacture and production of CD40L RNA, a ribonucleic acid used in the production of our Arcelis-based
products, and to manufacture and produce CD40L RNA.
In consideration for these development and production services,
we have agreed to pay Cellscript total fees of $4.6 million. Upon the execution of the agreement, we made an initial payment to
Cellscript of $2.1 million through the issuance to Cellscript of 45,309 shares of our common stock. The balance of these fees
is payable to Cellscript, at our option, in cash, common stock or a combination of cash and common stock upon the achievement
of development milestones. Any shares of common stock issued pursuant to the agreement are subject to a lock-up period of 180
days from the date of issuance of such shares to Cellscript.
Under the terms of the agreement, Cellscript shall be the sole
and exclusive manufacturer and supplier to us of CD40L RNA, and we will make agreed upon cash payments to Cellscript for CD40L
RNA produced for us during the term of the agreement. Under the agreement, Cellscript shall also be our sole and exclusive supplier
of enzymes and various kits comprising enzymes for transcription, capping and/or polyadenylation of RNA. We will make agreed upon
cash payments to Cellscript for each kit that is purchased under the agreement.
The agreement expired on June 30, 2018. As of June 30, 2018, we accrued $2.0 million for development and production
services performed by Cellscript under the development and supply agreement.
Manufacturing
We currently have a manufacturing suite located at our Technology Drive leased facility in Durham, North Carolina.
However, we have determined to cease the manufacture of Arcelis-based product candidates. Primarily due to our decision to cease
support for the Phase 2 trial of AGS-004 for the eradication of HIV, we elected to close our Patriot Center facility, a manufacturing
facility we previously leased in Durham, North Carolina, during the second quarter of 2018.
In January 2017, we entered into a ten-year lease agreement
with two five-year renewal options for 40,000 square feet of manufacturing and office space at the Center for Technology Innovation,
or CTI, on the Centennial Campus of North Carolina State University in Raleigh, North Carolina. We provided a security deposit
in the amount of $2.4 million as security for obligations under the lease agreement, which was provided in the form of a letter
of credit. We had intended to utilize this facility to manufacture rocapuldencel-T to support submission of a biologics license
application, or BLA, to the FDA and to support initial commercialization of rocapuldencel-T.
To provide for capacity expansion beyond the initial few years
following potential launch of rocapuldencel-T, we also had planned to build-out and equip a second facility, which we refer to
as the Centerpoint facility. In August 2014, we entered into a ten-year lease agreement with renewal options. Under the lease agreement,
we agreed to lease certain land and an approximately 125,000 square-foot building to be constructed in Durham County, North Carolina.
We initially intended this facility to house our corporate headquarters and commercial manufacturing before we entered into the
lease for the Center for Technology Innovation, or CTI, facility. The shell of the new facility was constructed on a build-to-suit
basis in accordance with agreed upon specifications and plans and was completed in June 2015. However, the build-out and equipping
of the interior of the facility was suspended as we pursued financing arrangements to support the further build out of the facility.
Due to the recommendation of the IDMC in February 2017 to discontinue
the ADAPT study, we reassessed our manufacturing plans. In March 2017, we entered into a lease termination agreement with the landlord
of our CTI facility terminating the lease as of March 17, 2017. From the $2.4 million letter of credit, the landlord drew down
$0.7 million to cover unpaid construction costs in March 2017 and $1.7 million in April 2017 for lease termination damages and
agreed to return $0.1 million in consideration for being able to salvage some of the construction costs. Pursuant to the lease
termination agreement, we have no further obligations under the lease. During the year ended December 31, 2017, we recorded a lease
termination fee of $1.6 million that is included in restructuring costs on the statement of operations. We also recorded an impairment loss on Construction-in-progress on the property of $0.9 million
during the year ended December 31, 2017.
In November 2017, we and TKC Properties, the landlord of the
Centerpoint facility, entered into a lease termination agreement terminating the lease agreement as of November 21, 2017. In addition,
TKC Properties completed the sale of the facility to a third party and we received cash proceeds of approximately $1.8 million.
As of December 31, 2017, we recorded $0 for the Centerpoint facility and $0 for the lease liability. Additionally, we are no longer
required to maintain restricted cash of approximately $0.7 million as a security deposit.
