Notes to Condensed Consolidated Financial
Statements
(Unaudited)
1. Nature of Operations
Description of the Business
The Company was incorporated on March 15,
2000 in California and reincorporated as a Delaware corporation in September 2001 under the name KaloBios Pharmaceuticals, Inc.
Effective August 7, 2017, the Company changed its legal name to Humanigen, Inc.
During
February 2018, the Company completed the restructuring transactions announced in December 2017 and furthered its
transformation into a biopharmaceutical company pursuing cutting-edge science to develop its proprietary monoclonal
antibodies for various oncology indications and to enhance T-cell engaging therapies, potentially making these treatments
safer, more effective and more efficiently administered.
The
Company’s primary focus is on improving the efficacy and safety of approved and development stage chimeric antigen
receptor T-cell therapy, also known as CAR-T, through the prophylactic administration of its proprietary Humaneered
®
monoclonal antibody, lenzilumab, the Company’s lead product candidate. The prophylactic administration of lenzilumab
in combination with CAR-T is in development to prevent the serious and potentially life-threatening side-effects associated
with CAR-T while simultaneously making those therapies more effective, efficient and cost-effective. Identifying, treating
and managing severe side-effects of CAR-T consumes significant hospital resources and additional costs that we believe
have impeded the pace of adoption of these promising and highly effective treatments as the standard of care for
certain hematologic cancers. These side-effects may also hamper the use of CAR-T in earlier stage treatment of hematologic
cancers as well as the expansion of CAR-T into treatment of solid tumors, both of which represent significant growth drivers
for the overall CAR-T marketplace.
There
are currently no FDA-approved therapies available for the prevention of the serious side-effects associated with CAR-T.
Pre-clinical data generated in partnership with the Mayo Clinic indicates that the use of lenzilumab may prevent or
significantly minimize the onset of both CAR-T induced neurologic toxicities (NT) and cytokine release syndrome (CRS) while
also enhancing the proliferation and effector functions of the CAR-T itself, thus simultaneously improving efficacy and
potentially reducing relapse rates, a key issue with current CAR-T where approximately half the patients who initially
respond have relapsed within a year of therapy. The Company continues to advance the development of lenzilumab through
clinical trials that it expects will serve as the basis for registration in close collaboration with some of the leading and
most experienced investigators in the CAR-T field. The Company is also exploring additional partnerships with established
CAR-T companies as a potential means of accelerating the development and commercialization of lenzilumab in conjunction with
their existing CAR-T offerings. The Company aims to position lenzilumab as an essential companion product to CAR-T and a
necessary part of the standard pre-conditioning drug regimen that all patients treated with CAR-T currently receive.
Lenzilumab is a recombinant monoclonal antibody
(mAb) that neutralizes soluble granulocyte-macrophage colony-stimulating factor (GM-CSF) a critical cytokine which is elevated
early in the inflammatory cascade and where peak levels are associated with serious and potentially life-threatening CAR-T-related
side-effects. GM-CSF is also implicated in the growth of certain hematologic malignancies, such as chronic myelomonocytic leukemia
(CMML) and juvenile myelomonocytic leukemia (JMML), graft-versus-host-disease (GVHD) associated with hematopoietic stem cell transplant
(HSCT), hemophagocytic lymphoproliferative disease (HLH), macrophage activation syndrome (MAS), certain solid tumors and other
serious conditions, particularly a range of auto-immune conditions.
There is extensive published evidence from
multiple academic and expert clinical centers linking early elevation of GM-CSF to serious and potentially life-threatening side-effects
in CAR-T therapy. Following CAR-T administration GM-CSF initiates a signaling cascade of inflammation that results in the trafficking
and recruitment of myeloid cells to the tumor site. These myeloid cells then produce key downstream cytokines known to be associated
with development of NT and CRS, further perpetuating the inflammatory cascade.
Peer-reviewed publications in leading journals
by well-recognized experts have shown that GM-CSF is a biomarker elevated in patients who suffer severe NT as a side-effect of
CAR-T. Pre-clinical studies have demonstrated lenzilumab’s effectiveness in preventing CRS and significantly reducing NT
associated with CAR-T. The data from these studies also shows an increase in CAR-T cell expansion when lenzilumab is administered
prophylactically in combination with CAR-T.
On
May 30, 2019, the Company entered into a Clinical Collaboration Agreement (the “Collaboration Agreement) with Kite
Pharma, Inc. (“Kite”), a wholly owned subsidiary of Gilead Sciences, Inc., pursuant to which the parties agreed
to conduct a multi-center Phase 1b/2 study of lenzilumab with Kite’s Yescarta
®
(axicabtagene
ciloleucel) in patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) (the “Study”). The
primary objective of the Study is to determine the effect of lenzilumab on the safety of Yescarta. Various other
important parameters, including efficacy and healthcare resource utilization, will also be measured. Kite will act as the
sponsor of the Study and will be responsible for its conduct.
On June 19, 2019 the
Company entered into an exclusive worldwide license agreement (the “Mayo Agreement”) with the Mayo Foundation for Medical
Education and Research (“Mayo”) for certain technologies used to create CAR-T cells lacking GM-CSF expression through
various gene-editing tools including CRISPR-Cas9 (GM-CSF knock-out). The license covers various patent applications and know-how
developed by Mayo in collaboration with the Company. These licensed technologies complement and broaden the Company’s position
in the GM-CSF neutralization space and expand the Company’s discovery platform aimed at improving CAR-T to include gene-edited
CAR-T cells.
