If we are unsuccessful in our efforts to raise additional capital, including in the immediate future, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern. The Report of Independent Registered Public Accounting Firm at the beginning of the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this2022 Annual Report on Form 10-K includes an explanatory paragraph about our ability to continue as a going concern.
Amendment No. 1
Index
The Consolidated Financial Statements for the year ended December 31, 2017 were prepared on the basis of a going concern, which contemplates that we will be able to realize our assets and discharge liabilities in the normal course of business. Our ability to meet our liabilities and to continue as a going concern is dependent upon the availability of future funding. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
In addition, our current financial situation, and the presence of the explanatory paragraph about our ability to continue as a going concern, could also make it more difficult to raise the capital necessary to address our current needs.
We are exploring strategic alternatives, but there can be no assurance that we will be successful in identifying or completing any strategic alternative or that any such strategic alternative will yield additional value for our stockholders.
We have an ongoing review of strategic alternatives to ensure our current structure optimizes our ability to execute our strategic plan and to maximize stockholder value. The review of strategic alternatives could result in, among other things, a sale, merger, consolidation or business combination, asset divestiture, partnering, licensing or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions, or continuing to operate with our current business plan and strategy. There can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction.
In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We also cannot assure that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in our current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.
Our business is solely dependent on the success of our current product candidates, lenzilumab and ifabotuzumab. We cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize, any of our product candidates.
We have a limited pipeline of product candidates and are not conducting active research at this time for discovery of new molecules or antibodies. We are currently dependent on the successful continued development and regulatory approval of our current product candidates for our future business success. Since the FDA’s August 29, 2017 announcement relating to benznidazole, our primary focus has shifted to investing our time and financial resources in the development of lenzilumab and ifabotuzumab. We will need to successfully enroll and complete clinical trials of lenzilumab and ifabotuzumab, and potentially obtain regulatory approval to market these products. The future clinical, regulatory and commercial success of our product candidates is subject to a number of risks, including the following:
| ·2 | we may not be able to enroll adequate numbers of eligible patients in the clinical trials we propose to conduct; |
| · | we may not have sufficient financial and other resources to complete the clinical trials;Table of Contents |
| · | we may not be able to provide acceptable evidence of safety and efficacy for our product candidates; |
| · | the results of our clinical trials may not meet the level of statistical or clinical significance, or product safety, required by FDA for marketing approval; |
| · | we may not be able to obtain, maintain and enforce our patents and other intellectual property rights; and |
| · | we may not be able to obtain and maintain commercial manufacturing arrangements with third-party manufacturers or establish commercial-scale manufacturing capabilities. |
Furthermore, even if we do receive regulatory approval to market any of our product candidates, any such approval may be subject to limitations on the indicated uses for which we may market the product. If any of our product candidates are unsuccessful, that could have a substantial negative impact on our business.
Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that our product candidates will be successfully developed or commercialized. If we or any future development partners are unable to develop, or obtain regulatory approval for or, if approved, successfully commercialize, one or more of our product candidates, we may not be able to generate sufficient revenue to continue our business.
Our product candidates are at an early stage of development and may not be successfully developed or commercialized.
Our product candidates are in the early stage of development and will require substantial clinical development, testing, and regulatory approval prior to commercialization. None of our product candidates have advanced into a pivotal study and it may be years before such a study is initiated, if at all. Of the large number of drugs in development, only a small percentage successfully complete FDA regulatory approval process and are commercialized. We have discontinued the development of prior product candidates after they failed to meet clinical endpoints in non-pivotal trials. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that our product candidates will be successfully developed or commercialized. If we or any future development partners are unable to develop, or obtain regulatory approval for or, if approved, successfully commercialize, one or more of our product candidates, we may not be able to generate sufficient revenue to continue our business.
Our business could target benefits from various regulatory incentives, such as orphan drug exclusivity, breakthrough therapy designation, fast track designation, and priority review, but we may not ultimately qualify for or benefit from these arrangements.
We may seek various regulatory incentives, such as orphan drug exclusivity, breakthrough therapy designation, fast track designation, accelerated approval, priority review and PRVs, where available, that provide for certain periods of exclusivity, expedited review and/or other benefits, and we may also seek similar designations elsewhere in the world. Often, regulatory agencies have broad discretion in determining whether or not products qualify for such regulatory incentives and benefits. We cannot guarantee that we will be able to receive orphan drug or NCE status from FDA or equivalent regulatory designations elsewhere. We also cannot guarantee that we will obtain breakthrough therapy or fast track designation, which may provide certain potential benefits such as more frequent meetings with FDA to discuss the development plan, intensive guidance on an efficient drug development program, and potential eligibility for rolling review or priority review. Legislative developments in the U.S., including recent proposed legislation that would restrict eligibility for PRVs, may affect our ability to qualify for these programs in the future.
Even if we are successful in obtaining beneficial regulatory designations by FDA or other regulatory agency for our product candidates, such designations may not lead to faster development or regulatory review or approval, and it does not increase the likelihood that our product candidates will receive marketing approval. We may not be able to obtain or maintain such designations for our product candidates, and our competitors may obtain these designations for their product candidates, which could impact our ability to develop and commercialize our product candidates or compete with such competitors, which would adversely impact our business, financial condition or results of operations.
There is a limited amount of information about us upon which investors can evaluate our product candidates and business prospects, including because we have a limited operating history developing product candidates, have not yet successfully commercialized any products, have changed our strategy and our management team, and emerged from bankruptcy.
On August 29, 2017, we shifted our primary focus toward developing our proprietary monoclonal antibody portfolio, which comprises lenzilumab and ifabotuzumab, for use in addressing significant unmet needs in oncology and CAR-T therapy. Our relatively new team, new strategic business focus and limited operating history developing clinical-stage product candidates may make it difficult for us to succeed or for investors to be able to evaluate our business and prospects. In addition, as an early-stage clinical development company, we have limited experience in development activities, including conducting clinical trials, or seeking and obtaining regulatory approvals. We are also heavily dependent at this time on external consultants for scientific, clinical manufacturing and regulatory expertise. We have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in the biopharmaceutical area. For example, to execute our business plan we will need to successfully:
execute our product candidate development activities, including successfully completing our clinical trial programs;
obtain required regulatory approvals for the development and commercialization of our product candidates;
manage our spending as costs and expenses increase due to clinical trials, regulatory approvals, manufacturing and commercialization;
secure substantial additional funding;
develop and maintain successful strategic relationships;
build and maintain a strong intellectual property portfolio;
build and maintain appropriate clinical, sales, manufacturing, distribution, and marketing capabilities on our own or through third parties; and
gain market acceptance and favorable reimbursement status for our product candidates.
If we are unsuccessful in accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business, or continue our operations.
We have and may continue to experience delays in commencing or conducting our clinical trials, in receiving data from third parties or in the continuation or completion of clinical testing, which could result in increased costs to us and delay our ability to generate product candidate revenue.
Before we can initiate clinical trials in the United States for any new product candidates, we are required to submit the results of preclinical testing to FDA as part of an IND, along with other information including information about product candidate chemistry, manufacturing, and controls and our proposed clinical trial protocol. For our programs already underway, we are required to report or provide information to appropriate regulatory authorities in order to continue with our testing programs. If we are unable to make timely regulatory submissions for any of our programs, it will delay our plans for our clinical trials. If those third parties do not make the required data available to us, we will likely have to identify and contract with another third party, and/or develop all necessary preclinical and clinical data on our own, which will lead to significant delays and increase development costs of the product candidate. In addition, FDA may require us to conduct additional preclinical testing for any product candidate before it allows us to initiate clinical testing under any IND, which may lead to additional delays and increase the costs of our preclinical development. Moreover, despite the presence of an active IND for a product candidate, clinical trials can be delayed for a variety of reasons, including delays in:
identifying, recruiting, and enrolling qualified subjects to participate in a clinical trial;
identifying, recruiting, and training suitable clinical investigators;
reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation, may be subject to modification from time to time, and may vary significantly among different CROs and trial sites;
obtaining and maintaining sufficient quantities of a product candidate for use in clinical trials, either as a result of transferring the manufacturing of a product candidate to another site or manufacturer, deferring ordering or production of product in order to conserve resources or mitigate risk, having product in inventory become no longer suitable for use in humans, or other reasons that reduce or delay availability of drug supply;
obtaining and maintaining institutional review board, or IRB, or ethics committee approval to conduct a clinical trial at an existing or prospective site;
retaining or replacing participants who have initiated a clinical trial but may withdraw due to adverse events from the therapy, insufficient efficacy, fatigue with the clinical trial process, or personal issues;
developing any companion diagnostic necessary to ensure that the study enrolls the target population; or
undergoing a clinical trial put on clinical hold at any time by FDA during product candidate development.
Once a clinical trial has begun, recruitment and enrollment of subjects may be slower than we anticipate. Numerous companies and institutions are conducting clinical studies in similar patient populations which can result in competition for qualified patients. In addition, clinical trials will take longer than we anticipate if we are required, or believe it is necessary, to enroll additional subjects. Clinical trials may also be delayed as a result of ambiguous or negative interim results. Further, a clinical trial may be suspended or terminated by us, an IRB, an ethics committee, or a data safety monitoring committee overseeing the clinical trial, any of our clinical trial sites with respect to that site, or FDA or other regulatory authorities, due to a number of factors, including:
failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
inspection of the clinical trial operations or clinical trial site by FDA or other regulatory authorities;
inability to provide timely supply of drug product;
unforeseen safety issues, known safety issues that occur at a greater frequency or severity than we anticipate, or any determination that the clinical trial presents unacceptable health risks; or
lack of adequate funding to continue the clinical trial.
Additionally, if any future development partners do not develop the licensed product candidates in the time and manner that we expect, or at all, the clinical development efforts related to these licensed product candidates could be delayed or terminated. In addition, our ability to enforce our partners’ obligations under any future collaboration efforts may be limited due to time and resource constraints, competing corporate priorities of our future partners, and other factors.
