HGEN Humanigen Inc

You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. This Quarterly Report on Form 10-Q contains statements that discuss future events or expectations, projections of results of operations or financial condition, trends in our business, business prospects and strategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue” or the negative of those words and other comparable words. These statements may relate to, among other things, our expectations regarding the scope, progress, timing, expansion, and costs of researching, developing and commercializing our product candidates; our expectations relating to regulatory pathways to emergency use or other conditional marketing authorizations and the opportunity to benefit from various regulatory incentives; expectations for our financial results, revenue, operating expenses and other financial measures in future periods; and the adequacy of our sources of liquidity to satisfy our working capital needs, capital expenditures, and other liquidity requirements. Among the factors that could cause actual results to differ materially are the factors discussed under “Risk Factors” in “Part I, Item 1A–- Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and the additional or modified risk factors disclosed in this Quarterly Report on Form 10-Q and each subsequently filed Quarterly Report on Form 10-Q. Some additional factors that could cause actual results to differ include:

These are only some of the factors that may affect the forward-looking statements contained in this Form 10-Q. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see “Risk Factors” in Item 1A of Part II below and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. You should review these risk factors, together, for a more complete understanding of the risks associated with an investment in our securities. However, we operate in a competitive and rapidly changing environment and new risks and uncertainties emerge, are identified or become apparent from time-to-time. It is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Form 10-Q. You should be aware that the forward-looking statements contained in this Form 10-Q are based on our current views and assumptions. We undertake no obligation to revise or update any forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law.

Overview

 We are a clinical stage biopharmaceutical company, developing our portfolio of proprietary Humaneered^® anti-inflammatory immunology and immuno-oncology monoclonal antibodies. Our proprietary, patented Humaneered technology platform is a method for converting existing antibodies (typically murine) into engineered, high-affinity human antibodies designed for therapeutic use, particularly with acute and chronic conditions. We have developed or in-licensed targets or research antibodies, typically from academic institutions, and then applied our Humaneered technology to optimize them. Our lead product candidate, lenzilumab, and our other product candidate, ifabotuzumab (“iFab”), are Humaneered monoclonal antibodies. Our Humaneered antibodies are closer to human antibodies than chimeric or conventionally humanized antibodies and have a high affinity for their target. In addition, we believe our Humaneered antibodies offer further important advantages, such as high potency, a slow off-rate and a lower likelihood to induce an inappropriate immune response or infusion related reaction.

We are focusing our efforts on the development of our lead product candidate, lenzilumab. Lenzilumab is a monoclonal antibody that has been demonstrated to neutralize human GM-CSF, a cytokine that we believe leads to the overproduction of monocytes which are responsible for CMML and is of critical importance in the hyperinflammatory cascade, sometimes referred to as CRS or cytokine storm, associated with aGvHD associated with bone marrow transplants.

Market Opportunity in CMML and Related Hematological Cancers

Clonal cytogenic abnormalities are commonly seen in CMML patients. RAS (Retrovirus-Associated DNA Sequence) mutations, which make leukemic cells hyperresponsive to GM-CSF, are seen in approximately 30%-40% of CMML patients and are the anticipated target patient population for lenzilumab. The incidence of new CMML patients in the U.S., UK, and Australia is about 1,700 patients annually.¹ RAS mutations, which may drive GM-CSF hyperresponsiveness, are also seen in additional myeloid hematological malignancies including juvenile myelomonocytic leukemia (“JMML”), myelodysplastic syndromes (“MDS”) and acute myeloid leukemia (“AML”), totaling over 4,500 new cases annually in the U.S. We believe success with CMML may provide proof of principle for targeting RAS pathway mutations in myeloid leukemias with lenzilumab and allow us to develop, and if successful, commercialize lenzilumab in these additional patient populations.

As a treatment for a rare disease, lenzilumab may qualify for certain regulatory and commercial benefits that may accelerate development and approval. Pricing and reimbursement for rare diseases are traditionally higher than treatments for more common diseases and can exceed $100,000 per year.

Together with the Principal Investigator, we are assessing regulatory pathways that may enable early results to support a regulatory submission and potential approval by the Therapeutic Goods Administration in Australia, which could be expanded through Project Orbis, an international regulatory agency collaboration, to the United States and the United Kingdom.