On July 19, 2019 the
Company entered into an exclusive worldwide license agreement (the “Zurich Agreement”) with the University of Zurich
(“UZH”) for technology used to prevent Graft versus Host Disease (“GvHD”) through GM-CSF neutralization.
The Zurich Agreement covers various patent applications filed by UZH which complement and broaden the Company’s position
in the application of GM-CSF and expands the Company’s development platform to include improving allogeneic Hematopoietic
Stem Cell Transplantation (“HSCT”).
Ifabotuzumab is an anti-Eph Type-A receptor
3 (EphA3) mAb that has the potential for treating solid tumors, hematologic malignancies and serious pulmonary conditions. Anti-EphA3
as a CAR-T construct, which utilizes certain sequences of ifabotuzumab to generate a specific type of CAR-T, may also be useful
in the treatment of a range of cancers. The Company is collaborating with an expert CAR-T center to make a series of CAR constructs
based on ifabotuzumab, of which initial constructs have been created, and plans to move to pre-clinical testing with these constructs
for a range of cancer types. EphA3 is a tumor specific antigen expressed on the surface of a multitude of solid bulk tumor cells,
tumor stroma cells and tumor vasculature in certain cancers. The Company completed the Phase I dose escalation portion of a Phase
I/II clinical trial in ifabotuzumab in multiple hematologic malignancies for which the preliminary results were published in the
journal
Leukemia Research
in 2016. A Phase I radio-labeled imaging trial of ifabotuzumab in recurrent glioblastoma multiforme,
a particularly aggressive and deadly form of brain cancer, is currently enrolling at two centers in Australia, the Olivia-Newton
John Cancer Research Institute (ONJCRI) in Melbourne and the Queensland Institute for Medical Research in Brisbane. The lead investigators
at the ONJCI, are also evaluating an antibody-drug conjugate (ADC) comprising ifabotuzumab. The current trial has enrolled
eight patients to date, and is expected to complete enrollment with a total of twelve patients by year end and to report on the
initial findings soon thereafter. The Company continues to explore partnering opportunities to facilitate the further
development of ifabotuzumab in a range of cancer types.
HGEN005 is a pre-clinical stage anti-human
epidermal growth factor-like module containing mucin-like hormone receptor 1 (EMR1) mAb. EMR1 is a therapeutic target for eosinophilic
disorders. Eosinophils are a type of white blood cell. If too many are produced in the body, chronic inflammation and tissue and
organ damage may result. Analysis of blood and bone marrow shows that surface expression of EMR1 is restricted to mature eosinophils
and correlated with eosinophilia. Tissue eosinophils also express EMR1. In pre-clinical work, the Company has demonstrated that
eosinophil killing is enhanced in the presence of HGEN005 and immune effector cells. A major limitation of current eosinophil targeted
therapies is incomplete depletion of tissue eosinophils and/or lack of cell selectivity, which may mean that HGEN005 could offer
promise in a range of eosinophil-driven diseases, such as eosinophilic asthma, eosinophilic esophagitis and eosinophilic granulomatosis
with polyangiitis. The Company is considering developing a series of CAR constructs based on HGEN005 and may take or partner these
constructs, if developed, into pre-clinical testing. Importantly, and in contrast to other agents, HGEN005 appears to have an effect
solely on eosinophils, without impacting other populations, such as mast cells.
The Company’s monoclonal antibody
portfolio was developed with its proprietary, patent-protected Humaneered
®
technology, which consists of methods
for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use, with
a focus on oncology and other serious, chronic conditions.
Liquidity and Going Concern
The Company has incurred significant losses
since its inception in March 2000 and had an accumulated deficit of $280.5 million as of June 30, 2019. At June 30, 2019,
the Company had a working capital deficit of $8.1 million. To date, none of the Company’s product candidates has been
approved for sale and therefore the Company has not generated any revenue from product sales. Management expects operating losses
to continue for the foreseeable future. The Company will require additional financing in order to meet its anticipated cash flow
needs during the next twelve months. As a result, the Company will continue to require additional capital through equity offerings,
debt financing and/or payments under new or existing licensing or collaboration agreements. If sufficient funds are not available
on acceptable terms when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce
the scope of, or eliminate one or more of its development programs. The Company’s ability to access capital when needed is
not assured and, if not achieved on a timely basis, could materially harm its business, financial condition and results of operations.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Condensed Consolidated Financial Statements
for the three and six months ended June 30, 2019 were prepared on the basis of a going concern, which contemplates that the Company
will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its
total liabilities of $12.3 million at June 30, 2019 and to continue as a going concern is dependent upon the availability of future
funding. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as
a going concern.
Basis of Presentation
The accompanying interim unaudited Condensed
Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S.
GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements and
include all adjustments necessary for the presentation of the Company’s condensed consolidated financial position, results
of operations and cash flows for the periods presented. The Condensed Consolidated Financial Statements include the accounts of
the Company and its wholly owned subsidiaries. These financial statements have been prepared on a basis that assumes that the Company
will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments
in the normal course of business. The December 31, 2018 Condensed Consolidated Balance Sheet was derived from the audited
financial statements but does not include all disclosures required by U.S. GAAP. These interim financial results are not necessarily
indicative of the results to be expected for the year ending December 31, 2019, or for any other future annual or interim
period. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated
financial statements and the related notes thereto included in the Company’s 2018 Form 10-K.
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported
in the Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.
The Company believes judgment is involved in determining the valuation of the fair value-based measurement of stock-based compensation,
accruals and warrant valuations. The Company evaluates its estimates and assumptions as facts and circumstances dictate. As future
events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions,
and those differences could be material to the Condensed Consolidated Financial Statements.