Any delays in the commencement of our clinical trials may delay or preclude our ability to further develop or pursue regulatory approval for our product candidates. Changes in U.S. and foreign regulatory requirements and guidance also may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may affect the costs, timing, and likelihood of a successful completion of a clinical trial. If we or any future development partners experience delays in the completion of, or if we or any future development partners must terminate, any clinical trial of any product candidate our ability to obtain regulatory approval for that product candidate will be delayed and the commercial prospects, if any, for the product candidate may suffer as a result. In addition, many of these factors may also ultimately lead to the denial of regulatory approval of a product candidate.
Our product candidates are subject to extensive regulation, compliance with which is costly and time consuming, may cause unanticipated delays, or may prevent the receipt of the required approvals to commercialize our product candidates.
The clinical development, approval, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing, and distribution of our product candidates are subject to extensive regulation by FDA in the United States and by comparable authorities in foreign markets. In the United States, we are not permitted to market our product candidates until we receive regulatory approval from FDA. The process of obtaining regulatory approval is expensive, often takes many years, and can vary substantially based upon the type, complexity, and novelty of the products involved, as well as the target indications. Approval policies or regulations may change and FDA has substantial discretion in the drug approval process, including the ability to delay, limit, or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed. FDA or other comparable foreign regulatory authorities can delay, limit, or deny approval of a product candidate for many reasons, including:
such authorities may disagree with the design or implementation of our or any future development partners’ clinical trials;
we or any future development partners may be unable to demonstrate to the satisfaction of FDA or other regulatory authorities that a product candidate is safe and effective for any indication;
such authorities may not accept clinical data from trials that are conducted at clinical facilities or in countries where the standard of care is potentially different from the United States;
the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;
we or any future development partners may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
such authorities may disagree with our interpretation of data from preclinical studies or clinical;
such authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we or any future development partners contract for clinical and commercial supplies; or
the approval policies or regulations of such authorities may significantly change in a manner rendering our or any future development partners’ clinical data insufficient for approval.
With respect to foreign markets, approval procedures vary widely among countries and, in addition to the aforementioned risks, can involve additional product testing, administrative review periods, and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals may result in increased caution by FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us, or any future development partners from commercializing our product candidates.
The results of preclinical studies and early clinical trials are not always predictive of future results. Any product candidate we or any future development partners advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.
Drug development has substantial inherent risk. We or any future development partners will be required to demonstrate through adequate and well-controlled clinical trials that our product candidates are effective, with a favorable benefit-risk profile, for use in their target populations for their intended indications before we can seek regulatory approvals for their commercial sale. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of development, including after commencement of any of our clinical trials. Success in early clinical trials does not mean that later clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. In addition, serious adverse or undesirable side effects may emerge or be identified during later stages of development that were not observed in earlier stages. Furthermore, our future trials will need to demonstrate sufficient safety and efficacy for approval by regulatory authorities in larger patient populations. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In addition, only a small percentage of drugs under development result in the submission of a New Drug Application or Biologic License Application, or BLA, to FDA and even fewer are approved for commercialization.
If we fail to attract and retain key management and clinical development personnel, or if the attention of such personnel is diverted, we may be unable to successfully manage our business and develop or commercialize our product candidates.
We will need to effectively manage our managerial, operational, financial, and other resources in order to successfully pursue our clinical development and commercialization efforts. As a company with a limited number of personnel, we are heavily affected by turnover and highly dependent on the expertise of the members of our senior management, in particular our Chief Executive Officer, Dr. Cameron Durrant. Furthermore, we rely on third party consultants for a variety of services. We cannot predict the impact of the loss of such individuals or the loss of services of any of our other senior management, should they occur, or the difficulty in replacing such individuals. Such losses could delay or prevent the further development and potential commercialization of our product candidates and, if we are not successful in finding suitable replacements, could harm our business.
In addition, at the closing of the Restructuring Transactions, Dr. Durrant entered into a consulting agreement with the JV Entity controlled by Nomis Bay pursuant to which Dr. Durrant agreed, for a period of up to two years, to furnish information and provide assistance to the JV Entity in connection with its exploration of potential claims versus third parties relating to the Benz Assets. Dr. Durrant is only required to provide these services to the extent that he can do so without (x) in his good faith, reasonable determination, materially adversely affecting his other business or employment obligations or (y) breaching any contractual arrangement relating to his other business or employment obligations. Nevertheless, performance of these consulting obligations could divert his attention away from our business, which could impair our ability to successfully pursue our strategy and our drug development programs.
Any product candidate we or any future development partner may advance into clinical trials may cause unacceptable adverse events or have other properties that may delay or prevent its regulatory approval or commercialization or limit its commercial potential.
Unacceptable adverse events caused by any of our product candidates that we advance into clinical trials could cause us or regulatory authorities to interrupt, delay, or halt clinical trials and could result in the denial of regulatory approval by FDA or other regulatory authorities for any or all targeted indications and markets. This in turn could prevent us from completing development or commercializing the affected product candidate and generating revenue from its sale.
We have not yet successfully completed testing of any of our product candidates for the treatment of the indications for which we intend to seek approval in humans, and we currently do not know the extent of adverse events, if any, that will be observed in individuals who receive any of our product candidates. If any of our product candidates cause unacceptable adverse events in clinical trials, we may not be able to obtain regulatory approval or commercialize such product candidates.
If our competitors develop treatments for the target indications of our product candidates that are approved more quickly, marketed more successfully or are demonstrated to be safer or more effective than our product candidates, or if FDA approves generic competitors to our products post-approval, our commercial opportunity will be reduced or eliminated.
We compete in an industry characterized by rapidly advancing technologies, intense competition, a changing regulatory and legislative landscape and a strong emphasis on the benefits of intellectual property protection and regulatory exclusivities. Our competitors include pharmaceutical companies, other biotechnology companies, academic institutions, government agencies and other private and public research organizations. We compete with these parties in immunotherapy and oncology treatments and in recruiting highly qualified personnel. Our product candidates, if successfully developed and approved, may compete with established therapies, with new treatments that may be introduced by our competitors, including competitors relying to a large extent on our drug approvals under section 505(b)(2) of the FDCA or on our biologics approvals under section 351(k) of the Public Health Service Act, or with generic copies of our products approved by FDA under an abbreviated new drug application, or ANDA, referencing our drug products. We believe that competitors are actively developing competing products to our product candidates. See “Competition” in Item 1 of this Annual Report for a discussion of competition with respect to our current product candidates.
Many of our competitors and potential competitors have substantially greater scientific, research, and product development capabilities, as well as greater financial, marketing, sales and human resources capabilities than we do. In addition, many specialized biotechnology firms have formed collaborations with large, established companies to support the research, development and commercialization of products that may be competitive with ours. Accordingly, our competitors may be more successful with respect to their products than we may be in developing, commercializing, and achieving widespread market acceptance for our products. If a competitor obtains approval for an orphan drug that is the same drug or the same biologic as one of our candidates before we do, we will be blocked from obtaining FDA approval for seven years from the date of the competitor’s product, unless we can establish that our product is clinically superior to the previously-approved competitor’s product or we can meet another exception, such as by showing that the competitor has failed to provide an adequate supply of its product to patients after approval. In addition, our competitors’ products may be more effective or more effectively marketed and sold than any treatment we or our development partners may commercialize and may render our product candidates obsolete or non-competitive before we can recover the expenses related to developing and supporting the commercialization of any of our product candidates. Developments by competitors may render our product candidates obsolete or noncompetitive. After one of our product candidates is approved, FDA may also approve a generic version with the same dosage form, safety, strength, route of administration, quality, performance characteristics and intended use as our product. These generic equivalents would be less costly to bring to market and could generally be offered at lower prices, thereby limiting our ability to gain or retain market share.
The acquisition or licensing of pharmaceutical products is also very competitive, and a number of more established companies, which have acknowledged strategies to in-license or acquire products, may have competitive advantages as may other emerging companies taking similar or different approaches to product acquisitions. The more established companies may have a competitive advantage over us due to their size, cash flows, institutional experience and historical corporate reputation.
We are subject to a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our products.
We are, and will for the foreseeable future continue to be, wholly dependent on third party contract manufacturers for the timely supply of adequate quantities of our products which meet or exceed requisite quality and production standards for use in clinical and nonclinical studies. Given the extensive risks, scope, complexity, cost, regulatory requirements and commitment of resources associated with developing the capabilities to manufacture one or more of our products, we have no present plan or intention of developing in-house manufacturing capabilities for nonclinical, clinical or commercial scale production, beyond our current supervision and management of our third-party contract manufacturers. In addition, in order to balance risk and conserve financial and human resources, we have and may continue from time to time to defer commitment to production of product, which could result in delays to the continued progress of our clinical and nonclinical testing.
In addition to the foregoing, the process of manufacturing our products is complex, highly regulated and subject to several risks, including but not limited to the following:
| · | We, and our contract manufacturers, must comply with FDA’s current Good Manufacturing Practice, or cGMP, regulations and guidance. We, and our contract manufacturers, may encounter difficulties in achieving quality control and quality assurance and may experience shortages in qualified personnel. We, and our contract manufacturers, are subject to inspections by FDA and comparable agencies in other jurisdictions to confirm compliance with applicable regulatory requirements. Any failure to follow cGMP or other regulatory requirements or any delay, interruption or other issues that arise in the manufacture, fill-finish, packaging, or storage of our products as a result of a failure of our facilities or the facilities or operations of third parties to comply with regulatory requirements, or a failure to pass any regulatory authority inspection, could significantly impair our ability to develop and commercialize our products, including leading to significant delays in the availability of products for our clinical studies or the termination or hold on a clinical study, or the delay or prevention of a filing or approval of marketing applications for our product candidates. Significant noncompliance could also result in the imposition of sanctions, including injunctions, civil penalties, failure of regulatory authorities to grant marketing approvals for our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions, adverse publicity, and criminal prosecutions, any of which could damage our reputation. If we are not able to maintain regulatory compliance, we may not be permitted to market our products and/or may be subject to product recalls, seizures, injunctions, or criminal prosecution. Any adverse developments affecting manufacturing operations for our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. |
| · | The manufacturing facilities in which our products are made could be adversely affected by equipment failures, plant closures, capacity constraints, competing customer priorities or changes in corporate strategy or priorities, process changes or failures, changes in business models or operations, materials or labor shortages, natural disasters, power failures and numerous other factors. |
| · | We are wholly dependent upon third party CMOs for the timely supply of adequate quantities of requisite quality product for our nonclinical, clinical and, if approved by regulatory authorities, commercial scale production. |
| · | The process of manufacturing biologics is extremely susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, or vendor or operator error. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. |
If any product candidate that we successfully develop does not achieve broad market acceptance among physicians, patients, healthcare payers and the medical community, the revenue that it generates may be limited.