Results of Operations
Comparison of the Three and Six Months Ended June 30,
2017 with the Three and Six Months Ended June 30, 2018
The following table summarizes the results
of our operations for each of the three and six month periods ended June 30, 2017 and 2018, together with the changes in those
items in dollars and as a percentage:
|
|
Three Months Ended
June 30,
|
|
$
|
|
%
|
|
Six Months Ended
June 30,
|
|
$
|
|
%
|
|
|
2017
|
|
2018
|
|
Change
|
|
Change
|
|
2017
|
|
2018
|
|
Change
|
|
Change
|
|
|
(in thousands)
|
Revenue
|
|
$
|
70
|
|
|
$
|
54
|
|
|
$
|
(15
|
)
|
|
|
(22.2
|
)%
|
|
$
|
175
|
|
|
$
|
5,987
|
|
|
$
|
5,812
|
|
|
|
*
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,121
|
|
|
|
3,924
|
|
|
|
(1,197
|
)
|
|
|
(23.4
|
)%
|
|
|
13,035
|
|
|
|
9,469
|
|
|
|
(3,565
|
)
|
|
|
(27.4
|
)%
|
General and administrative
|
|
|
2,680
|
|
|
|
2,496
|
|
|
|
(184
|
)
|
|
|
(6.9
|
)%
|
|
|
6,643
|
|
|
|
4,995
|
|
|
|
(1,648
|
)
|
|
|
(24.8
|
)%
|
Impairment of property and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,204
|
|
|
|
—
|
|
|
|
(27,204
|
)
|
|
|
(100.0
|
)%
|
Restructuring costs
|
|
|
344
|
|
|
|
—
|
|
|
|
(344
|
)
|
|
|
(100.0
|
)%
|
|
|
5,353
|
|
|
|
—
|
|
|
|
(5,353
|
)
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,145
|
|
|
|
6,420
|
|
|
|
(1,725
|
)
|
|
|
(21.2
|
)%
|
|
|
52,235
|
|
|
|
14,464
|
|
|
|
(37,771
|
)
|
|
|
(72.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,076
|
)
|
|
|
(6,366
|
)
|
|
|
1,710
|
|
|
|
21.2
|
%
|
|
|
(52,060
|
)
|
|
|
(8,477
|
)
|
|
|
43,583
|
|
|
|
83.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9
|
|
|
|
20
|
|
|
|
11
|
|
|
|
124.4
|
%
|
|
|
39
|
|
|
|
38
|
|
|
|
(1)
|
|
|
|
(3.8
|
)%
|
Interest expense
|
|
|
(294
|
)
|
|
|
(152
|
)
|
|
|
142
|
|
|
|
48.4
|
%
|
|
|
(1,023
|
)
|
|
|
(301
|
)
|
|
|
722
|
|
|
|
70.6
|
%
|
Gain on early extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
249
|
|
|
|
—
|
|
|
|
(249
|
)
|
|
|
100.0
|
%
|
Change in fair value of warrant liability
|
|
|
(178)
|
|
|
|
19
|
|
|
|
196
|
|
|
|
*
|
|
|
|
20,180
|
|
|
|
168
|
|
|
|
(20,012
|
)
|
|
|
*
|
|
Other expense
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
100.0
|
%
|
|
|
(5)
|
|
|
|
(18
|
)
|
|
|
(13
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,539
|
)
|
|
$
|
(6,479
|
)
|
|
$
|
2,060
|
|
|
|
24.1
|
%
|
|
$
|
(32,619
|
)
|
|
$
|
(8,590
|
)
|
|
$
|
24,029
|
|
|
|
73.7
|
%
|
_______________
Revenue
To date, we have not generated revenue from the sale of any products. Substantially all of our revenue has
been derived from our NIH and NIAID contract and our license agreements with Medinet and Lummy HK.
Revenue was $54,000 for the three months
ended June 30, 2018, compared with $70,000 for the three months ended June 30, 2017, a decrease of $15,000, or 22.2%.
The decrease for the three months ended June 30, 2018 compared with the three months ended June 30, 2017 resulted from lower reimbursement
under our NIH and NIAID contract.
Revenue was $5.9 million for the six months
ended June 30, 2018, compared with $0.1 million for the six months ended June 30, 2017, an increase of $5.8 million.
The $5.8 million increase for the six months ended June 30, 2018 resulted from the recognition of $5.8 million of revenue from
milestone payments from Medinet that had previously been recorded as deferred revenue as a result of our decision to irrevocably
forego our revocation right under our license agreement with Medinet.
Research and Development Expenses
Since our inception in 1997, we focused our resources on
our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development
efforts and activities related to regulatory filings for our product candidates. We recognize our research and development expenses
as they are incurred. Our research and development expenses consist primarily of:
•
|
salaries and related expenses for personnel in research and development functions;
|
•
|
fees paid to consultants and clinical research organizations, or CROs, including in connection with our clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;
|
•
|
commercial manufacturing development consisting of costs incurred under our development agreement with Invetech under which Invetech has agreed to develop and provide prototypes of the automated production system to be used for the manufacture of our Arcelis-based products;
|
•
|
allocation of facility lease and maintenance costs;
|
•
|
costs incurred under our development agreement with Saint-Gobain to develop a range of disposables for use in the automated production system;
|
•
|
depreciation of leasehold improvements, laboratory equipment and computers;
|
•
|
costs related to production of product candidates for clinical trials;
|
•
|
costs related to compliance with regulatory requirements;
|
•
|
consulting fees paid to third parties related to non-clinical research and development;
|
•
|
costs related to stock options or other share-based compensation granted to personnel in research and development functions; and
|
•
|
acquisition fees, license fees and milestone payments related to acquired and in-licensed technologies.
|
The table below summarizes our direct research and development
expenses by program for the periods indicated. Our direct research and development expenses consist principally of external costs,
such as fees paid to investigators, consultants, central laboratories and CROs, including in connection with our clinical trials,
and related clinical trial fees. Research and development expenses also include commercial manufacturing development costs consisting
primarily of costs incurred under our Invetech Development Agreement to develop and provide prototypes of the automated production
system to be used for the manufacture of our Arcelis-based products and our Saint-Gobain Development Agreement to develop a range
of disposables to be used in both our manual and automated manufacturing processes. We had been developing rocapuldencel-T and
AGS-004 in parallel, and typically use our employee and infrastructure resources across multiple research and development programs.
We do not allocate salaries, share-based compensation, employee benefit or other indirect costs related to our research and development
function to specific product candidates. Those expenses are included in “Indirect research and development expense”
in the table below.