2. Chapter 11 Filing
On December 29, 2015, the Company filed
a voluntary petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The filing was made in the United
States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) (Case No. 15-12628 (LSS) (the “Bankruptcy
Case”). The Company’s Plan of Reorganization filed with the Bankruptcy Court (the “Plan”) became effective
June 30, 2016 and the Company emerged from its Chapter 11 bankruptcy proceedings.
The reconciliation of certain proofs of
claim filed against the Company in the Bankruptcy Case, including certain General Unsecured Claims, Convenience Class Claims and
Other Subordinated Claims, is complete. As a result of its examination of the claims, the Company asked the Bankruptcy Court
to disallow, reduce, reclassify, subordinate or otherwise adjudicate certain claims the Company believes are subject to objection
or otherwise improper. On July 11, 2018, the Company filed an objection to the remaining claims. By objection, the Company
sought to disallow in their entirety the remaining claims totaling approximately $0.5 million. On September 17, 2018 the Bankruptcy
Court issued a Final Decree and Order to close the Bankruptcy Case and terminate the remaining claims and noticing services.
For the three and six months ended June
30, 2019 and 2018, Reorganization items, net consisted of the following charges related to the bankruptcy proceedings:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Legal fees
|
|
$
|
-
|
|
|
$
|
23
|
|
|
$
|
-
|
|
|
$
|
53
|
|
Professional fees
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
13
|
|
Total reorganization items, net
|
|
$
|
-
|
|
|
$
|
29
|
|
|
$
|
-
|
|
|
$
|
66
|
|
There were no cash payments for reorganization
for the three and six months ended June 30, 2019. Cash payments for reorganization items totaled $0.07 million and $0.09 million
for the three and six months ended June 30, 2018, respectively.
3. Summary of Significant Accounting Policies
There have been no material changes in the
Company’s significant accounting policies since those previously disclosed in the 2018 Form 10-K.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash”. ASU 2016-18 requires the inclusion of restricted cash with
cash and cash equivalents when reconciling the beginning-of-the period and end-of-period total amounts shown on the statement
of cash flows. The Company adopted the standard effective January 1, 2018. As a result of the adoption, the Company will no longer
present the change within restricted cash in the consolidated statements of cash flows. See below for the composition of cash,
cash equivalents and restricted cash shown on the statements of cash flow:
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
1,091
|
|
|
$
|
267
|
|
Restricted cash
|
|
|
71
|
|
|
|
71
|
|
Total cash, cash equivalents and restricted cash as shown on statement of cash flows
|
|
$
|
1,162
|
|
|
$
|
338
|
|
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation
and disclosure of leases for both lessees and lessors. The FASB subsequently issued ASU No. 2018-10 and 2018-11 in July 2018, which
provide clarifications and improvements to ASU 2016-02 (collectively, the “new lease standard”).
ASU No. 2018-11 provides the optional transition
method which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period
presented and continue to apply the provisions of the previous lease standard in its annual disclosures for the comparative periods.
The new lease standard requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet.
Additional footnote disclosures related to leases is also required.
On January 1, 2019, the Company adopted
the new lease standard using the optional transition method and certain other practical expedients. Under the practical expedient
package elected, the Company is not required to reassess whether expired or existing contracts are or contain a lease; and is not
required to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases.
The new lease standard also provides practical
expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases
that qualify. This means, for those leases that qualify, we will not recognize right of use assets or lease liabilities, and this
includes not recognizing right of use assets or lease liabilities for existing short-term leases of those assets in transition.
The Company elected the practical expedient to not separate lease and non-lease components for certain classes of assets. See
Note 4 for a description of the Company’s current leases and their treatment under the new lease standard.
4. Leases
The Company leases an office-space under
a month-to-month lease for $1,000 per month. Management has determined the lease term to be less than 12 months, including renewals,
and therefore has not recorded a right-of-use asset and corresponding liability under the short-term lease recognition exemption.
Lease costs for the three and six months ended June 30, 2019 totaled $3,000 and $6,400, respectively and are included in the Consolidated
Statements of Operations.
As described in Note 3, the Company has
elected to adopt the transitional practical expedients, and was not required to reassess whether any existing or expired contracts
contained embedded leases. The Company has not entered into any contracts during the 2019 fiscal year that contain an embedded
lease.
5. Potentially Dilutive Securities
The Company’s potentially dilutive
securities, which include stock options, restricted stock units and warrants, have been excluded from the computation of diluted
net loss per common share as the effect of including those securities would be to reduce the net loss per common share and be antidilutive.
Therefore, the denominator used to calculate both basic and diluted net loss per common share is the same in each period presented.
The following outstanding potentially dilutive
securities have been excluded from the computations of diluted net loss per common share:
|
|
As of June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Options to purchase common stock
|
|
|
15,139,374
|
|
|
|
15,651,023
|
|
Warrants to purchase common stock
|
|
|
331,193
|
|
|
|
331,193
|
|
|
|
|
15,470,567
|
|
|
|
15,982,216
|
|
6. Fair Value of Financial Instruments
Cash, accounts payable and accrued liabilities
are carried at cost, which approximates fair value given their short-term nature. Marketable securities and cash equivalents are
carried at fair value. The Company has money market funds of $71 at June 30, 2019 and December 31, 2018 that are reported as restricted
cash on the balance sheet. The amortized cost of these funds equals their fair value as there were no unrealized gains or losses
at June 30, 2019 or December 31, 2018.
The fair value of financial instruments
reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that
may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable,
as follows:
Level 1 — Quoted prices in
active markets for identical assets or liabilities.