There have been no new therapeutic agents for patients with high-risk CMML in 30 years² and independent publications have demonstrated the key role of GM-CSF and RAS pathway mutations in this and other cancers, including (“JMML”), myelodysplastic syndromes, myeloproliferative neoplasms, and acute myeloid leukemia.^3,4,5

A clinical protocol is also being developed for JMML with NRAS, KRAS, PTPN11 and/or NF1 genetic mutations.

¹ Incidence extrapolated by applying American Cancer Society incidence rate of four per one million people to the population of U.S., UK, and Australia. https://www.cancer.org/cancer/chronic-myelomonocytic-leukemia/about/key-statistics.html

² Aim of first-ever CMML study – to improve survival. Leukaemia Foundation. (2021, October 11). Retrieved July 21, 2022, from https://www.leukaemia.org.au/stories/aim-of-first-ever-cmml-study-to-improve-survival/

³ Gupta, A. et al. (2021, February 28). Juvenile myelomonocytic leukemia-A comprehensive review and recent advances in management. American Journal of Blood Research, 11(1), 1–21. Retrieved July 21, 2022, from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8010610/pdf/ajbr0011-0001.pdf

⁴ Padron, E., et al. (2013, June 20). GM-CSF–dependent PSTAT5 sensitivity is a feature with therapeutic potential in chronic myelomonocytic leukemia. Blood, 121(25), 5068–5077. https://doi.org/10.1182/blood-2012-10-460170

⁵ Emanuel, P. D., et al. (1991, March 1). Selective hypersensitivity to granulocyte-macrophage colony-stimulating factor by juvenile chronic myeloid leukemia hematopoietic progenitors. Blood, 77(5), 925–929. https://doi.org/10.1182/blood.v77.5.925.925

Recent Developments 

In July 2022, we announced a strategic realignment of our pipeline and resources. We plan to accelerate the development of LENZ in CMML, a rare blood cancer, for which the PREACH-M study is already underway, and to continue our plans for the RATinG study in aGvHD that occurs in patients undergoing bone marrow transplant, which is expected to enroll its first patient in the third quarter of 2022. These studies are majority funded by our partners. In addition, we are currently assessing requests for IIT of lenzilumab in combination with CAR-T therapies; the previously planned SHIELD study of lenzilumab with certain CAR-T therapies has been terminated. We also plan to continue the development of iFab, an EpAh-3 targeted monoclonal antibody currently in Phase 1 development, as part of an antibody drug conjugate (“ADC”), for certain solid tumors.

Key elements of the strategic realignment plan include:

In July 2022, preliminary topline results from the Accelerating COVID-19 Therapeutic Interventions and Vaccines-5 (“ACTIV-5”) and Big Effect Trial, in the “B” arm of the trial (“BET-B”), referred to as the ACTIV-5/BET-B trial, were released. The study was sponsored and funded by the National Institutes of Health (“NIH”) and evaluated lenzilumab in combination with remdesivir, compared to placebo and remdesivir, in hospitalized COVID-19 patients. Based on preliminary topline results, the trial did not achieve statistical significance on the primary endpoint, although did indicate that lenzilumab demonstrated a positive trend in mortality. We continue to support NIH’s further analysis of the data and lenzilumab has interest from a global group of leading institutions and research networks to include lenzilumab in their large-scale, multinational studies of COVID-19. Tocilizumab and baricitinib demonstrated mortality benefit following inclusion in such studies having failed to do so in smaller studies. With the recent preliminary topline results from the ACTIV-5/BET-B trial, we are reconsidering our regulatory strategy. Under the realignment plan, we will deemphasize the deployment of certain resources for the development of lenzilumab for COVID-19 and currently do not plan to file for Emergency Use Authorization (“EUA”) in the United States in 2022. We had previously planned to respond to the rolling review written questions received last year from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) following receipt of the results from the ACTIV-5/BET-B trial but do not plan to respond to these written questions in 2022. We no longer intend to submit a Conditional Marketing Authorization (“CMA”) for lenzilumab with an Accelerated Approval request to European Medicines Agency (“EMA”) in 2022. The Named Patient program in select European Countries will be terminated. With the exception of lenzilumab batches in process, we plan to stop the manufacturing of lenzilumab. We plan to consolidate the remaining inventory of lenzilumab bulk drug substance and drug product in a central location for potential future use.