Even if our product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payers, and the medical community. Coverage and reimbursement of our product candidates by third-party payers, including government payers, generally is also necessary for commercial success. The degree of market acceptance of any approved product candidates will depend on a number of factors, including:
the efficacy and safety as demonstrated in clinical trials;
the clinical indications for which the product candidate is approved;
acceptance by physicians, major operators of hospitals and clinics, and patients of the product candidate as a safe and effective treatment;
the potential and perceived advantages of product candidates over alternative treatments;
the safety of product candidates seen in a broader patient group, including its use outside the approved indications;
the cost of treatment in relation to alternative treatments;
the availability of adequate reimbursement and pricing by third parties and government authorities;
relative convenience and ease of administration;
the prevalence and severity of adverse events;
the effectiveness of our sales and marketing efforts; and
unfavorable publicity relating to the product candidate.
If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payers, and patients, we may not generate sufficient revenue from that product candidate and may not become or remain profitable.
Reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our product candidates profitably.
Market acceptance and sales of our product candidates will depend significantly on the availability of adequate insurance coverage and reimbursement from third-party payers for any of our product candidates and may be affected by existing and future health care reform measures. Government authorities and third-party payers, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. Reimbursement by a third-party payer may depend upon a number of factors including the third-party payer’s determination that use of a product candidate is:
a covered benefit under its health plan;
safe, effective, and medically necessary;
appropriate for the specific patient;
neither experimental nor investigational.
Obtaining coverage and reimbursement approval for a product candidate from a government or other third-party payer is a time-consuming and costly process that could require us to provide supporting scientific, clinical, and cost effectiveness data for the use of our product candidates to the payer. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our product candidates. If reimbursement is not available or is available only to limited levels or with restrictions, we may not be able to commercialize certain of our product candidates profitably, or at all, even if approved.
In the United States and in certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could affect our ability to sell our product candidates profitably. In particular, the Medicare Modernization Act of 2003 revised the payment methods for many product candidates under Medicare. This has resulted in lower rates of reimbursement. There have been numerous other federal and state initiatives designed to reduce payment for pharmaceuticals.
As a result of legislative proposals and the trend toward managed health care in the United States, third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. They may also refuse to provide coverage of approved product candidates for medical indications other than those for which FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payers will reimburse patients for their use of newly approved drugs, which in turn will put pressure on the pricing of drugs. We could be subject to pricing pressures in connection with the sale of our product candidates due to the trend toward managed health care, the increasing influence of health maintenance organizations, and additional legislative proposals as well as country, regional, or local healthcare budget limitations.
If we are unable to establish sales and marketing capabilities or fail to enter into agreements with third parties to market and sell any product candidates we may successfully develop, we may not be able to effectively market and sell any such product candidates.
We do not currently have the sales and marketing infrastructure in place that would be necessary to sell and market products. As our drug candidates progress, while we may build the infrastructure that would be needed to successfully market and sell any successful drug candidate, we currently anticipate seeking strategic alliances and partnerships with third parties, particularly for any drug candidates that we determine would require larger sales efforts. The establishment of a sales and marketing operation can be expensive and time consuming and could delay any product candidate launch.
Governments may impose price controls, which may adversely affect our future profitability.
We intend to seek approval to market our future product candidates in the United States and potentially in foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product candidates. In some foreign countries, particularly in the European Union, the pricing of prescription pharmaceuticals and biologics is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
We face potential product liability exposure and, if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.
The use of our product candidates in clinical trials and the sale of any product candidates for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us or any future development partners by participants enrolled in our clinical trials, patients, health care providers, or others using, administering, or selling our product candidates. If we cannot successfully defend ourselves against any such claims, or have insufficient insurance protection, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:
withdrawal of clinical trial participants;
termination of clinical trial sites or entire trial programs;
costs of related litigation;
substantial monetary awards to trial participants or other claimants;
decreased demand for our product candidates and loss of revenue;
impairment of our business reputation;
diversion of management and scientific resources from our business operations; and
the inability to commercialize our product candidates.
We have obtained limited product liability insurance coverage for our clinical trials domestically and in selected foreign countries where we are conducting clinical trials. As such, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for product candidates to include the sale of commercial products if we obtain marketing approval for our product candidates in development; however, we may be unable to obtain commercially reasonable product liability insurance for any product candidates approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our working capital and adversely affect our business.
Our insurance policies are expensive and protect us only from some business risks, which leaves us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers’ compensation, products liability, and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Our recent history may result in an increase in premium costs or otherwise affect the terms of coverage available to us. Any significant, uninsured liability may require us to pay substantial amounts, which would adversely affect our working capital and results of operations.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards, which could have a material adverse effect on our business.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, failure to provide accurate information to FDA or comparable foreign regulatory authorities, failure to comply with manufacturing standards, failure to comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, failure to report financial information or data accurately, violations of anti-bribery laws, or failure to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of confidential information obtained in the course of our business, which could result in civil or criminal legal actions, regulatory sanctions, or serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics and other corporate policies, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.
We may encounter difficulties in managing our growth and expanding our operations successfully.
As we seek to advance our product candidates through clinical trials we will need to expand our development, regulatory, manufacturing, marketing, and sales capabilities, and contract with third parties to provide these capabilities for us. As our operations expand we expect that we will need to manage additional relationships with various development partners, suppliers, and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend in part on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively. We may not be able to accomplish these tasks and our failure to accomplish any of them could prevent us from successfully growing our company.
We and any future development partners, third-party manufacturers and suppliers use hazardous materials, and any claims relating to improper handling, storage, or disposal of these materials could be time consuming or costly.
We and any future development partners, third-party manufacturers and suppliers may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. Our operations and the operations of our development partner, third-party manufacturers and suppliers also produce hazardous waste products. Federal, state, and local laws and regulations govern the use, generation, manufacture, storage, handling, and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage and our property, casualty, and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.
Our internal computer systems, or those of our future development partners, third-party clinical research organizations or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.
Despite the implementation of security measures, our internal computer systems and those of our development partners, third-party clinical research organizations and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. While we have not experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data for any of our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.
Healthcare reform measures, when implemented, could hinder or prevent our commercial success.
There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of health care and containing or lowering the cost of health care. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations, and other payers of healthcare services to contain or reduce costs of health care may adversely affect:
the demand for any drug products for which we may obtain regulatory approval;
our ability to set a price that we believe is fair for our product candidates;
our ability to generate revenue and achieve or maintain profitability;
the level of taxes that we are required to pay; and
the availability of capital.
We and any of our future development partners will be required to report to regulatory authorities if any of our approved products cause or contribute to adverse medical events, and any failure to do so would result in sanctions that would materially harm our business.
If we and any future development partners are successful in commercializing our products, FDA and foreign regulatory authorities would require that we and any future development partners report certain information about adverse medical events if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We and any future development partners may fail to report adverse events we become aware of within the prescribed timeframe. We and any future development partners may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we and any future development partners fail to comply with our reporting obligations, FDA or a foreign regulatory authority could take action including criminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of future products.
Our product candidates for which we intend to seek approval as biologic products may face competition sooner than anticipated.
With the enactment of the Biologics Price Competition and Innovation Act of 2009, or the BPCIA, as part of the Affordable Care Act, an abbreviated pathway for the approval of biosimilar and interchangeable biological products was created. The abbreviated regulatory pathway establishes legal authority for FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as ‘‘interchangeable’’ based on its similarity to an existing brand product. Under the BPCIA, an application for a biosimilar product cannot be approved by FDA until 12 years after the original branded product was approved under a BLA. The law is complex and is still being interpreted and implemented by FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when such processes intended to implement BPCIA may be fully adopted by FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.
We believe that any of our product candidates approved as biological products under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for biosimilar competition sooner than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. Finally, there is a risk that the 12-year exclusivity period could be reduced which could negatively affect our products.
In addition, foreign regulatory authorities may also provide for exclusivity periods for approved biological products. For example, biological products in Europe may be eligible for a 10-year period of exclusivity. However, biosimilar products have been approved under a sub-pathway of the centralized procedure since 2006. The pathway allows sponsors of a biosimilar product to seek and obtain regulatory approval based in part on the clinical trial data of an originator product to which the biosimilar product has been demonstrated to be ‘‘similar.’’ In many cases, this allows biosimilar products to be brought to market without conducting the full suite of clinical trials typically required of originators. It is unclear whether we and our development partner would face competition to our products in European markets sooner than anticipated.
We may in the future be subject to various U.S. federal and state laws pertaining to health care fraud and abuse, including anti-kickback, self-referral, false claims and fraud laws, and any violations by us of such laws could result in fines or other penalties.
If one or more of our product candidates is approved, we will likely be subject to the various U.S. federal and state laws intended to prevent health care fraud and abuse. The federal anti-kickback statute prohibits the offer, receipt, or payment of remuneration in exchange for or to induce the referral of patients or the use of products or services that would be paid for in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items and services. Many states have similar laws that apply to their state health care programs as well as private payers. Violations of the anti-kickback laws can result in exclusion from federal health care programs and substantial civil and criminal penalties.
The False Claims Act imposes liability on persons who, among other things, present or cause to be presented false or fraudulent claims for payment by a federal health care program. The False Claims Act has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. The False Claims includes a whistleblower provision that allows individuals to bring actions on behalf of the federal government and share a portion of the recovery of successful claims. If our marketing or other arrangements were determined to violate the False Claims Act or anti-kickback or related laws, then our revenue could be adversely affected, which would likely harm our business, financial condition, and results of operations.