Level 2 — Inputs other than
those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in
active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs
that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company measures the fair value of
financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The
following tables summarize the fair value of financial assets that are measured at fair value and the classification by level
of input within the fair value hierarchy:
|
|
Fair Value Measurements as of
|
|
|
|
June 30, 2019
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71
|
|
Total assets measured at fair value
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71
|
|
|
|
Fair Value Measurements as of
|
|
|
|
December 31, 2018
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71
|
|
Total assets measured at fair value
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71
|
|
7. Debt
Notes Payable to Vendors
On June 30, 2016, the Company issued promissory
notes in an aggregate principal amount of approximately $1.2 million to certain claimants in accordance with the Plan. The notes
are unsecured, bear interest at 10% per annum and became due and payable in full, including principal and accrued interest on June
30, 2019. As of June 30, 2019 and December 31, 2018, the Company has accrued $0.4 million and $0.3 million in interest related
to these promissory notes, respectively. As June 30, 2019 fell on a Sunday, in July 2019 the Company used approximately $0.5 million
of the proceeds from the 2019 Bridge Notes (described below) to retire a portion of these notes. (See below for a discussion of
the 2019 Bridge Notes including proceeds received subsequent to June 30, 2019.) After giving effect to these payments in July,
the aggregate principal amount and accrued but unpaid interest on these notes approximates $1.1 million. The outstanding principal
amount and accrued but unpaid interest on these notes is currently payable to the respective holders without demand, notice or
declaration, and the holders, without demand or notice of any kind, may exercise any and all other rights and remedies available
to them under the notes, the Plan, at law or in equity. We do not have sufficient funds to repay the principal and accrued but
unpaid interest on these notes in their entirety. See Part II, Item 1A. “Risk Factors” for more information.
Advance Notes
In June, July and August, 2018 the Company
received an aggregate of $0.9 million of proceeds from advances made to the Company (the “Advance Notes”) by four different
lenders including Dr. Cameron Durrant, the Company’s Chairman and Chief Executive Officer; Cheval Holdings, Ltd., an affiliate
of Black Horse Capital, L.P., the Company’s controlling stockholder; and Ronald Barliant, a director of the Company (collectively
the “Lenders”). The Advance Notes accrued interest at a rate of 7% per year, compounded annually.
In accordance with their terms, on May 30,
2019, in connection with the Company’s announcement of the Collaboration Agreement with Kite, the lenders converted the amounts
due under the Advance Notes into the Company’s common stock at the conversion price of $0.45 per share. The Company issued
a total of 2,179,622 shares of common stock in connection with the conversion.
2018 Convertible Notes
Commencing September 19, 2018, the Company
delivered a series of convertible promissory notes (the “2018 Notes”) evidencing an aggregate of $2.5 million of loans
made to the Company by six different lenders, including an affiliate of Black Horse Capital, L.P., the Company’s controlling
stockholder. The 2018 Notes bear interest at a rate of 7% per annum and will mature on the earliest of (i) twenty-four months
from the date the Notes were signed, (ii) the occurrence of any customary event of default, or (iii) the certain liquidation events
including any dissolution or winding up of the Company or merger or sale by the Company of all or substantially all of its assets
(in any case, a “Liquidation Event”). The Company used the proceeds from the Notes for working capital.
The 2018 Notes are convertible into equity
securities in the Company in three different scenarios:
If the Company sells its equity securities
on or before the date of repayment of the 2018 Notes in any financing transaction that results in gross proceeds to the Company
of at least $10 million (a “Qualified Financing”), the 2018 Notes will be converted into either (i) such equity securities
as the noteholder would acquire if the principal and accrued but unpaid interest thereon (the “Conversion Amount”)
were invested directly in the financing on the same terms and conditions as given to the financing investors in the Qualified Financing,
or (ii) common stock at a conversion price equal to $0.45 per share (subject to ratable adjustment for any stock split, stock dividend,
stock combination or other recapitalization occurring subsequent to the date of the Notes).
If the Company sells its equity securities
on or before the date of repayment of the 2018 Notes in any financing transaction that results in gross proceeds to the Company
of less than $10 million (a “Non-Qualified Financing”), the noteholders may convert their remaining 2018 Notes into
either (i) such equity securities as the noteholder would acquire if the Conversion Amount were invested directly in the financing
on the same terms and conditions as given to the financing investors in the Non-Qualified Financing, or (ii) common stock at a
conversion price equal to $0.45 per share (subject to ratable adjustment for any stock split, stock dividend, stock combination
or other recapitalization occurring subsequent to the date of the Notes).
The 2018 Notes may convert in the event
the Company enters into or publicly announces its intention to consummate a Liquidation Event. Immediately prior to the completion
of any such Liquidation Event, in lieu of receiving payment in cash, noteholders may convert the Conversion Amount into common
stock at a conversion price equal to $0.45 per share (subject to ratable adjustment for any stock split, stock dividend, stock
combination or other recapitalization occurring subsequent to the date of the Notes).
2019 Convertible Notes
Commencing on April
23, 2019, the Company delivered a series of convertible promissory notes (the “2019 Notes”) evidencing an aggregate
of $1.3 million of loans made to the Company.
The 2019 Notes bear interest at a rate of
7.5% per annum and will mature on the earliest of (i) twenty-four months from the date the 2019 Notes are signed (the “Stated
Maturity Date”), (ii) the occurrence of any customary event of default, or (iii) the certain liquidation events including
any dissolution or winding up of the Company or merger or sale by the Company of all or substantially all of its assets (in any
case, a “Liquidation Event”). The Company used the proceeds from the 2019 Notes for working capital.