In July 2022, we paid $25.0 million of outstanding principal, together with approximately $1.7 million of accrued interest, fees and other amounts, due under the Term Loan with Hercules. In connection with the prepayment, the Term Loan with Hercules was terminated, and all obligations, liens and security interests under the Term Loan were released, discharged and satisfied. See Notes 5 and 11 to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information on the Term Loan. 

As of the end of July 2022, the C-SMART study in cancer patients with COVID-19 will not be taking on any new patients in all arms of the trial and is being brought to a conclusion, due to changes in COVID-19 treatment in Australia. As no patients have been entered into the lenzilumab arm, due to low numbers of cancer patients being hospitalized with COVID-19 and associated logistics issues, we aim to utilize the investigational product as part of a larger Victorian Government-funded trial.

In May 2022, our partners in South Korea dosed the final healthy volunteer of the 20 required for their Phase 1 bridging study. This study is being conducted to explore the safety, tolerability, and pharmacokinetic (“PK”) properties of lenzilumab and compare it between Koreans and Caucasians. With the trial now fully enrolled, we anticipate the results will be available in the fourth quarter of 2022.

Our Pipeline

Our product candidates are in the clinical stage of development and require substantial time, resources, research and development, and regulatory approval prior to commercialization. Our current pipeline is depicted below:

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, the fair value-based measurement of stock-based compensation, and accruals. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the Condensed Consolidated Financial Statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

There were no significant and material changes in our critical accounting policies and use of estimates during the six months ended June 30, 2022, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our 2021 Annual Report on Form 10-K, filed with the SEC on March 1, 2022.

Results of Operations

At June 30, 2022, we had an accumulated deficit of $662.5 million. Since inception, we have recognized a nominal amount of revenue from payments for license or collaboration fees. Our product candidates may never be successfully developed or commercialized and we may therefore never realize revenue from any product sales. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits. Our ability to continue as a going concern depends on our ability to attain a significant amount of additional financing, as more fully described below under “—Liquidity and Capital Resources” and in “Risk Factors” in Item 1A of Part II below.

Revenue

Revenue in the three and six months ended June 30, 2022 and 2021, represents license revenue under the license agreement (the “South Korea Agreement”) with KPM Tech Co., Ltd. (“KPM”) and its affiliate, Telcon RF Pharmaceutical, Inc. (together with KPM, the “Licensee”) described in more detail in Note 4 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. License revenue was $1.0 million and $2.1 million for the three and six months ended June 30, 2022, respectively, as compared to $1.0 million and $1.5 million for the three and six months ended June 30, 2021, respectively.

Research and Development Expenses

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We track external research and development costs incurred by project for each of our clinical programs. Our external research and development costs consist primarily of:

Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees, stock-based compensation charges, and travel costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project.

The following table shows our total research and development expenses for the three and six months ended June 30, 2022 and 2021:

Research and development expenses decreased by $36.6 million from $63.0 million for the three months ended June 30, 2021 to $26.4 million for the three months ended June 30, 2022 and decreased by $79.2 million from $122.9 million for the six months ended June 30, 2021 to $43.7 million for the six months ended June 30, 2022. The decrease in the three months ended June 30, 2022 as compared to June 30, 2021 is primarily due to a $34.6 million decrease in lenzilumab manufacturing costs, while the decrease in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 is primarily due to a $70.3 million decrease in lenzilumab manufacturing costs, a $5.4 million decrease in clinical trial expenses as the LIVE-AIR study has been completed and the first patient has not yet been dosed in the CAR-T trial and a $1.0 million decrease in consulting expenses.

We expect our research and development costs will continue to decrease in 2022 as compared to 2021. We have sought to mitigate our financial commitments by ceasing additional manufacturing of lenzilumab, certain operational activities, and reducing staff and consultants in connection with our realignment plan. Our earlier mitigation efforts included the amendment or in some cases cancelation of certain of our agreements with CMOs for future manufacturing work, some of which were contingent on an EUA, in an effort to reduce our future spending. We incurred cancellation fees for several of these modifications. We also have disputed several invoices for cancellation fees and for production batches for lenzilumab that had been submitted by CMOs that failed to produce lenzilumab within our stated release specifications, but our mitigation efforts may not be successful to recoup any such loss of lenzilumab bulk drug substance (“BDS”) or drug product (“DP”). See Notes 6, 10 and 11 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information on these disputes.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs (including stock-based compensation), professional fees for legal and patent expenses, insurance, consulting, audit, investor relations costs, and other general operating expenses not otherwise included in research and development.