State and federal authorities have aggressively targeted medical technology companies for alleged violations of these anti-fraud statutes, based on improper research or consulting contracts with doctors, certain marketing arrangements that rely on volume-based pricing, off-label marketing schemes, and other improper promotional practices. Companies targeted in such prosecutions have paid substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans or Corporate Integrity Agreements, and have often become subject to consent decrees severely restricting the manner in which they conduct their business. If we become the target of such an investigation or prosecution based on our contractual relationships with providers or institutions, or our marketing and promotional practices, we could face similar sanctions, which would materially harm our business.
Also, the Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, future distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties, or prosecution and have a negative impact on our business, results of operations and reputation.
Legislative or regulatory healthcare reforms in the United States may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to produce, market, and distribute our products after approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our current product candidates or any future product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:
changes to manufacturing methods;
additional studies, including clinical studies;
recall, replacement, or discontinuance of one or more of our products; and
additional record-keeping.
Each of these would likely entail substantial time and cost and could materially harm our business and our financial results. In addition, delays in receipt of or failure to receive regulatory approvals for any future products would harm our business, financial condition, and results of operations.
Even if we are able to obtain regulatory approval for our product candidates, we will continue to be subject to ongoing and extensive regulatory requirements, and our failure to comply with these requirements could substantially harm our business.
If we receive regulatory approval for our product candidates, we will be subject to ongoing FDA obligations and continued regulatory oversight and review, such as continued safety reporting requirements, and we may also be subject to additional FDA post-marketing obligations. If we are not able to maintain regulatory compliance, we may not be permitted to market our product candidates and/or may be subject to product recalls or seizures.
If FDA approves any of our product candidates, the labeling, manufacturing, packaging, storage, distribution, export, adverse event reporting, storage, advertising, promotion and record-keeping for our products will be subject to extensive regulatory requirements. Violations of these regulatory requirements or the subsequent discovery of previously unknown problems with the products, including adverse events of unanticipated severity or frequency, may result in:
the issuance of warning or untitled letters;
requirements to conduct post-marking clinical trials;
restrictions on the marketing and distribution of the product, including potential withdrawal of the product from the market;
suspension of ongoing clinical trials;
the issuance of product recalls, import and export restrictions, seizures, and detentions; and
the issuance of injunctions, or imposition of other civil and/or criminal penalties.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred substantial losses during our history and do not expect to become profitable in the foreseeable future and may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. We may be unable to use these losses to offset income before such unused losses expire. Under Section 382 of the Internal Revenue Code, if a corporation undergoes an ‘‘ownership change’’ (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have recently and in the past experienced ownership changes that have resulted in limitations on the use of a portion of our net operating loss carryforwards. On February 27, 2018, upon the closing of the Restructuring Transactions, we experienced an ownership change that may result in limitations on the use of a portion of our net operating losses. If we experience further ownership changes our ability to utilize our net operating loss carryforwards could be further limited.
Risks Related to Our Bankruptcy
Despite having emerged from bankruptcy, we cannot be certain that the residual effects of the bankruptcy proceedings will not adversely affect our operations going forward.
Because of the residual risks and uncertainties associated with Chapter 11 bankruptcy proceedings, the ultimate impact of events that occurred in connection with, or that may occur subsequent to, these proceedings will have on our reputation, business, financial condition and results of operations cannot be accurately predicted or quantified. Due to uncertainties, many risks exist, including the following:
key business partners could terminate their relationships or require financial assurances or enhanced performance;
the ability to renew existing contracts and negotiate favorable terms from suppliers, partners and others may be adversely affected;
the ability to attract, motivate and/or retain key executives and employees may be adversely affected;
employees may be distracted from performance of their duties or more easily attracted to other employment opportunities; and
other costs of operations, including obtaining insurance, could be more expensive.
The occurrence of one or more of these events, or others related to our emergence from bankruptcy, could have a material and adverse effect on our operations, financial condition and reputation. We cannot assure you that having been subject to bankruptcy proceedings will not adversely affect our operations in the future.
Allowance of claims by the Bankruptcy Court could materially exceed our estimated liability and adversely affect our financial condition.
The reconciliation of certain proofs of claim filed against us in the Bankruptcy Case is ongoing. As of December 31, 2017, approximately $0.5 million in claims remain subject to review and reconciliation. As of December 31, 2017, we have recorded $0.06 million related to these claims in Accounts payable and Notes payable to vendors, which represents management’s best estimate of claims to be allowed by the Bankruptcy Court.
Despite management’s best estimate of claims to be allowed by the Bankruptcy Court, we may be ultimately unsuccessful in our attempt to have certain proofs of claim that we believe are subject to objection or otherwise improperly filed to be disallowed, reduced or reclassified by the Bankruptcy Court. The allowance of claims by the Bankruptcy Court could materially exceed our estimated liability and adversely affect our business, financial condition, and results of operations. In addition, we may identify additional liabilities during this process that will need to be recorded or reclassified to liabilities subject to compromise. The resolution of such claims could result in material adjustments to our financial statements.
For additional information, see Note 2 to our Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Our actual financial results may vary significantly from the projections filed with the Bankruptcy Court and, as a result of our bankruptcy, our historical financial information is not comparable to future financial information.
In connection with the Plan, we were required to prepare projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan and our ability to continue operations upon emergence from bankruptcy. These projections were limited by the information available to us as of the date they were prepared and reflected numerous assumptions concerning anticipated future performance and prevailing and anticipated market and economic conditions that were and continue to be beyond our control and that may not materialize. Projections are inherently subject to uncertainties and to a wide variety of significant business, economic and competitive risks. Therefore, variations from the projections may be material. These projections were prepared solely for the purpose of the bankruptcy proceedings, have not been incorporated into this report, have not been, and will not be, updated on an ongoing basis and should not be considered or relied upon by investors.
Additionally, as a result of the consummation of the Plan and the transactions contemplated thereby, our financial condition and results of operations from and after our emergence from bankruptcy may not be comparable to the financial condition or results of operations reflected in our historical financial statements.
Risks Related to Our Dependence on Third Parties
We rely on third parties to conduct our clinical trials. If these third parties do not meet our deadlines or otherwise conduct the trials as required, our clinical development programs could be delayed or unsuccessful and we may not be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.
We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. Therefore, the timing of the initiation and completion of these trials is uncertain and may occur on substantially different timing from our estimates. We also use CROs to conduct our clinical trials and rely on medical institutions, clinical investigators, CROs, and consultants to conduct our trials in accordance with our clinical protocols and regulatory requirements. Our CROs, investigators, and other third parties play a significant role in the conduct of these trials and subsequent collection and analysis of data.
There is no guarantee that any CROs, investigators, or other third parties on which we rely for administration and conduct of our clinical trials will devote adequate time and resources to such trials or perform as contractually required. If any of these third parties fails to meet expected deadlines, fails to adhere to our clinical protocols, or otherwise performs in a substandard manner, our clinical trials may be extended, delayed, or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in our ongoing clinical trials unless we are able to transfer those subjects to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be jeopardized.
We rely completely on third parties, most of which are sole source suppliers, to supply drug substance and manufacture drug product for our clinical trials and preclinical studies and intend to rely on other third parties to produce commercial supplies of product candidates, and our dependence on third parties could adversely impact our business.
We are completely dependent on third-party suppliers, most of which are sole source suppliers of the drug substance and drug product for our product candidates. We are continually evaluating potential alternate sources of supply but there can be no assurance that any such suppliers would be available, acceptable or successful. From time to time, we experience delays from our drug substance suppliers. To date, such delays have been manageable. However, if these third-party suppliers do not supply sufficient quantities for product candidates to us on a timely basis and in accordance with applicable specifications and other regulatory requirements, there could be a significant interruption of our supplies, which would adversely affect clinical development of the product candidate, including affecting our ability to enroll in and timely progress clinical trials. Furthermore, if any of our contract manufacturers cannot successfully manufacture material that conforms to our specifications and with regulatory requirements, we will not be able to secure and/or maintain regulatory approval, if any, for our product candidates.
We will also rely on our contract manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our anticipated clinical trials. There are a small number of suppliers for certain capital equipment and raw materials used to manufacture our product candidates. We do not have any control over the process or timing of the acquisition of these raw materials by our contract manufacturers. Moreover, we currently do not have agreements in place for the commercial production of these raw materials. Any significant delay in the supply of a product candidate or the raw material components thereof for an ongoing clinical trial could considerably delay completion of that clinical trial, product candidate testing, and potential regulatory approval of that product candidate.
We do not expect to have the resources or capacity to commercially manufacture any of our proposed product candidates if approved, and will likely continue to be dependent on third-party manufacturers. Our dependence on third parties to manufacture and supply us with clinical trial materials and any approved product candidates may adversely affect our ability to develop and commercialize our product candidates on a timely basis.
We may not be successful in establishing and maintaining additional development partnerships and licensing agreements, which could adversely affect our ability to develop and commercialize product candidates.
Part of our strategy is to enter into development partnerships and licensing agreements. We face significant competition in seeking appropriate partners and the negotiation process is time consuming and complex. Even if we are successful in securing a development partnership, we may not be able to continue it. For example, in 2017, we terminated certain of our licensing agreements for KB001-A, a discontinued drug candidate. We cannot predict the impact of that decision on the likelihood of our ability to enter into future partnerships for our programs. Moreover, we may not be successful in our efforts to establish a development partnership or other alternative arrangements for any of our other existing or future product candidates and programs because, among other reasons, our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early a stage of development for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts to establish new development partnerships, the terms that we agree upon may not be favorable to us and we may not be able to maintain such development partnerships if, for example, development or approval of a product candidate is delayed or sales of an approved product candidate are disappointing. Any delay in entering into new development partnership agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness if they reach the market.
Moreover, if we fail to establish and maintain additional development partnerships related to our product candidates:
the development of our current or future product candidates may be terminated or delayed;
our cash expenditures related to development of certain of our current or future product candidates would increase significantly and we may need to seek additional financing;
we may be required to hire additional employees or otherwise develop expertise, such as sales and marketing expertise, for which we have not budgeted; and
we will bear all of the risk related to the development of any such product candidates.