The 2019 Notes
are convertible into equity securities in the Company in four different scenarios:
If the Company
sells its equity securities on or before the Stated Maturity Date in any financing transaction that results in gross proceeds to
the Company of at least $10.0 million (a “Qualified Financing”) or the Company consummates a reverse merger or similar
transaction, the 2019 Notes will be converted into either (i) (a) in the case of a Qualified Financing, such equity securities
as the noteholder would acquire if the principal and accrued but unpaid interest thereon together with such additional amount of
interest as would have been paid on the 2019 Notes if held to the Stated Maturity Date (the “Conversion Amount”) were
invested directly in the financing on the same terms and conditions (including price) as given to the financing investors in the
Qualified Financing or (b) in the case of a reverse merger, common stock at the same price per share paid by the buyer in such
transaction (which in a stock for stock transaction, shall be based on the price per share used by the parties for purposes of
setting the applicable exchange ration), or (ii) common stock at a conversion price equal to $1.25 per share (subject to ratable
adjustment for any stock split, stock dividend, stock combination or other recapitalization occurring subsequent to the date of
the 2019 Notes).
If the Company
sells its equity securities on or before the date of repayment of the 2019 Notes in any financing transaction that results in gross
proceeds to the Company of less than $ 10.0 million (a “Non-Qualified Financing”), the noteholders may convert their
remaining Convertible Notes into either (i) such equity securities as the noteholder would acquire if the Conversion Amount were
invested directly in the financing on the same terms and conditions (including price) as given to the financing investors in the
Non-Qualified Financing, or (ii) common stock at a conversion price equal to $1.25 per share (subject to ratable adjustment for
any stock split, stock dividend, stock combination or other recapitalization occurring subsequent to the date of the 2019 Notes).
The 2019 Notes
may convert in the event the Company enters into or publicly announces its intention to consummate a Liquidation Event. Immediately
prior to the completion of any such Liquidation Event, in lieu of receiving payment in cash, noteholders may convert the Conversion
Amount into common stock at a conversion price equal to $1.25 per share (subject to ratable adjustment for any stock split, stock
dividend, stock combination or other recapitalization occurring subsequent to the date of the 2019 Notes).
In addition, upon the six-month anniversary
of the date the 2019 Notes are signed or such earlier time as the Company publicly announces that it has entered into a definitive
arrangement with an unaffiliated third party (a “Strategic Partner”) pursuant to which, among other things, such Strategic
Partner may agree to collaborate with the Company in conducting a clinical study to assess the efficacy of the Company’s
lenzilumab monoclonal antibody in reducing adverse effects from neurotoxicity and cytokine release syndrome when used as a companion
therapy in certain CAR-T cell therapies, noteholders may convert any portion of the outstanding principal amount of the 2019 Notes,
together with (a) any unpaid and accrued interest on such principal amount to the date the noteholder’s notice of the noteholder’s
intention to convert is received by the Company (the “Notice Date”), and (b) such additional amount of interest as
would have been paid on such principal amount from the Notice Date to the Stated Maturity Date, into common stock at a conversion
price equal to $1.25 per share (subject to ratable adjustment for any stock split, stock dividend, stock combination or other recapitalization
occurring subsequent to the date of the 2019 Notes). The Company’s announcement of the Collaboration Agreement with Kite
satisfied this requirement and accordingly, the 2019 Notes are convertible into common stock on the above terms.
The Advance Notes, the 2018 Notes and the
2019 Notes have an optional voluntary conversion feature in which the holder could convert the notes in the Company’s common
stock at maturity at a conversion rate of $0.45 per share for the Advance Notes and the 2018 Notes and at a conversion rate of
$1.25 for the 2019 Notes. The intrinsic value of this beneficial conversion feature was $1.8 million upon the issuance of the Advance
Notes, the 2018 Notes and the 2019 Notes and was recorded as additional paid-in capital and as a debt discount which is accreted
to interest expense over the term of the Advance Notes and Notes. Interest expense includes debt discount amortization of $0.2
million and $0.4 million for the three and six month periods ended June 30, 2019.
The Company evaluated the embedded features
within the Advance Notes, the 2018 Notes and the 2019 Notes to determine if the embedded features are required to be bifurcated
and recognized as derivative instruments. The Company determined that the Advance Notes, the 2018 Notes and the 2019 Notes contain
contingent beneficial conversion features (“CBCF”) that allow or require the holder to convert the Advance Notes, the
2018 Notes and the 2019 Notes, as applicable, to Company common stock at a conversion rate of $0.45 per share for the Advance Notes
and the 2018 Notes and $1.25 for the 2019 Notes, but did not contain embedded features requiring bifurcation and recognition as
derivative instruments. Upon the occurrence of a CBCF that results in conversion of the Advance Notes, the 2018 Notes or the 2019
Notes to Company common stock, the remaining unamortized discount will be charged to interest expense. Upon conversion of the Advance
Notes on May 30, 2019, the remaining unamortized discount was charged to interest expense. The remaining debt discount will be
amortized over 15 and 22 months for the 2018 Notes and the 2019 Notes, respectively.
2019 Bridge
Notes
On
June 28, 2019, the Company issued three short-term, secured bridge notes (the “2019 Bridge Notes”) evidencing an aggregate
of $1.7 million of loans made to the Company by three parties: Cheval Holdings, Ltd., an affiliate of Black Horse Capital,
L.P., the Company’s controlling stockholder, lent $750,000; Nomis Bay LTD, the Company’s second largest stockholder,
lent $750,000; and Cameron Durrant, M.D., MBA, the Company’s Chief Executive Officer and Chairman of the Board of Directors,
lent $200,000. The proceeds from the 2019 Bridge Notes were or will be used to satisfy a portion of the unsecured obligations incurred
in connection with the Company’s emergence from bankruptcy in 2016 and for working capital and general corporate purposes.