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
|
(in thousands)
|
Direct research and development expense by program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocapuldencel-T
|
|
$
|
2,151
|
|
|
$
|
446
|
|
|
$
|
4,554
|
|
|
$
|
3,569
|
|
AGS-004
|
|
|
21
|
|
|
|
12
|
|
|
|
77
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct research and development program expense
|
|
|
2,172
|
|
|
|
458
|
|
|
|
4,631
|
|
|
|
3,594
|
|
Commercial manufacturing development expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(373)
|
|
|
|
—
|
|
Indirect research and development expense
|
|
|
2,949
|
|
|
|
3,466
|
|
|
|
8,777
|
|
|
|
5,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expense
|
|
$
|
5,121
|
|
|
$
|
3,924
|
|
|
$
|
13,035
|
|
|
$
|
9,469
|
|
Three months ended June 30, 2017 and 2018.
Research and development expenses were $3.9 million for the three months ended June 30, 2018, compared with
$5.1 million for the three months ended June 30, 2017, a decrease of $1.2 million, or 23.4%. The decrease in research and
development expense reflects a $1.7 million decrease in direct research and development expense partially offset by a $0.5 million
increase in indirect research and development expense.
Direct research and development expense for rocapuldencel-T was $0.4 million in the three months ended June
30, 2018, compared with $2.2 million for the three months ended June 30, 2017, a decrease of $1.7 million. This decrease reflects
a reduction of costs for the ADAPT trial following the termination of this trial in April 2018.
Direct research and development expense for AGS-004
was not significantly different in the three months ended June 30, 2018 compared with the three months ended June 30,
2017.
Six Months ended June 30, 2017 and 2018
.
Research and development expenses were $9.5 million for the six months ended June 30, 2018, compared with
$13.0 million for the six months ended June 30, 2017, a decrease of $3.6 million, or 27.4%. The decrease in research and development
expense reflects a $1.0 million decrease in direct research and development expense and a $2.9 million decrease in indirect research
and development expense, partially offset by a credit of $0.4 million during the six months ended June 30, 2017 related to our
Saint Gobain Development Agreement.
The decrease in direct research and development expenses for rocapuldencel-T and AGS-004 resulted primarily
from the following:
•
|
Direct research and development expense for rocapuldencel-T decreased
to $3.6 million in the six months ended June 30, 2018 from $4.6 million for the six months ended June 30, 2017. This decrease
primarily reflects a reduction of costs for the ADAPT trial.
|
•
|
Direct research and development expense with respect to AGS-004 was not significantly different in the six months ended June 30, 2018 compared with the six months ended June 30, 2017.
|
During the six months ended June 30, 2017, we recorded a credit
of $0.4 million related to amounts owed under our Saint-Gobain Development Agreement, which we recorded as a reduction of research and
development expense. No commercial manufacturing development expense was recorded for the six months ended June 30, 2018.
The decrease in indirect research and development expense was
primarily due to the reduction in the size of our workforce engaged in research
and development activities. As of June 30, 2018, we had 21 employees engaged in such activities, compared with 36 employees engaged
in such activities as of June 30, 2017.
The successful development of any product candidate is
highly uncertain. Even if we resume our research and development activities, at this time we cannot reasonably estimate the nature,
timing or costs of the efforts that will be necessary to complete the development of any product candidate, or the period, if
any, in which material net cash inflows from such product candidates may commence. This is due to the numerous risks and uncertainties
associated with developing drugs, including the uncertainty of:
|
•
|
the scope, rate of progress, expense and results of our ongoing clinical trials;
|
|
•
|
the scope, rate of progress, expense and results of additional clinical trials that we may conduct;
|
|
•
|
the scope, rate of progress, expense and results of our commercial manufacturing development efforts;
|
|
•
|
other research and development activities; and
|
|
•
|
the timing of regulatory approvals.
|
A change in the outcome of any of these variables with respect to the development of a product candidate could
mean a significant change in the costs and timing associated with the development of that product candidate. If the FDA or another
regulatory authority were to require additional clinical trials or if there were significant delays in enrollment, significant
additional financial resources and time would be expended on the completion of clinical development.
General and Administrative Expenses
General and administrative expenses were $2.5 million for the
three months ended June 30, 2018, compared with $2.7 million for the three months ended June 30, 2017, a decrease of
$0.2 million or 6.9%. This decrease was primarily due to a reduction in personnel costs consisting primarily of stock-based compensation.
General and administrative expenses were $5.0 million for the
six months ended June 30, 2018, compared with $6.6 million for the six months ended June 30, 2017, a decrease of $1.6
million or 24.8%. This decrease was primarily due to a reduction in personnel costs consisting primarily of salaries and stock-based compensation.
General and administrative expenses consist primarily of salaries
and related costs for employees in executive, operational and finance, information technology and human resources functions. Other
significant general and administrative expenses include allocation of facilities costs, professional fees for accounting and legal
services and expenses associated with obtaining and maintaining patents.
Impairment Loss on Property and Equipment
We did not recognize an impairment loss on property and equipment for the three and six months ended June 30,
2018, and the three months ended June 30, 2017. We recognized an impairment loss on property and equipment of $27.2 million for
the six months ended June 30, 2017. We review our property and equipment for impairment whenever events or changes indicate
its carrying value may not be recoverable.
Impairment of Centerpoint Facility and Construction-in-Progress
We determined during the six months ended June 30, 2017 that we no longer planned to develop our Centerpoint
facility. Accordingly, we recorded an impairment loss of $18.3 million for the Construction-in-progress on the property.
Additionally, we determined during the six months ended June 30, 2017 that we would no longer need to develop
various equipment included in Construction-in-progress under our current manufacturing plans. As such, we entered into agreements
and understandings with various vendors to attempt to sell or dispose this equipment at prices less than our carrying value. Accordingly,
we determined that the fair value of this equipment held for sale was $0.7 million as of March 31, 2017 and recorded an impairment
loss of $1.1 million as of March 31, 2017. Additionally, we recorded a $6.1 million impairment loss on other equipment included
in Construction-in-progress that had to be abandoned or had no net realizable value. Finally, we recorded an impairment loss of
$0.9 million on Construction-in-progress that was abandoned at the CTI facility.