General and administrative expenses decreased by $4.2 million from $8.1 million for the three months ended June 30, 2021 to $3.9 million for the three months ended June 30, 2022 and decreased by $4.7 million from $13.0 million for the six months ended June 30, 2021 to $8.3 million for the six months ended June 30, 2022. The decrease for the three months ended June 30, 2022, is primarily due to decreases of $2.9 million in consulting expenses, $0.5 million in compensation-related expenses, $0.4 million in investor and public relations expenses and $0.2 million in professional fees, while the decrease for the six months ended June 30, 2022, is primarily due to decreases of $4.2 million in consulting expenses and $0.8 million in investor and public relations expenses partially offset by a $0.4 million increase in compensation related expenses, primarily non-cash stock-based compensation expense. We expect that our overall general and administrative costs may decrease in the near-term due to our realignment plan designed to significantly reduce our go-forward, cash-based general and administrative expenses.

Interest Expense

Interest expense for both periods is primarily related to the Loan and Security Agreement with Hercules Capital as agent for its affiliates serving as lenders thereunder (the “Term Loan”). Interest expense was $0.8 million and $0.6 million for the three months ended June 30, 2022 and 2021, respectively, while interest expense increased to $1.5 million for the six months ended June 30, 2022 as compared to $0.6 million for the six months ended June 30, 2021, as we drew the initial $25.0 million under the Term Loan on March 29, 2021. After giving effect to payment of fees and expenses associated with the draw, we received net proceeds of approximately $24.4 million.

In July 2022, we paid $26.7 million in full settlement of the Term Loan with Hercules. See Notes 5 and 11 to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information on the Term Loan. 

Other Expense

Other expense decreased by $1.1 million for the six months ended June 30, 2022, primarily due to litigation settlement costs incurred in the prior year period.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through proceeds from the public offerings of our common stock, private placements of our common and preferred stock, debt financings, interest income earned on cash, and cash equivalents, and marketable securities, and borrowings against lines of credit, and with the proceeds under the South Korea Agreement. At June 30, 2022, we had cash and cash equivalents of $47.0 million. In the first half of 2022, we sold an aggregate of 7,215,309 shares of our common stock under the Controlled Equity Offering^SM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), raising net proceeds of approximately $21.8 million.

Net cash used in operating activities was $44.8 million and $103.8 million for the six months ended June 30, 2022 and 2021, respectively. Cash used in operating activities of $44.8 million for the six months ended June 30, 2022, primarily related to our net loss of $51.4 million, adjusted for non-cash items, such as $3.2 million in stock-based compensation, and a net change in operating assets and liabilities of $3.1 million, including a $12.0 million increase in accounts payable and a $5.5 million decrease in accrued expenses.

Cash used in operating activities of $103.8 million for the six months ended June 30, 2021, primarily related to our net loss of $136.4 million, adjusted for non-cash items, such as $2.4 million in stock-based compensation, and a net change in operating assets and liabilities of $30.0 million, including a $21.9 million increase in accounts payable and a $5.8 million increase in accrued expenses.

Net cash provided by financing activities was $21.8 million for the six months ended June 30, 2022 and consists of net proceeds from the issuance of common stock in connection with the Sales Agreement with Cantor.

Net cash provided by financing activities was $156.6 million for the six months ended June 30, 2021 and consists primarily of net proceeds of approximately $94.2 million related to the sale of 5,427,017 shares of our common stock in connection with an underwritten public offering, $36.1 million received from the issuance of common stock in connection with the Sales Agreement with Cantor, $24.4 million in net proceeds received from the Term Loan, and $1.9 million received from the exercise of stock options.