Of the $1.7 million in proceeds received, $950,000 was received on June 28, 2019 and was recorded as Advance notes in the Condensed
Consolidated Balance Sheet as of June 30, 2019. The remaining proceeds of $750,000 were received July 1, 2019 and recorded accordingly.
The
2019 Bridge Notes bear interest at a rate of 7.0% per annum and will mature on October 1, 2019. The 2019 Bridge Notes may become
due and payable at such earlier time as the Company raises more than $3,000,000 in a bona fide financing transaction or upon a
change in control. The 2019 Bridge Notes are secured by liens of substantially all of the Company’s assets.
Upon
an event of default, which events include, but are not limited to, (1) the Company failing to timely pay any monetary obligation
under the 2019 Bridge Notes; (2) the Company failing to pay its debts generally as they become due and (3) the Company commencing
any proceeding relating to the Company under any bankruptcy reorganization, arrangement, insolvency, readjustment of debt, dissolution
or liquidation or similar laws of any jurisdiction now or hereafter in effect, the interest payable on the 2019 Bridge Notes increases
to 10.0% per annum. Further, upon certain events of default, all payments and obligations due and owed under the 2019 Bridge Notes
shall immediately become due and payable without demand and without notice to the Company.
8. Commitments and Contingencies
Contractual Obligations and Commitments
As of June 30, 2019, other than the debt
issuances described in Note 7 and the license agreement described in Note 10, there were no material changes to the Company’s
contractual obligations from those set forth in the 2018 Form 10-K.
Guarantees and Indemnifications
The Company has certain agreements with
service providers with which it does business that contain indemnification provisions pursuant to which the Company typically agrees
to indemnify the party against certain types of third-party claims. The Company accrues for known indemnification issues when a
loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification
issues based on historical activity. As the Company has not incurred any indemnification losses to date, there were no accruals
for or expenses related to indemnification issues for any period presented.
9. Stockholders’ Equity
Restructuring Transactions
As further described in the Company’s
Form 10-K for the year ended December 31, 2018, on February 27, 2018, the Company completed a comprehensive restructuring of its
outstanding indebtedness of approximately $18.4 million under a series of term loans (the “Term Loans”) with two lender
groups, including affiliates of Black Horse Capital, L.P. and raised incremental new capital from Cheval Holdings, Ltd. At the
closing of the restructuring, the Company: (i) in exchange for the satisfaction and extinguishment of the entire balance of the
Company’s Term Loans and related accrued interest totaling $18.4 million, (a) issued an aggregate of 59,786,848 shares of
Common Stock (the “New Lender Shares”), and (b) transferred and assigned to a joint venture controlled by one of the
term loan lenders, all of the assets of the Company related to benznidazole (the “Benz Assets”), the Company’s
former drug candidate; and (ii) issued to Cheval an aggregate of 32,028,669 shares of Common Stock for total consideration of $3.0
million.
The conversion of the outstanding debt for
Common Stock at closing of the restructuring was accounted for as a decrease to Long-term debt and an increase to Common stock
and Additional paid-in capital in the amount of the liabilities outstanding at the time of conversion.
In connection with the transfer of the Benz
Assets to the joint venture, the joint venture partner paid certain amounts incurred by the Company after December 21, 2017 and
prior to February 27, 2018 in investigating certain causes of action and claims related to or in connection with the Benz Assets.
In addition, upon exercise of its rights under the terms of the joint venture, the joint venture partner assumed certain legal
fees and expenses owed by the Company to its litigation counsel totaling $0.3 million.
Since the Benz Assets had no carrying value
on the Company’s Condensed Consolidated Balance Sheet, the Company’s initial investment in the joint venture was recorded
at $0.
Equity Financings
On March 12, 2018, the Company issued 2,445,557
shares of its common stock for total proceeds of $1.1 million to accredited investors.
On June 4, 2018, the Company issued 400,000
shares of its common stock for total proceeds of $0.2 million to an accredited investor.
2012 Equity Incentive Plan
Under the Company’s 2012 Equity Incentive
Plan, the Company may grant shares, stock units, stock appreciation rights, performance cash awards and/or options to employees,
directors, consultants, and other service providers. For options, the per share exercise price may not be less than the fair market
value of a Company common share on the date of grant. Awards generally vest and become exercisable over three to four years and
expire 10 years from the date of grant. Options generally become exercisable as they vest following the date of grant.
On March 9, 2018, the Board of Directors
of the Company approved an amendment to the Company’s 2012 Equity Incentive Plan (the “Equity Plan”) to increase
the number of shares of the Company’s common stock authorized for issuance under the Equity Plan by 16,050,000 shares, and
to increase the annual maximum aggregate number of shares subject to stock option awards that may be granted to any one person
under the Equity Plan during a calendar year to 7,500,000.
A summary of stock option activity for the
six months ended June 30, 2019 under all of the Company’s options plans is as follows:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1, 2019
|
|
|
15,409,357
|
|
|
$
|
0.95
|
|
Granted
|
|
|
728,610
|
|
|
|
1.10
|
|
Exercised
|
|
|
(488,625
|
)
|
|
|
0.67
|
|
Cancelled (forfeited)
|
|
|
(509,923
|
)
|
|
|
0.62
|
|
Cancelled (expired)
|
|
|
(45
|
)
|
|
|
9.68
|
|
Outstanding at June 30, 2019
|
|
|
15,139,374
|
|
|
$
|
0.97
|
|
The weighted average fair value of options
granted during the six months ended June 30, 2019 was $0.82 per share.