Impairment of Capital Leases
In August 2016, we entered into two agreements, or the
Power Generation Agreements, with an electric utility company. The Power Generation Agreements were accounted for as capital leases
for financial reporting purposes. Under the lease agreements, the electric utility company agreed to design, procure, install,
own and maintain electrical equipment at Centerpoint to provide required electrical loads. Property, plant and equipment included
$2.4 million as of December 31, 2016 under the Power Generation Agreements in the Construction-in-progress account. As of June
30, 2017, $2.2 million of these assets were classified as Assets held for sale on our Balance Sheet. Since the capital leases are
for electrical equipment held for sale on the Centerpoint property, we recorded an impairment loss of $0 and $0.1 million during the three and six months ended June 30, 2017, respectively.
Restructuring Costs
We recognized restructuring costs of $0.3 million and $5.4 million
during the three and six months ended June 30, 2017, respectively, compared with $0 during the three and six months ended June
30, 2018, respectively. The restructuring costs and impairment charges during the three and six months ended June 30, 2017 were
related to the restructuring of our operations following the recommendation by the IDMC to discontinue the ADAPT study in February
2017.
Workforce Action Plan
On March 10, 2017, we enacted a workforce action plan designed to streamline operations and reduce our operating
expenses. Under this plan, we reduced our workforce by 58 employees during the six months ended June 30, 2017. During the three
and six months ended June 30, 2017, we recognized $0.1 million and $1.1 million in severance costs, respectively, and $0.2 and
$2.6 million in stock compensation cost, respectively, from the acceleration of vesting of stock options held by the terminated
employees.
CTI Lease Agreement
In January 2017, we entered into a ten-year lease agreement
with two five-year renewal options for 40,000 square feet of manufacturing and office space at CTI on the Centennial Campus of
North Carolina State University in Raleigh, North Carolina. We provided a security deposit in the amount of $2.4 million as security
for obligations under the lease agreement, which was provided in the form of a letter of credit. In March 2017, we initiated discussions
with the landlord of the CTI facility regarding the termination of this lease.
In March 2017 the landlord of our CTI facility notified us that
it was terminating the lease due to nonpayment of invoices for up-fit costs, effective immediately. On March 31, 2017, we entered
into a termination agreement with the landlord terminating the lease as of March 17, 2017. From the $2.4 million letter of credit,
the landlord drew down $0.7 million to cover unpaid construction costs in March 2017 and $1.7 million in April 2017 for lease termination
damages and agreed to return $0.1 million in consideration for being able to salvage some of the construction costs. Pursuant to
the termination agreement, we have no further obligations under the lease. During the three and six months ended June 30, 2017,
we recorded a lease termination fee of $0 and $1.6 million, respectively, which is included in Restructuring costs on the statement
of operations. We also recorded an impairment loss on Construction-in-progress
on the property of $0 and $0.9 million during the three and six months ended June 30, 2017, respectively.
Interest Expense
Interest expense was $0.2 million for the three months ended June 30, 2018, compared with $0.3 million for
the three months ended June 30, 2017, a decrease of $0.1 million or 48.4%. The decrease primarily resulted from the termination
of the Power Generation Agreements on November 21, 2017, 2018 that were accounted for as capital leases.
Interest expense was $0.3 million for the
six months ended June 30, 2018, compared with $1.0 million for the six months ended June 30, 2017, a decrease of $0.7
million or 70.6%. The decrease resulted primarily from our repayment of the balance outstanding under the Loan Agreement on March
6, 2017 and the termination of the Power Generation Agreements that were accounted for as capital leases.
Gain on Early Extinguishment of Debt
We recognized a gain on early extinguishment of debt of $0 and $0.2 million for the three and six months ended
June 30, 2017, respectively. We recognized no gain on early extinguishment of debt for the three and six months ended June 30,
2018. On March 3, 2017, we entered into a payoff letter with the Lenders, pursuant to which we paid on March 6, 2017, a total of
$23.1 million to the Lenders, representing the principal balance and accrued interest outstanding under the Loan Agreement in repayment
of our outstanding obligations under the Loan Agreement. In addition, we issued to the Lenders five year warrants to purchase an
aggregate of 5,000 shares of our common stock at an exercise price of $26.00 per share in consideration of the Lenders accepting
the $23.1 million as repayment in full.
Change in Fair Value of Warrant Liability
The gain (loss) from the change in fair value of the warrant liability was $0.01 million and $0.2 million
for the three and six months ended June 30, 2018, respectively, compared with $(0.2) million and $20.2 million for the three and
six months ended June 30, 2017, respectively. These amounts represent the change in the fair value of our warrant liability
for the warrants issued in August 2016. The August 2016 warrants contain provisions that could require cash settlement and are
recorded as a liability at fair value on the date of issuance and as of the end of each reporting period. The fair value of the
August 2016 warrants declined primarily due to a significant decline in the price of our common stock and a shorter expected life
of the warrants. As of June 30, 2018, the fair value of the August 2016 warrants was $0.
Liquidity and Capital Resources
Sources of Liquidity
As of June 30, 2018, we had cash and cash equivalents of
$12.1 million.
Since our inception in May 1997 through June 30, 2018,
we have funded our operations principally with $360.7 million from the sale of common stock, convertible debt, warrants and preferred
stock, $32.9 million from the licensing of our technology, $107.3 million from government contracts, grants and license and collaboration
agreements, and $25.0 million from the Loan Agreement.