Our or any new partner’s failure to develop, manufacture or effectively commercialize our product would result in a material adverse effect on our business and results of operations and would likely cause our stock price to decline.
Risks Related to Intellectual Property
If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish, and our business and competitive position would suffer.
Our success, competitive position and future revenues will depend in part on our ability and the abilities of our licensors and licensees to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties. We have an active patent protection program that includes filing patent applications on new compounds, formulations, delivery systems and methods of making and using products and prosecuting these patent applications in the United States and abroad. As patents issue, we also file continuation applications as appropriate. Although we have taken steps to build a strong patent portfolio, we cannot predict:
| · | the degree and range of protection any patents will afford us against competitors, including whether third parties find ways to invalidate or otherwise circumvent our licensed patents; |
| · | if and when patents will issue in the United States or any other country; |
| · | whether or not others will obtain patents claiming aspects similar to those covered by our licensed patents and patent applications; |
| · | whether we will need to initiate litigation or administrative proceedings to protect our intellectual property rights, which may be costly whether we win or lose; |
| · | whether any of our patents will be challenged by our competitors alleging invalidity or unenforceability and, if opposed or litigated, the outcome of any administrative or court action as to patent validity, enforceability or scope; |
| · | whether a competitor will develop a similar compound that is outside the scope of protection afforded by a patent or whether the patent scope is inherent in the claims modified due to interpretation of claim scope by a court; |
| · | whether there were activities previously undertaken by a licensor that could limit the scope, validity or enforceability of licensed patents and intellectual property; or |
| · | whether a competitor will assert infringement of its patents or intellectual property, whether or not meritorious, and what the outcome of any related litigation or challenge may be. |
Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as our licensors, sublicensees and contractors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we require all employees, consultants and board members to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired, and our business and competitive position would suffer.
Due to legal and factual uncertainties regarding the scope and protection afforded by patents and other proprietary rights, we may not have meaningful protection from competition.
Our long-term success will substantially depend upon our ability to protect our proprietary technologies from infringement, misappropriation, discovery and duplication and avoid infringing the proprietary rights of others. Our patent rights, and the patent rights of biopharmaceutical companies in general, are highly uncertain and include complex legal and factual issues. These uncertainties also mean that any patents that we own or may obtain in the future could be subject to challenge, and even if not challenged, may not provide us with meaningful protection from competition. Patents already issued to us or our pending applications may become subject to dispute, and any dispute could be resolved against us.
If some or all of our or any licensor’s patents expire or are invalidated or are found to be unenforceable, or if some or all of our patent applications do not result in issued patents or result in patents with narrow, overbroad, or unenforceable claims, or claims that are not supported in regard to written description or enablement by the specification, or if we are prevented from asserting that the claims of an issued patent cover a product of a third party, we may be subject to competition from third parties with products in the same class of products as our product candidates or products with the same active pharmaceutical ingredients as our product candidates, including in those jurisdictions in which we have no patent protection.
Our commercial success will depend in part on obtaining and maintaining patent and trade secret protection for our product candidates, as well as the methods for treating patients in the product indications using these product candidates. We will be able to protect our product candidates and the methods for treating patients in the applicable product indications using these product candidates from unauthorized use by third parties only to the extent that we or our exclusive licensor owns or controls such valid and enforceable patents or trade secrets.
Even if our product candidates and the methods for treating patients for prescribed indications using these product candidates are covered by valid and enforceable patents and have claims with sufficient scope, disclosure and support in the specification, the patents will provide protection only for a limited amount of time. Our and any licensor’s ability to obtain patents can be highly uncertain and involve complex and in some cases unsettled legal issues and factual questions. Furthermore, different countries have different procedures for obtaining patents, and patents issued in different countries provide different degrees of protection against the use of a patented invention by others. Therefore, if the issuance to us or any licensor, in a given country, of a patent covering an invention is not followed by the issuance, in other countries, of patents covering the same invention, or if any judicial interpretation of the validity, enforceability, or scope of the claims in, or the utility, written description or enablement in, a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in another country, our ability to protect our intellectual property in those countries may be limited. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection.
We may be subject to competition from third parties with products in the same class of products as our product candidates, or products with the same active pharmaceutical ingredients as our product candidates in those jurisdictions in which we have no patent protection. Even if patents are issued to us or any licensor regarding our product or methods of using them, those patents can be challenged by our competitors who can argue such patents are invalid or unenforceable on a variety of grounds, including lack of utility, lack sufficient written description or enablement, utility, or that the claims of the issued patents should be limited or narrowly construed. Patents also will not protect our product candidates if competitors devise ways of making or using these products without legally infringing our patents. The current U.S. regulatory environment may have the effect of encouraging companies to challenge branded drug patents or to create non-infringing versions of a patented product in order to facilitate the approval of abbreviated new drug applications for generic substitutes. These same types of incentives encourage competitors to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor, providing another less burdensome pathway to approval.
If we infringe the rights of third parties, we could be prevented from selling products and be forced to defend against litigation and pay damages.
There is a risk that we are infringing the proprietary rights of third parties because numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields that are the focus of our development and manufacturing efforts. Others might have been the first to make the inventions covered by each of our or any licensor’s pending patent applications and issued patents and/or might have been the first to file patent applications for these inventions. In addition, because patent applications take many months to publish and patent applications can take many years to issue, there may be currently pending applications, unknown to us or any licensor, which may later result in issued patents that cover the production, manufacture, synthesis, commercialization, formulation or use of our product candidates. In addition, the production, manufacture, synthesis, commercialization, formulation or use of our product candidates may infringe existing patents of which we are not aware. Defending ourselves against third-party claims, including litigation in particular, would be costly and time consuming and would divert management’s attention from our business, which could lead to delays in our development or commercialization efforts. If third parties are successful in their claims, we might have to pay substantial damages or take other actions that are adverse to our business.
If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and may have to:
| · | obtain licenses, which may not be available on commercially reasonable terms, if at all; |
| · | redesign our products or processes to avoid infringement, which may not be possible or could require substantial funds and time; |
| · | stop using the subject matter claimed in patents held by others, which could cause us to lose the use of one or more of our drug candidates; |
| · | pay damages royalties, or other amounts; or |
| · | grant a cross license to our patents to another patent holder. |
We expect that, as our drug candidates move further into clinical trials and commercialization and our public profile is raised, we will be more likely to be subject to such claims.
We may fail to comply with any of our obligations under existing agreements pursuant to which we license or have otherwise acquired rights or technology, which could result in the loss of rights or technology that are material to our business.
We are a party to technology licenses and have acquired certain assets and rights that are important to our business and we may enter into additional licenses or acquire additional assets and rights in the future. We currently hold licenses from LICR, BioWa, and Lonza. These licenses impose various commercial, contingent payments, royalty, insurance, indemnification, and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license or take back rights or assets, in which event we would lose valuable rights under our collaboration agreements, potential claims and our ability to develop product candidates.
We may be subject to claims that our consultants or independent contractors have wrongfully used or disclosed alleged trade secrets of their other clients or former employers to us.
As is common in the biotechnology and pharmaceutical industry, we engage the services of consultants to assist us in the development of our product candidates. Many of these consultants were previously employed at, or may have previously or may be currently providing consulting services to, other biotechnology or pharmaceutical companies including our competitors or potential competitors. We may become subject to claims that our company or a consultant inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management team.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and we intend to seek patent protection only in selected countries. Our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product candidates and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Risks Related to Our Common Stock
The Black Horse Entities own more than a majority of our outstanding common stock and will be able to exert control over all matters subject to stockholder approval.
The completion of the Restructuring Transactions on February 27, 2018 resulted in a change in control of our company, as the issuance of the New Common Shares to the Black Horse Entities resulted in the Black Horse Entities and their affiliates owning more than a majority of our outstanding common stock. As of February 27, 2018, the Black Horse Entities collectively held 66,870,851 shares of our common stock, or approximately 62.6% of our outstanding common stock, and Dr. Chappell, a member of our board of directors from June 30, 2016 until November 10, 2017, who controls the Black Horse Entities, nor has the ability to elect all of the members of our board of directors and thereby to control our management and affairs, including determinations with respect to entry into new lines of business, borrowings, and issuances of common stock or other securities, as well as the outcome of all matters requiring stockholder approval and the ability to cause or prevent a change of control of our company. The control possessed by Dr. Chappell could prevent or discourage unsolicited acquisition proposals or offers for our common stock that may be in the best interest of our other stockholders.
The interests of the Black Horse Entities may not in all cases be aligned with the interests of our other stockholders. For example, a sale of a substantial number of shares of our common stock in the future by the Black Horse Entities could cause our stock price to decline. Additionally, the Black Horse Entities are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Accordingly, the Black Horse Entities may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. In addition, Black Horse Entities may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to holders of our common stock.
The concentration of our common stock owned by insiders may limit the ability of our other stockholders to influence corporate matters and may contribute to volatility in our stock price.
We have a relatively small public float due to the ownership percentage of our executive officers and directors, and greater than 5% stockholders. Our directors, executive officers, and the holders of more than 5% of our common stock together with their affiliates beneficially own approximately 94.3% of our common stock as of February 27, 2018. Some of these persons or entities may have interests that are different from our other stockholders. As of February 27, 2018, Nomis Bay held 33,573,530 shares of our common stock, or approximately 31.4% of our outstanding common stock, and the Black Horse Entities collectively held 66,870,851 shares of our common stock, or approximately 62.6% of our outstanding common stock. This significant concentration of ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders.
As a result of our small public float, our common stock may be less liquid and have greater stock price volatility than the common stock of companies with broader public ownership. In addition, the trading of a relatively small volume of shares of our common stock may result in significant volatility in our stock price. If and to the extent ownership of our common stock becomes more concentrated, whether due to increased ownership by our directors and executive officers or other principal stockholders, any future repurchase of our common stock, or other factors, our public float would further decrease, which in turn would likely result in increased stock price volatility. Additionally, because a large amount of our stock is closely held, we may experience low trading volume or large fluctuations in share price and volume due to large sales by our principal stockholders.