The
Company valued the options granted using the Black-Scholes options pricing model and the following weighted-average assumption
terms for the six months ended
June 30
, 2019:
|
|
|
Six months ended
June 30, 2019
|
|
Exercise price
|
|
|
$0.84 - $1.30
|
|
Market value
|
|
|
$0.84 - $1.30
|
|
Risk-free rate
|
|
|
2.49% - 2.59%
|
|
Expected term
|
|
|
6 years
|
|
Expected volatility
|
|
|
99.1% - 99.3%
|
|
Dividend yield
|
|
|
-
|
|
Stock-Based Compensation
The Company recorded stock-based compensation
expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss as follows:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
General and administrative
|
|
$
|
697
|
|
|
$
|
780
|
|
|
$
|
1,394
|
|
|
$
|
3,254
|
|
Research and development
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
201
|
|
Total stock-based compensation
|
|
$
|
729
|
|
|
$
|
780
|
|
|
$
|
1,426
|
|
|
$
|
3,455
|
|
At June 30, 2019, the Company had $1.7 million
of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options that
will be recognized over a weighted-average period of 1.4 years.
10. License Agreements
Mayo Agreement
On June 19, 2019 the
Company entered into an exclusive worldwide license agreement (the “Mayo Agreement”) with the Mayo Foundation for Medical
Education and Research (“Mayo”) for certain technologies used to create CAR-T cells lacking GM-CSF expression through
various gene-editing tools including CRISPR-Cas9 (GM-CSF knock-out). The license covers various patent applications and know-how
developed by Mayo in collaboration with the Company. These licensed technologies complement and broaden the Company’s position
in the GM-CSF neutralization space and expand the Company’s discovery platform aimed at improving CAR-T to include gene-edited
CAR-T cells.
Pursuant to the Mayo
Agreement, the Company will pay $200,000 to Mayo within six months of the effective date, or upon completion of a qualified financing,
whichever is earlier. The Mayo Agreement also requires the payment of milestones and royalties upon the achievement of certain
regulatory and commercialization milestones. The Company accrued the initial payment in Accrued expenses in the accompanying Condensed
Consolidated Balance Sheet as of June 30, 2019.
11. Savant Arrangements
On June 30, 2016 the Company and Savant
Neglected Diseases, LLC (“Savant”) entered into an Agreement for the Manufacture, Development and Commercialization
of Benznidazole for Human Use (the “MDC Agreement”), pursuant to which the Company acquired certain worldwide rights
relating to benznidazole (the “Compound”).
In addition, on the Effective Date the
Company and Savant also entered into a Security Agreement (the “Security Agreement”), pursuant to which the Company
granted Savant a continuing senior security interest in the assets and rights acquired by the Company pursuant to the MDC Agreement
and certain future assets developed from those acquired assets.
On the Effective Date, the Company issued
to Savant a five year warrant (the “Warrant”) to purchase 200,000 shares of the Company’s Common Stock, at an
exercise price of $2.25 per share, subject to adjustment. The Warrant is exercisable for 25% of the shares immediately and exercisable
for the remaining shares upon reaching certain regulatory related milestones. As of June 30, 2019 the number of shares for which
the Warrant is currently exercisable totals 100,000 shares at an exercise price of $2.25 per share.
As a result of the FDA granting accelerated
and conditional approval of a benznidazole therapy manufactured by a competitor for the treatment of Chagas disease and awarding
such competitor a neglected tropical disease PRV in August 2017, the Company ceased development of benznidazole and re-evaluated
the final two vesting milestones and concluded that the probability of achievement of these milestones had decreased to 0%.
In July 2017, the Company commenced litigation
against Savant alleging that Savant breached the MDC Agreement and seeking a declaratory judgement. Savant has asserted counterclaims
for breaches of contract under the MDC Agreement and the Security Agreement. The dispute primarily concerns the Company’s
right under the MDC Agreement to offset certain costs incurred by the Company in excess of the agreed upon budget against payments
due Savant. See Note 12, below, for more information regarding the Savant litigation. The aggregate cost overages as of June 30,
2017 that the Company asserts are Savant’s responsibility total approximately $3.4 million, net of a $0.5 million deductible.
The Company asserts that it is entitled to offset $2.0 million in milestone payments due Savant against the cost overages, such
that as of June 30, 2017, Savant owed the Company approximately $1.4 million. As of June 30, 2019, the cost overages totaled $4.1
million such that Savant owed the Company approximately $2.1 million in cost overages. Such cost overages have been charged to
Research and development expense as incurred. Recovery of such cost overages, if any, will be recorded as a reduction of Research
and development expense in the period received.
The $2.0 million in milestone payments due Savant are included
in Accrued expenses in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2019 and December 31, 2018.
12. Litigation
Savant Litigation
On July 10, 2017, the Company filed a complaint
against Savant Neglected Diseases, LLC (“Savant”) in the Superior Court for the State of Delaware, New Castle County
(the “Delaware Court”).
KaloBios Pharmaceuticals, Inc. v. Savant Neglected Diseases, LLC
, No. N17C-07-068 PRW-CCLD.