Troubled Debt Restructuring with Invetech.
As
of June 30, 2017, we had recorded a manufacturing research and development obligation payable to Invetech on our consolidated balance
sheet of $8.3 million, representing $5.2 million in deferred fees, $2.3 million in estimated bonus payments and $0.7 million in
accrued interest. On September 22, 2017, we entered into the Invetech Satisfaction and Release Agreement. Under the Invetech Satisfaction
and Release Agreement, we agreed to make, issue and deliver to Invetech (i) a cash payment of $0.5 million, (ii) 57,142 shares
of our common stock and (iii) an unsecured convertible promissory note in the original principal amount of $5.2 million on account
of and in full satisfaction and release of all of our payment obligations to Invetech arising under the Invetech Development Agreement
prior to the date of the Invetech Satisfaction and Release Agreement, including our obligation to pay Invetech up to a total of
$8.3 million in deferred fees, bonus payments and accrued interest.
The maturity date for the payment of principal
and interest under the note is September 30, 2020. The note bears interest at a rate of 6.0% per annum, which interest will compound
annually. For the quarterly periods ended December 31, 2017, March 31, 2018 and June 30, 2018, we paid Invetech $200,000, $200,000
and $150,000, respectively, in cash under the note. For the fiscal quarters ending September 30, 2018 through March 31, 2019, we
are required to make quarterly installment payments under the note, each in an aggregate amount of up to $0.3 million, consisting
of (i) cash in the amount of $150,000 and (ii) if certain specified conditions are met as of the corresponding payment date, up
to $150,000 of shares of our common stock. For the fiscal quarters ending June 30, 2019 through June 30, 2020, we are required
to make quarterly installment payments under the note, each in an amount of $150,000, payable in cash. Subject to Invetech’s
conversion rights, we may prepay the note in full or in part at any time without penalty or premium.
The note also provides that on the anniversary
of the issue date of the note for each of the first three years following the issue date, the outstanding principal amount of the
note, if any, plus accrued and unpaid interest thereon shall automatically be deemed to be reduced by $250,000, if and only if
we have paid all debt service payments due under the note on or prior to the relevant anniversary date and no event of default,
fundamental transaction or change of control, each as defined in the note, has occurred on or prior to such anniversary date.
Upon maturity of the note or at any time within 75 days of such
maturity, or upon the occurrence of certain events of default, Invetech may, at its option, elect to convert any amount of the
outstanding principal and accrued interest into shares of our common stock. Upon a change of control pursuant to which Invetech
has a redemption right, Invetech may, at its option, elect to convert any amount of the outstanding principal and accrued interest,
less any remaining installment payments required to be made in cash, into shares of our common stock. We will be required to pay
any amount not so converted in cash. Upon the occurrence of certain events of default, Invetech may, at its option, elect to convert
any amount of the outstanding principal and accrued interest into shares of our common stock. We will be required to pay any amount
not so converted in cash. In each case, the number of shares of common stock issuable upon such complete or partial conversion
of the note is determined by dividing the portion of the principal and accrued or unpaid interest to be converted by $10.00 per
share (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction). Unless
Invetech has elected to exercise these conversion rights, we, subject to specified exceptions, may prepay the note in whole or
in part, in cash, at any time without penalty or premium.
Troubled Debt Restructuring with Saint-Gobain.
As of September 30, 2017, we had recorded accrued expenses of $4.8 million payable to Saint-Gobain. On November 22, 2017, we entered
into the Saint-Gobain Satisfaction and Release Agreement. Under the Saint Gobain Satisfaction and Release Agreement, we agreed
to make, issue and deliver to Saint-Gobain (i) a cash payment of $0.5 million, (ii) 34,499 shares of common stock, (iii) an unsecured
convertible promissory note in the original principal amount of $2.4 million, and (iv) certain specified equipment originally provided
to us by Saint-Gobain under the Saint-Gobain Development Agreement, on account of and in full satisfaction and release of all of
our payment obligations to Saint-Gobain arising under the Saint-Gobain Development Agreement, prior to the date of the Saint-Gobain
Satisfaction and Release Agreement, including the development fees and charges. As a result, we recognized a gain on the early
extinguishment of debt of $0.6 million during the year ended December 31, 2017.
The maturity date for the payment of principal and interest under the note is September 30, 2020. The note
bears interest at a rate of 6.0% per annum, which interest will compound quarterly. For the quarterly periods ended December 31,
2017, March 31, 2018, and June 30, 2018, we paid Saint-Gobain $270,000, $270,000 and $185,000, respectively, in cash under the
note. For the fiscal quarter ending September 30, 2018, we are required to make a quarterly installment payment under the note,
in the aggregate amount of up to $245,000, consisting of (i) cash in the amount of $125,000 and (ii) if certain specified conditions
are met as of the corresponding payment date, up to $120,000 of shares of our common stock. For the fiscal quarters ending December
31, 2018 and March 31, 2019, we are required to make quarterly installment payments under the note, each in an aggregate amount
of up to $220,000, consisting of (i) cash in the amount of $100,000 and (ii) if certain specified conditions are met as of the
corresponding payment date, up to $120,000 of shares of our common stock. For the fiscal quarters ending December 31, 2017, March
31, 2018, June 30, 2018, September 30, 2018, December 31, 2018 and March 31, 2019, if the conditions required for the issuance
of common stock are not met solely because the price of the common stock at the time is less than $4.058 per share (as adjusted
for any stock dividend, stock split, stock combination, reclassification or similar transaction), then are required to pay in each
such quarter cash equal to 50% of the value of the common stock that would otherwise have been issued. For the fiscal quarters
ending June 30, 2019 through June 30, 2020, we are required to make quarterly installment payments under the note, each in an amount
of $100,000, payable in cash.