Recent Financings

Controlled Equity Offering

On December 31, 2020, we entered into the Sales Agreement with Cantor, under which we could issue and sell shares of our common stock, having an aggregate gross sales price of up to $100 million through Cantor, as sales agent. On April 14, 2022, we filed a prospectus in respect of the Sales Agreement which provides us with the ability to offer and sell shares of common stock having an aggregate offering price of up to $75.0 million. As mentioned above, for the first half of 2022, we issued and sold 7,215,309 shares of our common stock under the Sales Agreement, raising net proceeds of $21.8 million, and for the first half of 2021, we issued and sold 1,796,858 shares of our common stock under the Sales Agreement, raising net proceeds of $36.1 million. Subsequent to June 30, 2022 and through August 10, 2022, as disclosed in Note 11 below, the Company issued and sold 33,628,000 shares of common stock pursuant to the Sales Agreement and received net proceeds of approximately $15.9 million, after deducting fees and expenses. As of August 10, 2022, we had the ability to offer and sell shares of common stock having an aggregate offering price of up to $68.4 million under the Sales Agreement. The ability to continue to utilize the Sales Agreement at terms acceptable to us and in sufficient quantities relies on future market conditions that are uncertain and cannot be relied upon. See “Risk Factors” in Item 1A of Part II below.

2021 Underwritten Public Offering

On March 30, 2021, we entered into an underwriting agreement with Jefferies LLC, Credit Suisse Securities (USA) LLC and Cantor, as representatives of the several underwriters, in connection with the public offering of 5,000,000 shares of our common stock. In addition, we granted the underwriters a 30-day option to purchase an additional 750,000 shares of our common stock. The initial offering closed on April 5, 2021. On May 3, 2021, we closed on the sale of an additional 427,017 shares of our common stock related to the exercise of the underwriters’ 30-day option. The aggregate gross proceeds from the sale of the 5,427,017 shares in the offering, inclusive of the additional shares purchased by the underwriters, were approximately $100.4 million. The net proceeds from this offering, after deducting underwriting discounts and offering costs, were approximately $94.2 million.

Term Loan with Hercules

On March 10, 2021, we entered into the Term Loan with Hercules which provided us with the ability to draw an initial amount of $25.0 million, which we drew on March 29, 2021. In July 2022, we paid $26.7 million in full settlement of the Term Loan with Hercules. See Notes 5 and 11 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information on the Term Loan.

Liquidity and Manufacturing Commitments

As of June 30, 2022, we had cash and cash equivalents of $47.0 million and paid $26.7 million in full settlement of the Term Loan with Hercules in July 2022, fully extinguishing and terminating the Term Loan in the process. Considering our current cash resources and our current and expected levels of operating expenses for the next twelve months, which includes our combined accounts payable and accrued expenses as of June 30, 2022 of $71.1 million, and our non-manufacturing commitments of $0.3 million and manufacturing commitments of $36.5 million for the remaining six months of 2022, $7.6 million for 2023, and $6.6 million thereafter related to our manufacturing agreements, as further described below (see “–Contracts”), we require additional capital to fund our planned operations and capital requirements. Certain of these commitments and amounts accrued at June 30, 2022 are in dispute. We intend to seek to defer these and other payments, negotiate lower amounts or seek other courses of action, which may include legal recourse for the amounts in question. We will seek to raise additional capital through public or private equity offerings, including under the Sales Agreement with Cantor, grant financing, convertible and other debt financings, collaborations, strategic alliances, or licensing arrangements. Subsequent to June 30, 2022 and through August 10, 2022, as disclosed in Note 11 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, the Company issued and sold 33,628,000 shares of common stock pursuant to the Sales Agreement and received net proceeds of approximately $15.9 million, after deducting fees and expenses. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay or reduce the scope of or eliminate one or more of our research or development programs, our commercialization efforts or our manufacturing commitments and capacity. In addition, if we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. While we believe our strategic realignment plan and our plans to raise additional funds will alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, these plans are not entirely within our control and cannot be assessed as being probable of occurring at this time. If we are unsuccessful in our efforts to raise additional capital, based on our current and expected levels of operating expenses our current capital will not be sufficient to fund our operations for the next twelve months.

Contracts

Eversana Agreement

On January 10, 2021, we announced that we had entered into a master services agreement (the “Eversana Agreement”) with Eversana Life Science Services, LLC (“Eversana”) pursuant to which Eversana will provide us with services in connection with the potential launch of lenzilumab.