The Company asserted breach of contract and declaratory judgment claims against Savant arising under the MDC Agreement. See Note
11 - “Savant Arrangements” for more information about the MDC Agreement. The Company alleges that Savant has breached
its MDC Agreement obligations to pay cost overages that exceed a budgetary threshold as well as other related MDC Agreement representations
and obligations. In the litigation, the Company has alleged that as of June 30, 2017, Savant was responsible for aggregate cost
overages of approximately $3.4 million, net of a $0.5 million deductible under the MDC. The Company asserts that it is entitled
to offset $2.0 million in milestone payments due Savant against the cost overages, such that as of June 30, 2017 Savant owed the
Company approximately $1.4 million.
On July 12, 2017, Savant removed the case
to the Bankruptcy Court, claiming that the action is related to or arises under the Bankruptcy Case from which we emerged in July
2016. On July 27, 2017, Savant filed an Answer and Counterclaims. Savant’s filing alleges breaches of contracts under the
MDC Agreement and the Security Agreement, claiming that the Company breached its obligations to pay the milestone payments and
other related representations and obligations.
On August 1, 2017, the Company moved to
remand the case back to the Delaware Court (the “Motion to Remand”).
On August 2, 2017, Savant sent a foreclosure
notice to the Company, demanding that it provide the Collateral as defined in the Security Agreement for inspection and possession
on August 9, 2017, with a public sale to be held on September 1, 2017. The Company moved for a Temporary Restraining Order (the
“TRO”) and Preliminary Injunction in the Bankruptcy Court on August 4, 2017. Savant responded on August 7, 2017. On
August 7, 2017, the Bankruptcy Court granted the Company’s motion for a TRO, entering an order prohibiting Savant from collecting
on or selling the Collateral, entering our premises, issuing any default notices to us, or attempting to exercise any other remedies
under the MDC Agreement or the Security Agreement. The parties have stipulated to continue the provisions of the TRO in full force
and effect until further order of the appropriate court.
On January 22, 2018, Savant wrote to the
Bankruptcy Court requesting dissolution of the TRO. On January 29, 2018, the Bankruptcy Court granted the Motion to Remand and
denied Savant’s request to dissolve the TRO, ordering that any request to dissolve the TRO be made to the Delaware Court.
On February 13, 2018 Savant made a letter
request to the Delaware Superior Court to dissolve the TRO. Also on February 13, 2018, the Company filed its Answer and Affirmative
defenses to Savant’s Counterclaims. On February 15, 2018 the Company filed a letter opposition to Savant’s request
to dissolve the TRO and requesting a status conference. A hearing on Savant’s request to dissolve the TRO was held before
the Delaware Superior Court on March 19, 2018. The Delaware Superior Court denied Savant’s request to dissolve the TRO and
the TRO remains in effect.
On April 11, 2018, the Company advised the
Delaware Superior Court that it would meet and confer with Savant regarding a proposed case management order and date for trial.
On April 26, 2018 the Delaware Superior Court so-ordered a proposed case management order submitted by the Company and Savant.
The schedule in the case management order was modified by stipulation on August 24, 2018.
On April 8, 2019, the Company moved to compel
Savant to produce documents in response to the Company’s document requests. The parties thereafter agreed to a discovery
schedule through June 30, 2019, which the Superior Court so-ordered, and the parties produced documents to each other.
On June 4, 2019, Savant filed
a complaint against the Company and Madison Joint Venture LLC (“Madison”) in the Delaware Court of Chancery
(the “Chancery Action”) seeking to “recover as damages that amounts owed to it under the MDC Agreement,
and to reclaim Savant’s intellectual property,” among other things. Savant also requested leave to move to
dismiss the Company’s complaint on the grounds that the Company’s transfer of assets to Madison was
champertous. On June 10, 2019, the Company requested by letter that the Superior Court hold a contempt hearing because
the Chancery Action violated the TRO entered by the Bankruptcy Court, the terms of which have been extended by stipulation of
the parties. On June 18, 2019, the Superior Court held a telephonic status conference. The parties agreed that
the Chancery Action should be consolidated with the Superior Court action, after which the Superior Court would address the
parties’ motions.
On July 22, 2019, the Company moved for
contempt against Savant. Savant filed its opposition on July 29, 2019.
On July 23, 2019, Savant moved for summary
judgment on the issue of champerty. The Company’s response is due August 27, 2019.
On July 25, 2019, Savant moved for a
preliminary injunction hearing. The Company filed its response on August 1, 2019.
On July 26, 2019, the Company moved to modify
the previously agreed-upon discovery schedule to extend discovery through December 31, 2019.
On July 30, 2019, the Company filed
a motion to dismiss Savant’s Chancery Court complaint. The Company’s opening brief is due on September 6, 2019.
On August 12, 2019, the Superior Court
denied the Company’s motion for contempt.
Savant’s motion for summary
judgment and the Company’s motion to dismiss will be heard on October 7, 2019, after which the parties will meet and confer
and agree on a joint scheduling order going forward.
13. Subsequent Events
On July 19, 2019 the
Company entered into an exclusive worldwide license agreement (the “Zurich Agreement”) with the University of Zurich
(“UZH”) for technology used to prevent Graft versus Host Disease (“GvHD”) through GM-CSF neutralization.
The Zurich Agreement covers various patent applications filed by UZH which complement and broaden the Company’s position
in the application of GM-CSF and expands the Company’s development platform to include improving allogeneic Hematopoietic
Stem Cell Transplantation (“HSCT”).
Pursuant to the Zurich
Agreement, the Company paid $100,000 to UZH in July 2019. The Zurich Agreement also requires the payment of milestones and royalties
upon the achievement of certain regulatory and commercialization milestones.