Upon maturity of the note or at any time during the 75-day period
prior to the maturity date of the note, Saint-Gobain may, at its option, elect to convert any amount of the outstanding principal
and accrued interest into shares of our common stock. Upon a change of control pursuant to which Saint-Gobain has a redemption
right, Saint-Gobain may, at its option, elect to convert any amount of the outstanding principal and accrued interest, less any
remaining installment payments required to be made in cash, into shares of our common stock. We will be required to pay any amount
not so converted in cash. Upon the occurrence of certain events of default, Saint-Gobain may, at its option, elect to convert any
amount of the outstanding principal and accrued interest into shares of our common stock. We will be required to pay any amount
not so converted in cash. In each case, the number of shares of common stock issuable upon such complete or partial conversion
of the note is determined by dividing the portion of the principal and accrued or unpaid interest to be converted by $10.00 per
share (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction). Unless Saint-Gobain
has elected to exercise these conversion rights, we, subject to specified exceptions, may prepay the note in whole or in part,
in cash, at any time without penalty or premium.
Venture Loan and Security Agreement
.
In September 2014, we entered into the Loan Agreement with the
Lenders, under which we borrowed $25.0 million in two tranches of $12.5 million each. The per annum interest rate for each tranche
was a floating rate equal to 9.25% plus the amount by which the one-month LIBOR exceeds 0.50% (effectively a floating rate equal
to 8.75% plus the one-month LIBOR Rate). The total per annum interest rate could not exceed 10.75%.
On March 3, 2017, we entered into a payoff letter with the Lenders,
pursuant to which we paid, on March 6, 2017, a total of $23.1 million to the Lenders, representing the principal balance and accrued
interest outstanding under the Loan Agreement in repayment of our outstanding obligations under the Loan Agreement. In addition,
we issued to the Lenders five year warrants to purchase an aggregate of 5,000 shares of common stock at an exercise price of $26.00
per share in consideration of the Lenders acceptance of $23.1 million as payment in full. Upon the payment of the $23.1 million
and the issuance of the warrants pursuant to the payoff letter, all of our outstanding indebtedness and obligations to the Lenders
under the Loan Agreement were deemed paid in full, and the Loan Agreement and the notes thereunder were terminated.
At-the-market Offering
.
On May 8, 2015, we filed a shelf registration statement on Form
S-3, or the 2015 Shelf, with the SEC, which covers the offering, issuance and sale of up to $125.0 million of our common stock,
preferred stock, debt securities, depositary shares, purchase contracts, purchase units and warrants. We simultaneously entered
into a sales agreement, or the Original Sales Agreement, with Cowen and Company LLC, or Cowen, to provide for the offering, issuance
and sale of up to $30.0 million of our common stock from time to time in “at-the-market” offerings under the 2015 Shelf.
The 2015 Shelf was declared effective by the SEC on May 14, 2015.
On January 9, 2017, we filed a shelf registration statement
on Form S-3, or the 2017 Shelf, with the SEC, which covers the offering, issuance and sale of up to $200.0 million of our common
stock, preferred stock, debt securities, depositary shares, purchase contracts, purchase units and warrants and which became effective
on January 24, 2017. On February 2, 2018, we amended and restated the Original Sales Agreement with Cowen, or the Amended and Restated
Sales Agreement, in order to increase the maximum aggregate offering price of our shares of common stock that may be offered from
time to time in “at-the-market offerings” by $15.0 million from $30.0 million to $45.0 million. On February 2, 2018,
we filed a prospectus supplement with the SEC in connection with the issuance and sale of the additional shares available under
the 2017 Shelf. We refer to the Original Sales Agreement and the Amended and Restated Sales Agreement collectively as the Sales
Agreement.
Under the Sales Agreement, we paid Cowen a commission of up to 3% of the gross proceeds. During the six months
ended June 30, 2018, the Company sold 4,135,993 shares of common stock pursuant to the Sales Agreement, resulting in proceeds of
$7.5 million, net of commissions and issuance costs. However, upon the delisting of our common stock from The Nasdaq Capital Market
in April 2018, we ceased to sell any additional shares under the Sales Agreement.
Follow-On Public Offering
.
On August
2, 2016, we issued and sold 454,545 shares of common stock and warrants to purchase an aggregate of 340,909 shares of common stock,
in an underwritten public offering at a price to the public of $110.00 per share and accompanying warrant. The shares of common
stock and warrants were sold in combination, with one warrant to purchase up to 0.75 of a share of common stock accompanying each
share of common stock sold. The warrants have an exercise price of $110.00 per share, became immediately exercisable upon issuance
and will expire on August 2, 2021. The aggregate net proceeds to us of the offering were approximately $48.2 million after deducting
underwriting discounts and commissions and offering expenses.
Convertible Note
.
On June 15, 2017, we entered into a convertible note purchase
agreement with Pharmstandard, pursuant to which we agreed to issue and sell to Pharmstandard a convertible secured promissory note
in the original principal amount of $6.0 million in a private placement. We issued the note to Pharmstandard on June 21, 2017,
the closing date of the financing. Under the note, the maturity date for the payment of principal and interest is the fifth anniversary
of the issue date. The note bears interest at a rate of 9.5% per annum, which interest compounds annually. The note is secured
by a lien on and security interest in all of our intellectual property. We may prepay the note in whole or in part at any time
without penalty or premium. Upon the occurrence of certain events of default, Pharmstandard will have the option to require us
to repay the unpaid principal amount of the note and any unpaid accrued interest.