There is a limited trading market for our securities. An active trading market for our common stock may not develop or be sustained and the market price of our securities is subject to volatility.
Trading in our common stock is limited and we cannot predict whether an active market for our common stock will ever develop in the future. In the absence of an active trading market:
investors may have difficulty buying and selling shares of our common stock;
market visibility for shares of our common stock may be limited;
a lack of visibility for shares of our common stock may have a depressive effect on the market price for shares of our common stock; and
significant sales of our common stock, or the expectation of these sales, could materially and adversely affect the market price of our common stock.
An inactive market may also impair our ability to raise capital to continue as a going concern and to fund operations by selling shares and may impair our ability to acquire additional intellectual property assets by using our shares as consideration.
No assurance can be given that an active market will develop for the common stock or as to the liquidity of the trading market for the common stock. The common stock may be traded only infrequently in transactions arranged through brokers or otherwise, and reliable market quotations may not be available.
Our ability to re-list our common stock on a national securities exchange is subject to us meeting applicable listing criteria.
If we are able to raise the necessary capital, we intend to apply for our common stock to be re-listed on a national securities exchange. In addition, we are exploring strategic transactions to affect a listing on a national securities exchange, including by completing a reverse merger or sale. However, no assurances can be given regarding our ability to achieve a listing in a timely manner or at all. Each national securities exchange requires companies desiring to list their common stock to meet certain listing criteria including total number of stockholders, minimum stock price, total value of public float, and in some cases total shareholders’ equity and market capitalization. Our failure to meet such applicable listing criteria will prevent us from listing our common stock on a national securities exchange.
Raising additional funds by issuing securities or through licensing or lending arrangements may cause dilution to our existing stockholders, restrict our operations or require us to relinquish proprietary rights.
To the extent that we raise additional capital by issuing equity securities, the share ownership of existing stockholders will be diluted. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance could result in further dilution to our stockholders.
Any future debt financing may involve covenants that restrict our operations, including, among other restrictions, limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments, and engage in certain merger, consolidation, or asset sale transactions. In addition, if we raise additional funds through licensing arrangements, it may be necessary to grant potentially valuable rights to our product candidates or grant licenses on terms that are not favorable to us.
We have identified material weaknesses in our internal control over financial reporting and may be unable to maintain effective control over financial reporting.
In the course of the preparation and external audit of our consolidated financial statements for the fiscal year ended December 31, 2017, we and our independent registered public accounting firm identified a “material weakness” in our internal control over financial reporting related to our limited number of accounting and financial reporting personnel. A material weakness in internal control over financial reporting is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis. We identified an insufficient degree of segregation of duties amongst our accounting and financial reporting personnel.
During 2018, we intend to work to remediate the material weaknesses identified above, which could include the addition of accounting and financial reporting personnel and/or the engagement of accounting and personnel consultants on a limited-time basis until we add a sufficient number of personnel. However, our current financial position could make it difficult for us to add the necessary resources.
Any material weaknesses in our internal control over financing reporting in the future could adversely affect investor confidence, impair the value of our common stock and increase our cost of raising capital.
If we are unable to remediate our material weakness over financial controls or we identify other material weaknesses or significant deficiencies in the future, our operating results might be harmed, we may fail to meet our reporting obligations or fail to prevent or detect material misstatements in our financial statements. Any such failure could, in turn, affect the future ability of our management to certify that internal control over our financial reporting is effective. Inferior internal control over financial reporting could also subject us to the scrutiny of the SEC and other regulatory bodies which could cause investors to lose confidence in our reported financial information and could subject us to civil or criminal penalties or stockholder litigation, which could have an adverse effect on our results of operations and the market price of our common stock.
In addition, if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our share price. Furthermore, deficiencies could result in future non-compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Such non-compliance could subject us to a variety of administrative sanctions, including review by the SEC or other regulatory authorities.
Our stock price is volatile and purchasers of our common stock could incur substantial losses.
The market price of our common stock may fluctuate significantly in response to a number of factors. These factors include those discussed in this “Risk Factors” section of this Annual Report on Form 10-K and others such as:
delay or failure in initiating or completing preclinical studies or clinical trials, or unsatisfactory results of these trials and the resulting impact on ongoing product development;
the success, progress, timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders;
our ability to re-list our common stock on a national securities exchange, whether through a new listing or by completing a strategic transaction;
announcements regarding equity or debt financing transactions;
sales or potential sales of substantial amounts of our common stock or securities convertible into our common stock;
announcements about us or about our competitors including clinical trial results, regulatory approvals, or new product candidate introductions;
developments concerning our development partner, licensors or product candidate manufacturers;
litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
conditions in the pharmaceutical or biotechnology industries and the economy as a whole;
governmental regulation and legislation;
recruitment or departure of members of our board of directors, management team or other key personnel;
changes in our operating results;
any financial projections we may provide to the public, any changes in these projections, our failure to meet these projections, or changes in recommendations by any securities analysts that elect to follow our common stock;
change in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations; and
price and volume fluctuations in the overall stock market or resulting from inconsistent trading volume levels of our shares.
In recent years, the stock market in general, and the market for pharmaceutical and biotechnological companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume fluctuations. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance.
Our common stock may be considered to be a “penny stock” and, as such, any market for our common stock may be further limited by certain SEC rules applicable to penny stocks.
To the extent the price of our common stock remains below $5.00 per share, our common stock may be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our common stock and limit the liquidity of our common stock.
In addition, under applicable SEC rules and interpretations, issuers of penny stocks are subject to disclosure requirements that can increase the cost and complexity of registering shares for sale in a public offering, including a public offering proposed to be made to facilitate sales by existing stockholders. These penny stock disclosure requirements may pose challenges or impediments to achieving our goals of increasing our public float and the liquidity of the trading market for our shares.
Substantial future sales of shares by existing stockholders, or the perception that such sales may occur, could cause our stock price to decline.
If our existing stockholders, particularly our directors, executive officers and the holders of more than 5% of our common stock, or their affiliates or associates, sell substantial amounts of our common stock in the public market, or are perceived by the public market as intending to sell substantial amounts of our common stock, the trading price of our common stock could decline significantly. As of March 23, 2018, we had 109,207,786 shares of common stock outstanding, of which 100,683,750 shares were held by directors, officers and stockholders who hold greater than 5% of our common stock.
If securities analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for a company’s common stocks often is based in part on the research and reports that securities and industry analysts publish about the company. We are not currently aware of any well-known analysts that are covering our common stock, and without analyst coverage it could be hard to generate interest in investments in our common stock. Furthermore, if analyst coverage does develop, and an analyst downgrades our stock or publishes unfavorable research about our business, or if our clinical trials or operating results fail to meet the analysts’ expectations, our stock price would likely decline.
We have never paid and do not intend to pay cash dividends and, consequently, your ability to achieve a return on your investment in our common stock will depend on appreciation in the price of our common stock.
We have never paid cash dividends on any of our capital stock, and we currently intend to retain future earnings, if any, to fund the development and growth of our business. Therefore, you are not likely to receive any dividends on our common stock for the foreseeable future. Since we do not intend to pay dividends, your ability to receive a return on an investment in our common stock will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which you purchased it.
Anti-takeover provisions in our charter documents and Delaware law, could discourage, delay, or prevent a change in control of our company and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders.
Our amended and restated certificate of incorporation, as amended (the “Charter”), and our second amended and restated bylaws (the “Bylaws”) may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. Our Charter and Bylaws:
provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
do not provide stockholders with the ability to cumulate their votes; and
require advance notification of stockholder nominations and proposals.
In addition, effective February 26, 2018, our Charter permits the Board to issue up to 25,000,000 shares of Preferred Stock, with such powers, rights, terms and conditions as may be designated by the Board upon the issuance of shares of Preferred Stock at one or more times in the future. Specifically, the Charter permits the Board to approve the future issuance of all or any shares of the Preferred Stock in one or more series, to determine the number of shares constituting any series and to determine any voting powers, conversion rights, dividend rights, and other designations, preferences, limitations, restrictions and rights relating to such shares without any further authorization by our stockholders. The Board’s power to issue Preferred Stock could have the effect of delaying, deterring or preventing a transaction or a change in control of our company that might otherwise be in the best interest of our stockholders.
We are an emerging growth company and the extended transition period for complying with new or revised financial accounting standards and reduced disclosure and governance requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We plan to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). If we do, the information that we provide stockholders may be different than what is available with respect to other public companies.
Investors could find our common stock less attractive because we will rely on these exemptions, which may make it more difficult for investors to compare our business with other companies in our industry. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. In addition, it may be difficult for us to raise additional capital as and when we need it. If we are unable to do so, our financial condition and results of operations could be materially and adversely affected.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) December 31, 2018, the end of the fiscal year following the fifth anniversary of the first sale of our common equity securities pursuant to an effective registration statement filed under the Securities Act.
PART III
ITEM 1B. UNRESOLVED STAFF COMMENTSNone.
We lease a facility in Brisbane, California. The lease commenced in April 2016 and was to expire in March 2017. On February 16, 2017, we amended the lease to extend the term of the lease for an additional period of eighteen months such that the lease will expire on September 30, 2018.
ITEM 3. LEGAL PROCEEDINGSBankruptcy Proceedings
We filed for protection under Chapter 11 of Title 11 of the United States Code on December 29, 2015, in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court (Case No. 15-12628 (LSS). Our Second Amended Plan of Reorganization, dated May 9, 2016, as amended, or the Plan, was approved by the Bankruptcy Court on June 16, 2016 and went effective on June 30, 2016, or the Effective Date. As of the Effective Date, approximately 195 proofs of claim were outstanding (including claims that were previously identified on the Schedules) totaling approximately $32.0 million.