On September 21, 2021, we notified Eversana that due to the EUA status in the U.S., we were terminating the initial statement of work related to commercialization support of lenzilumab for the treatment of COVID-19 in the United States. Eversana is disputing the termination notice and has requested payment of approximately $4.0 million it has asserted we owe for services rendered from April 1, 2021 to September 30, 2021. We have disputed this assertion and Eversana has filed for arbitration to resolve this dispute. See Note 10 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.

Manufacturing Agreements

We entered into agreements with several CMOs to manufacture BDS and fill/finish DP for our lenzilumab clinical trial activities in COVID-19 as well as to manufacture BDS and DP for a potential launch of lenzilumab in anticipation of an EUA or CMA, should one have been obtained in that indication. We also entered into agreements for packaging of the drug. These agreements provided for upfront amounts prior to commencement of manufacturing and progress payments through the course of the manufacturing process and payments for technology transfer. Certain of these CMOs were unsuccessful in their efforts to manufacture some batches of lenzilumab to our specifications for various reasons. As of July 22, 2022, there are approximately 11,500 lenzilumab treatments in production. Approximately 65,800 lenzilumab treatments are being stored and 9,000 treatments are being sent for destruction as a result of expiry of drug substance (an intermediate step to final drug product). Current shelf life of drug product is 36 months and bulk drug substance is 12 months. One of our CMOs, Catalent Pharma Solutions, LLC (“Catalent”), has notified us that we are in breach of contract and has issued a demand for payment for outstanding amounts owed. Catalent has demanded payment of the past due balance of $12.8 million by August 8, 2022 to cure this breach and has threatened to cancel the manufacturing agreement if payment is not made. See Notes 10 and 11 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information. Unless we comply with Catalent’s demands, it is unlikely that we will be able to utilize treatments in production and treatments for which production has been completed. Another 33,000 treatments are in production at one of our CMOs, Thermo Fisher Scientific, Inc. (“Thermo”), for which material has not yet been released by us, and which may require reprocessing prior to release. We have disputed the amounts owed to Thermo as a result of Thermo’s failure to produce usable material within stated release specifications. See Note 1 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information. At this time, it is unlikely that these 33,000 treatments would be released by us. Inventory of treatments produced at our CMOs for which the process has not been validated or released will likely be destroyed in the future if no potential commercial use is found.

Please see our Form 10-K for the year ended December 31, 2021, Part I, Item 1A - Risk Factors—“Risks Related to Our Efforts to Develop Lenzilumab for COVID-19— Manufacturing efforts relating to our lenzilumab program in COVID-19 have been extremely costly and inefficient in producing treatments for use in our clinical development program or potential sale.”

License Agreements

We are obligated to make future payments to third parties under in-license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones.

We record upfront and milestone payments made to third parties under licensing arrangements as an expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.

Outlicensing Agreements

The South Korea Agreement

On November 3, 2020, we entered into a License Agreement (the “South Korea Agreement”) with KPM and Telcon (together, the “Licensee”). Pursuant to the South Korea Agreement, among other things, we granted the Licensee a license under certain patents and other intellectual property to develop and commercialize our lead product candidate, lenzilumab (the “Product”), for treatment of COVID-19 pneumonia, in South Korea and the Philippines (the “Territory”), subject to certain reservations and limitations. The Licensee will be responsible for gaining regulatory approval for, and subsequent commercialization of, lenzilumab in those territories.

As consideration for the license, the Licensee has agreed to pay us (i) an up-front license fee of $6.0 million (or $4.5 million net of withholding taxes and other fees and royalties), payable promptly following the execution of the License Agreement, which was received in the fourth quarter of 2020, (ii) up to an aggregate of $14.0 million in two payments based on our achievement of two specified milestones in the U.S., of which the first milestone was met in the first quarter of 2021 and $6.0 million (or $4.5 million net of withholding taxes and other fees and royalties) was received in the second quarter of 2021,and (iii) subsequent to the receipt by the Licensee of the requisite regulatory approvals, double-digit royalties on the net sales of lenzilumab in South Korea and the Philippines. The Licensee has agreed to certain development and commercial performance obligations. It is expected that we will supply lenzilumab to the Licensee for a minimum of 7.5 years at a cost-plus basis from an existing or future manufacturer. The Licensee has agreed to certain minimum purchases of lenzilumab on an annual basis.

Indemnification

In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.