In addition, at Pharmstandard’s election, Pharmstandard
may convert the entire principal and interest of the note into shares of our common stock at a price per share equal to $10.00.
However, Pharmstandard will not be permitted to convert the entire note if such conversion would result in Pharmstandard and its
affiliates holding shares that exceed 39.9% of the total number of outstanding shares of our common stock or 39.9% of the combined
voting power of all of our outstanding securities. To the extent that conversion of the entire note would cause Pharmstandard and
its affiliates to exceed these thresholds, Pharmstandard may convert a portion of the note to the extent these thresholds are not
exceeded by such partial conversion.
Pharmstandard is our largest stockholder, and beneficially owned,
in the aggregate, shares representing approximately 14.49% of our outstanding common stock as of August 17, 2018. In addition,
two members of our board of directors are closely associated with Pharmstandard.
We paid $23,000 in legal expenses of Pharmstandard, including
legal expenses incurred in connection with our resale registration obligations set forth in a registration rights agreement that
we entered into with Pharmstandard. We have granted Pharmstandard, and Pharmstandard has granted us, indemnification rights with
respect to each parties’ respective representations, warranties, covenants and agreements under the note purchase agreement.
Cash Flows
The following table sets forth the major sources and uses of
cash for the periods set forth below:
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2018
|
|
|
(in thousands)
|
|
|
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(24,145
|
)
|
|
$
|
(10,778
|
)
|
Investing activities
|
|
|
(2,138
|
)
|
|
|
610
|
|
Financing activities
|
|
|
(17,357)
|
|
|
|
7,110
|
|
Effect of exchange rate changes on cash
|
|
|
4
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(43,636)
|
|
|
$
|
(3,063
|
)
|
Operating Activities
.
Net cash used in operating activities of $10.8 million during the six months ended June 30, 2018
was primarily a result of our $8.6 million net loss and an increase in net operating assets of $5.1 million, partially offset by
non-cash items of $2.9 million.
The increase in net operating assets reflects a decrease in
deferred revenue of $4.9 million, a decrease in accounts payable of $0.9 million and an increase in prepaid expenses and other
receivables of $0.6 million, partially offset by an increase in accrued expenses of $1.3 million.
The non-cash items primarily reflect compensation expense related
to stock options of $1.4 million, depreciation and amortization expense of $0.9 million, interest accrued on long term debt of
$0.3 million and issuance of common stock for a license option of $0.2 million, partially offset by a decrease in the fair value
of the warrant liability of $0.2 million.
Net cash used in operating activities of $24.1 million during
the six months ended June 30, 2017 was primarily a result of our $32.6 million net loss and an increase in net operating
assets of $4.3 million, partially offset by non-cash items of $12.8 million.
The increase in net operating assets reflects a decrease in
accounts payable of $2.4 million, a decrease in accrued expenses of $1.9 million, an increase in prepaid expenses and other receivables
of $0.5 million and a decrease in deferred liabilities of $0.1 million, partially offset by an increase in the current portion
of the restructuring obligation of $0.3 million and an increase in the manufacturing research and development obligation of $0.2
million.
The non-cash items primarily reflect an impairment loss on property
and equipment of $27.2 million, compensation expense related to stock options of $5.1 million, depreciation and amortization expense
of $0.5 million and interest accrued on long term debt of $0.5 million, partially offset by a decrease in the fair value of the
warrant liability of $20.2 million and a gain on the early extinguishment of debt of $0.2 million.
Investing Activities.
Net cash provided by investing activities
was $0.6 million during the six months ended June 30, 2018, consisting of proceeds of $0.6 million from the sale of property
and equipment.
Net cash used in investing activities was
$2.1 million during the six months ended June 30, 2017, consisting of $3.6 million of purchases of property and equipment,
partially offset by proceeds of $1.5 million from the sale of property and equipment.
Financing Activities.
Net cash provided by financing activities was $7.1 million
during the six months ended June 30, 2018, consisting primarily of $7.5 million of proceeds from the issuance of common stock
through our at-the-market offering and the sale of $0.4 million of common stock to Lummy HK, partially offset by $0.8 million
of debt amortization payments.
Net cash used in financing activities was $17.4 million during
the six months ended June 30, 2017, consisting primarily of $23.6 million for repayment of the Loan Agreement, partially offset
by $6.0 million of proceeds from the convertible note issued to Pharmstandard and $0.3 million of proceeds from the issuance of
common stock through our at-the-market offering.
Funding Requirements
To date, we have not generated any product revenue from our development stage product candidates. We do not
know when, or if, we will generate any product revenue. We do not expect to generate significant product revenue unless or until
we obtain marketing approval of, and commercialize, a product candidate.
As of June 30, 2018, we had cash and cash equivalents of $12.1
million. We do not currently have sufficient cash resources to pay all of our accrued obligations in full or to continue our business
operations beyond the end of 2018. As a result, in order to continue to operate our business beyond that time, we will need to
raise additional funds. However, there can be no assurance that we will be able to generate funds on terms acceptable to us, on
a timely basis, or at all.