The reconciliation of certain proofs of claim filed against us in the Bankruptcy Case, including certain General Unsecured Claims, Convenience Class Claims and Other Subordinated Claims, is ongoing. As a result of its examination of the claims, we may ask the Bankruptcy Court to disallow, reduce, reclassify or otherwise adjudicate certain claims we believe are subject to objection or otherwise improper. Under the terms of the Plan, we had until December 27, 2016 to file additional objections to disputed claims, subject to our right to seek an extension of this deadline from the Bankruptcy Court. By Order, dated February 6, 2017, the Bankruptcy Court extended the claims objection deadline to June 26, 2017. By Order dated July 10, 2017, the Bankruptcy Court extended the claims objection deadline to September 25, 2017. By Order dated October 23, 2017, the Bankruptcy Court extended the claims objection deadline to December 26, 2017. By Order dated January 19, 2018, the Bankruptcy Court extended the claims objection deadline to March 26, 2018. We may compromise certain claims with or without specific prior approval of the Bankruptcy Court as set forth in the Plan and may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise. The resolution of such claims could result in material adjustments to our financial statements.
As of December 31, 2017, approximately $0.5 million in claims remain subject to review and reconciliation. We may file objections to these claims after we complete the reconciliation process. As of December 31, 2017, we have recorded $0.06 million related to these claims in Accounts payable and Notes payable to vendors, which represents our best estimate of claims to be allowed by the Bankruptcy Court.
Savant Litigation
On July 10, 2017, we 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. We asserted breach of contract and declaratory judgment claims against Savant arising under the MDC Agreement. See Note 6 - “Savant Arrangements” to the accompanying condensed consolidated financial statements for more information about the MDC Agreement. We allege 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, we have 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. We assert that we are entitled to offset $2.0 million in milestone payments due Savant against the cost overages, such that as of June 30, 2017 Savant owed us approximately $1.4 million.
On July 12, 2017, Savant removed the case to the United States District Court for the District of Delaware, claiming that the action is related to or arises under the bankruptcy court 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 we breached its obligations to pay the milestone payments and other related representations and obligations.
On August 1, 2017, we moved to remand the case back to the Delaware Superior Court. Briefing on that motion is completed and awaiting determination by the Bankruptcy Court.
On August 2, 2017, Savant sent a foreclosure notice to us, demanding that we 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. We moved for a Temporary Restraining Order, or 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 our 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 Superior Court.
On February 13, 2018 Savant made a letter request to the Delaware Superior Court to dissolve the TRO. Also on February 13, 2018, Humanigen filed its Answer and Affirmative defenses to Savant’s Counterclaims. On February 15, 2018 Humanigen filed a letter opposition to Savant’s request to dissolve the TRO and requesting a status conference. There have been no further proceedings in this matter to date.
BioWa, Inc. Litigation
On October 17, 2016, Kyowa Hakko Kirin Co., Ltd. and BioWa, Inc. filed a patent infringement Complaint in the U.S. District Court for the Northern District of California against Aragen Bioscience, Inc. and Transposagen Biopharmaceuticals, Inc. ("Defendants"), alleging infringement of three United States Patents that are currently licensed to Humanigen, Inc. (Captioned as Kyowa Hakko Kirin Co. Ltd. and BioWa, Inc. v. Aragen Bioscience, Inc. and Transposagen Biopharmaceuticals, Inc., Case No. 3:16-cv-05993-JD (N.D. Cal.)). On January 17, 2017, the Defendants filed an Amended Answer and Counterclaims. One of the Defendants’ counterclaims sought a declaratory judgment that the three asserted patents are invalid. Since then, the litigation has been ongoing and trial is scheduled to begin on June 25, 2018. Fact discovery recently closed, and expert discovery is currently taking place. No dispositive motions have yet been filed. In April 2017, Defendants filed petitions in the U.S. Patent and Trademark Office ("USPTO") for inter partes review ("IPR") of the same three patents asserted in the district court patent infringement litigation. In October 2017, the USPTO's Patent Trial and Appeal Board ("PTAB") declined to institute IPR of the patents, holding that Defendants had not shown a reasonable likelihood that they would prevail in showing the unpatentability of even one of the challenged patent claims. In November 2017, Defendants filed requests for rehearing of the PTAB's decision not to institute IPR, and the PTAB denied those requests as well. The PTAB's decision cannot be appealed.
Releases, Exculpation, Injunction and Discharge Provisions
Section 10.3 of the Plan provides certain releases, including the following: (i) releases by us, subject to certain exclusions, of claims and causes of action against (a) our officers, directors, employees, advisors and certain related persons who acted in such capacity on or after the Petition Date and (b) the Black Horse Entities and Nomis, as well as their respective current and former directors and officers, partners, advisors and certain other related parties, or collectively, the Released Parties; (ii) releases by holders of claims and interests, subject to certain exclusions, of claims and causes of action against us and Released Parties; (iii) mutual releases between us and the PIPE Claimants, for the benefit of each and certain related parties, as contemplated by the PIPE Settlement; and (iv) releases as contemplated by the Securities Class Action Settlement. All our claims and causes of action or those of our bankruptcy estate not expressly released by us under the Plan or pursuant to another Bankruptcy Court order are expressly reserved to us under the Plan.
The Plan also contains certain exculpation provisions, which include exculpation from liability, subject to certain exceptions for acts and omissions that are the result of willful misconduct or gross negligence, in favor of us and our directors, officers, employees, advisors and certain other related persons and entities who served in such capacity on or after the Petition Date relating to the bankruptcy proceedings, the negotiation and formulation of the Plan and the related disclosure statement, and the confirmation, consummation and administration of the Plan.
The Plan provides for a discharge of all claims against us to the fullest extent provided under section 1141(d)(1)(A) of the Bankruptcy Code.
Additional Information
For additional information on the foregoing bankruptcy proceeding, including with respect to our bankruptcy related financing arrangements, our arrangements with Savant and details on the Governance Agreement, see Note 2, 6 and 10 to our Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, which are incorporated by reference into this Item.
ITEM 4. MINE SAFETY DISCLOSURESNone.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket Information
Our common stock is currently quoted on the OTCQB Venture Market operated by OTC Markets Group, Inc. under the symbol “HGEN”. From January 13, 2016 to June 25, 2017, our common stock was quoted on the OTC Pink marketplace operated OTC Markets Group, Inc. Previously, our common stock was listed on the NASDAQ Global Market under the symbol “KBIO” from its beginning of trading on January 31, 2013 through January 13, 2016. Prior to January 31, 2013, there was no public market for our common stock.
The following table sets forth the high and low intraday sale prices per share of our common stock for the quarterly periods beginning January 1, 2016 through January 13, 2016 as reported by The NASDAQ Global Market. The following table also sets forth the high and low intraday sales prices per share of our common stock for the quarterly periods beginning January 14, 2016 through December 31, 2017 based on information provided by OTC Markets Group, Inc. The over-the-counter market quotations set forth for our common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| | | High | | | Low | |
| 2017 | | | | | | |
| 4th Quarter | | $ | 1.00 | | | $ | 0.13 | |
| 3rd Quarter | | $ | 2.60 | | | $ | 0.23 | |
| 2nd Quarter | | $ | 2.98 | | | $ | 1.51 | |
| 1st Quarter | | $ | 4.50 | | | $ | 1.90 | |
| | | | | | | | | |
| 2016 | | | | | | | | |
| 4th Quarter | | $ | 4.75 | | | $ | 2.17 | |
| 3rd Quarter | | $ | 6.00 | | | $ | 3.18 | |
| 2nd Quarter | | $ | 8.70 | | | $ | 2.51 | |
| 1st Quarter | | $ | 23.59 | | | $ | 1.02 | |
Holders of Common Stock
As of March 23, 2018, we had 109,207,786 shares of common stock outstanding held by approximately 43 stockholders of record. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
Dividend Policy
We have never declared or paid any cash dividends. We currently expect to retain all future earnings, if any, for use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATAInformation requested by this Item is not applicable as we are electing scaled disclosure requirements available to Smaller Reporting Companies with respect to this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis together with our Consolidated Financial Statements and the notes thereto included elsewhere in this Annual Report on Form 10‑K. This discussion contains forward‑looking statements that involve risks and uncertainties. For additional discussion, see “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS” above.
Overview
We were incorporated on March 15, 2000 in California and reincorporated as a Delaware corporation in September 2001 under the name KaloBios Pharmaceuticals, Inc. We completed our initial public offering in January 2013. Effective August 7, 2017, we changed our legal name to Humanigen, Inc.
We have undergone significant changes since December 2015. As a result of challenges facing us at the time, on December 29, 2015, we filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On June 30, 2016, our Second Amended Plan of Reorganization, dated May 9, 2016, as amended, or the Plan, became effective and we emerged from our Chapter 11 bankruptcy proceedings. For further information on our bankruptcy and emergence from bankruptcy, see Note 2 to our Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K .
On January 13, 2016, our common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the ticker symbol KBIOQ. On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of our common stock, and the delisting was effective on February 5, 2016. On June 30, 2016, upon emergence from bankruptcy, the ticker symbol for the trading of our common stock on the over-the-counter market reverted back to KBIO. On June 26, 2017 our common stock began trading on the OTCQB Venture Market under the same ticker symbol. On August 7, 2017, following effectiveness of our previously reported name change to Humanigen, Inc., our common stock began trading on the OTCQB Venture Market under the new ticker symbol “HGEN”.
From the time of our emergence from bankruptcy to August 29, 2017, our lead product candidate was benznidazole for the treatment of Chagas disease, a parasitic illness that can lead to long-term heart, intestinal and neurological problems. On June 30, 2016, we acquired certain worldwide rights to benznidazole from Savant Neglected Diseases, LLC, or Savant, and until August 29, 2017, we were primarily focused on the development necessary to seek and obtain approval by the United States Food and Drug Administration, or FDA, for benznidazole and the subsequent commercialization, if approved. According to FDA-issued guidance, benznidazole is eligible for review pursuant to a 505(b)(2) regulatory pathway as a potential treatment for Chagas disease and, if it became the first FDA-approved treatment for Chagas disease, we would have been eligible to receive a Priority Review Voucher (“PRV”).