In light of the termination of the development of rocapuldencel-T, cessation of our research and development
activities and our cash resources, and based on a review of the status of our internal programs, resources and capabilities, we
are exploring a wide range of strategic alternatives that may include a potential merger or sale of our company, a strategic partnership
with one or more parties or the licensing, sale or divestiture of some or all of our assets or proprietary technologies, among
other potential alternatives. There can be no assurance that we will be able to enter into a strategic transaction or transactions
on a timely basis, on terms that are favorable to us, or at all. If we are unable to successfully conclude a strategic transaction
in the near future, we expect that we will seek protection under the bankruptcy laws in order to continue to pursue potential transactions
and conduct a wind-down of our company. If we decide to seek protection under the bankruptcy laws, and if we decide to wind down
the company under the bankruptcy laws or otherwise, it is unclear to what extent we will be able to pay our obligations to creditors,
and, whether and to what extent any resources will be available for distributions to our stockholders. However, based on our current
resources, we believe that it is unlikely that any resources will be available for distributions to our stockholders and that a
likely outcome of our wind-down and potential bankruptcy proceeding will be the cancellation or extinguishment of all outstanding
shares in the company without any payment or other distribution on account of those shares.
On April 23, 2018, we received a notification from The Nasdaq
Stock Market LLC indicating that, because we had indicated that we would be unable to meet the stockholders’ equity requirement
for continued listing as of the April 24, 2018 deadline that had been set by the Nasdaq Hearing Panel, the Nasdaq Hearing Panel
had determined to delist our common stock from The Nasdaq Capital Market and to suspend trading in our common stock effective at
the open of business on April 25, 2018. Following such delisting, we transferred our common stock to the OTCQB® Venture Market.
Because our common stock is not listed for trading on a national securities exchange, our ability to raise capital to continue
to fund our operations by selling shares and our ability to acquire other companies or technologies by using our shares as consideration
has been impaired.
We have based our estimates on assumptions that may prove to
be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties
associated with the development and commercialization of product candidates, we are unable to estimate the amounts of increased
capital outlays and operating expenditures necessary to complete the development of product candidates.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial
condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with
U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments
on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions
or conditions.
Our significant accounting policies are described in Note 1
of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017. Other than
as described below, there have been no significant changes to our critical accounting policies since December 31, 2017.
Revenue Recognition.
An important part of our business
strategy has been to enter into arrangements with third parties both to assist in the development and commercialization of our
product candidates, particularly in international markets, and to in-license product candidates in order to expand our pipeline.
The terms of the agreements typically include non-refundable license fees, funding of research and development, payments based
upon achievement of clinical development and regulatory objectives, and royalties on product sales. We have adopted the provisions
of the Financial Accounting Standards Board, or FASB, Codification Topic 606, Revenue from Contracts with Customers, or Topic 606,
effective January 1, 2018. This guidance supersedes the provisions of FASB Codification Topic 605, Revenue Recognition.
License Fees and Multiple Element Arrangements.
If a
license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement,
we recognize revenues from non-refundable, up-front fees allocated to the license at such time as the license is transferred to
the licensee and the licensee is able to use, and benefit from, the license. For licenses that are bundled with other promises,
we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation
is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing
revenue from non-refundable, up-front fees. We evaluate the measure of progress in each reporting period and, if necessary, adjusts
the measure of performance and related revenue recognition.
If we are involved in a steering committee as part of a multiple
element arrangement, we assess whether our involvement constitutes a performance obligation or a right to participate. Steering
committee services that are determined to be performance obligations are combined with other research services or performance obligations
required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which
we expect to complete our aggregate performance obligations.
If we cannot reasonably measure its progress toward complete
satisfaction of a performance obligation because it lacks reliable information that would be required to apply an appropriate method
of measuring progress, but we can reasonably estimate when the performance obligation ceases or the remaining obligations become
inconsequential and perfunctory, then revenue is not recognized until we can reasonably estimate when the performance obligation
ceases or becomes inconsequential. Revenue is then recognized over the remaining estimated period of performance.
Significant management judgment is required in determining the
level of effort required under an arrangement and the period over which we are expected to complete our performance obligations
under an arrangement.
Development Milestone Payments.
At the inception of each
arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being achieved
and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant
revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that
are not within our control or the control of the licensee, such as regulatory approvals, are not considered probable of being achieved
until those approvals are received. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks
that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in
determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting
period, we reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjusts our estimate
of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues
and earnings in the period of adjustment.
Reimbursement of Costs.
Reimbursement of research and
development costs by third party collaborators is recognized as revenue over time provided we have determined that it transfers
control (for example, performs the services) of a service over time and, therefore, satisfies a performance obligation according
to the provisions outlined in the FASB Codification Topic 606-10-25-27, Revenue Recognition.
Royalty Revenue.
For arrangements that include sales-based
royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for
which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i)
when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has
been satisfied or partially satisfied. To date, we have not recognized any royalty revenue resulting from any of its collaboration
agreements.
Deferred Revenue.
Amounts received prior to satisfying
the above revenue recognition criteria are recorded as deferred revenue in the accompanying condensed consolidated balance sheets.
Short-term deferred revenue would consist of amounts that are expected to be recognized as revenue within the next fiscal year.
Amounts that the we expect will not be recognized in the next fiscal year would be classified as long-term deferred revenue.
With respect to each of the foregoing areas of revenue recognition,
we exercise significant judgment in determining whether an arrangement contains multiple elements, and, if so, how much revenue
is allocable to each element. In addition, we exercise our judgment in determining when its significant obligations have been met
under such agreements and the specific time periods over which we recognized revenue, such as non-refundable, up-front license
fees. To the extent that actual facts and circumstances differ from our initial judgments, revenue recognition with respect to
such transactions would change accordingly and any such change could affect our reported financial results.
Contractual Obligations
During the six months ended June 30, 2018, there were no material
changes outside the ordinary course of our business to our contractual obligations as disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2017.