However, on August 29, 2017, the FDA announced it had granted accelerated and conditional approval of a benznidazole therapy manufactured by Chemo Research, S.L., or Chemo, for the treatment of Chagas disease and had awarded that manufacturer a neglected tropical disease PRV. Chemo’s benznidazole also received Orphan Drug designation. As a result of FDA’s actions and because we no longer expected to be eligible to receive a PRV with our own benznidazole candidate for the treatment of Chagas disease, we immediately ceased development for benznidazole and began assessing a full range of options with respect to our benznidazole assets and development program. We also began an accelerated scientific assessment of emerging new possibilities for our monoclonal antibody assets and development programs
On December 21, 2017, we reached an agreement with our Term Loan Lenders (as defined below) on a series of transactions, including the transfer and assignment of all of our assets related to benznidazole to an affiliate of one of the Term Loan Lenders, providing for, among other things, the satisfaction and extinguishment of our outstanding obligations under our Term Loan Credit Agreement (as defined below). We refer to these transactions herein as the “Restructuring Transactions.” On February 27, 2018, we completed the Restructuring Transactions. For further information regarding the Restructuring Transactions, see “Liquidity and Capital Resources” and “Item 1. Business – Restructuring Transactions.”
Since the FDA’s August 29, 2017 announcement relating to benznidazole, we have shifted our primary focus toward developing our proprietary monoclonal antibody portfolio, which comprises lenzilumab (formerly known as KB003) and ifabotuzumab (formerly known as KB004), for use in addressing significant unmet needs in oncology. Both of these product candidates are in the early stage of development and will require substantial time, expenses, clinical development, testing, and regulatory approval prior to commercialization. Furthermore, neither of these product candidates has advanced into a pivotal registration study and it may be years before such a study is initiated, if at all.
Lenzilumab is a recombinant monoclonal antibody, or mAb, that neutralizes soluble granulocyte-macrophage colony-stimulating factor, or GM-CSF, a critical cytokine in the inflammatory cascade associated with CAR-T-related side effects and in the growth of certain hematologic malignancies, solid tumors and other serious conditions. We expect to study lenzilumab’s potential in reducing serious and life-threatening adverse events associated with CAR-T therapy. We have begun to explore lenzilumab’s effectiveness in preventing or ameliorating neurotoxicity associated with CAR-T therapy, and potentially cytokine release syndrome or CRS. In addition, we continue dosing in a Phase 1 clinical trial in patients with CMML to identify the maximum tolerated dose, or MTD, or recommended Phase 2 dose of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity. We have fully enrolled the total of 12 patients in the 200, 400 and 600 mg dose cohorts of our CMML trial, and are currently evaluating subjects in the highest dose cohort of 600 mg for continuing accrual. We also plan to review preliminary safety and efficacy results and anticipate completion of the ad hoc interim analysis in the first half of 2018. We may also use the interim data from the lenzilumab CMML Phase 1 study to determine the feasibility of rapidly commencing a Phase 1 study in JMML patients, or to explore progressing directly the CMML development program. JMML is a rare pediatric cancer, is associated with a very high unmet medical need and there are no FDA-approved therapies.
Ifabotuzumab is an anti-Ephrin Type-A receptor 3, or EphA3, mAb that has the potential to offer a novel approach to treating solid tumors and hematologic malignancies, serious pulmonary conditions and as a CAR construct. EphA3 is aberrantly expressed on the surface of tumor cells and stroma cells in certain cancers. We have completed the Phase 1 dose escalation portion of a Phase 1/2 clinical trial in ifabotuzumab in multiple hematologic malignancies for which the preliminary results were published in the journal Leukemia Research in 2016. An investigator-sponsored Phase 0/1 radio-labeled imaging trial of ifabotuzumab in glioblastoma multiforme, a particularly aggressive and deadly form of brain cancer, has begun at the Olivia-Newton John Cancer Institute in Melbourne, Australia. We are currently exploring partnering opportunities to enable further development of ifabotuzumab.
Lenzilumab and ifabotuzumab were each developed with our proprietary, patent-protected Humaneered® technology, which consists of methods for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use, typically for chronic conditions.
We have incurred significant losses and had an accumulated deficit of $262.5 million as of December 31, 2017. We expect to continue to incur net losses for the foreseeable future as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our development activities and seek regulatory approvals. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.
Despite completing the Restructuring Transactions, we will require substantial additional capital to continue as a going concern and to support our business efforts, including obtaining regulatory approvals for our product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. We anticipate that we will seek additional financing from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all. If in the best interests of our stockholders, we may also find it appropriate to enter into a strategic transaction that could result in, among other things, a sale, merger, consolidation or business combination.
If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern. The Report of Independent Registered Public Accounting Firm at the beginning of the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K includes an explanatory paragraph about our ability to continue as a going concern.
The consolidated financial statements for the year ended December 31, 2017 were prepared on the basis of a going concern, which contemplates that we will be able to realize our assets and discharge liabilities in the normal course of business. Our ability to meet our liabilities and to continue as a going concern is dependent upon the availability of future funding. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, valuation of financing derivative, the fair value‑based measurement of stock‑based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.
We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
While our significant accounting policies are described in more detail in Note 3 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing contracts and purchase orders, reviewing the terms of our license agreements, communicating with our applicable personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. Some of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees to:
| · | contract research organizations and other service providers in connection with clinical studies; |
| · | contract manufacturers in connection with the production of clinical trial materials; and |
| · | vendors in connection with preclinical development activities. |
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing these costs, we estimate the time period over which services will be performed for which we have not been invoiced and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period.
Stock‑Based Compensation
Our stock‑based compensation expense for stock options is estimated at the grant date based on the award’s fair value as calculated by the Black‑Scholes option pricing model and is recognized as expense over the requisite service period. The Black‑Scholes option pricing model requires various highly judgmental assumptions including expected volatility and expected term. The expected volatility is based on the historical stock volatilities of several of our publicly listed peers over a period equal to the expected terms of the options as we do not have a sufficient trading history to use the volatility of our own common stock. To estimate the expected term, we have opted to use the simplified method, which is the use of the midpoint of the vesting term and the contractual term. If any of the assumptions used in the Black‑Scholes option pricing model changes significantly, stock‑based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre‑vesting termination behavior of employees. To the extent our actual forfeiture rate is different from our estimate, stock‑based compensation expense is adjusted accordingly.
Revenue Recognition
Our contract revenue to date has been generated primarily through license agreements and research and development collaboration agreements. Contract revenue may include nonrefundable, non‑creditable upfront fees, funding for research and development efforts, and milestone or other contingent payments for achievements with regards to our licensed products. We did not materially modify any previous material collaboration agreements or enter into any new such agreements from 2011 through the end of 2016. All collaboration agreements have been accounted for in accordance with the accounting guidance applicable to such arrangements prior to our adoption of Accounting Standards Update, or ASU, 2009‑13, Multiple‑Deliverable Revenue Arrangements, and ASU 2010‑17, Revenue Recognition—Milestone Method, each of which we adopted on a prospective basis on January 1, 2011.
We recognize revenue when persuasive evidence of an arrangement exists, transfer of technology has been completed, services have been performed or products have been delivered, the fee is fixed and determinable, and collection is reasonably assured.
For multiple element arrangements, we evaluate whether the components of each arrangement are to be accounted for as separate units of accounting based on certain criteria. Upfront payments for licensing our intellectual property to date have not been separable from the activity of providing research and development services because the license has not been assessed to have stand‑alone value separate from the research and development services provided. Such upfront payments are recorded as deferred revenue in the balance sheet and are recognized as contract revenue over the contractual or estimated substantive performance period, which is consistent with the term of the research and development obligations contained in the research and development collaboration agreement.
Payments resulting from our research and development efforts under license agreements are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because we act as a principal, with discretion to choose suppliers, bear credit risk, and perform part of the services.
Substantive, at‑risk milestone payments are recognized as revenue when the milestone is achieved and collectability is reasonably assured. When contingent payments are not for substantive and at‑risk milestones, revenue is recognized over the estimated remaining term of the related service period or, if there are no continuing performance obligations under the arrangement, upon receipt provided that collection is reasonably assured and other revenue recognition criteria have been satisfied.
Financial Reporting in Reorganization
Liabilities subject to compromise is our estimate of known or potential pre-petition claims to be resolved in connection with our Chapter 11 bankruptcy case (the “Bankruptcy Case”). Such claims remain subject to future adjustments. Payment terms for liabilities subject to compromise are established as part of the Plan.
We applied Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. It requires that the financial statements for periods subsequent to the Chapter 11 filing distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the Consolidated Statements of Operations and Comprehensive Loss. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be subject to a plan of reorganization must be reported at the amounts expected to be allowed in the Company’s Chapter 11 case, even if they may be settled for lesser amounts as a result of the plan of reorganization or negotiations with creditors. In addition, cash used by reorganization items are disclosed separately in the Consolidated Statements of Cash Flow.
In conjunction with our exit from bankruptcy on June 30, 2016, we reclassified $4.8 million of Liabilities subject to compromise in the amounts of $2.8 million, $0.8 million and $1.2 million to Accounts payable, Accrued expenses and Notes payable to vendors, respectively. For the year ended December 31, 2016, we paid approximately $3.4 million related to Liabilities subject to compromise, issued $1.2 million in promissory notes to vendors, wrote off approximately $0.3 million in deferred rent liabilities related to its lease termination and reversed approximately $0.1 million in accrued expenses related to a claim that has been denied by the court, which as discussed above, were previously included in Liabilities subject to compromise. As of December 31, 2016, approximately $0.4 million and $1.2 million remain in Accounts payable and Notes payable to vendors, respectively. As of December 31, 2017, approximately $0.06 million and $1.3 million remain in Accounts payable and Notes payable to vendors, respectively. Remaining amounts will be paid based on terms of the Plan.
Reorganization items, net consisted of the following charges ($000’s):
| | | Year ended December 31, | |
| | | 2017 | | | 2016 | |
| Legal fees | | $ | 297 | | | $ | 4,870 | |
| Professional fees | | | 34 | | | | 1,218 | |
| Debtor-in-possession financing costs | | | - | | | | 1,143 | |
| Beneficial conversion on debtor-in-possession financing | | | - | | | | 484 | |
| Fair value of shares issued to officer and directors for service in bankruptcy | | | - | | | | 700 | |
| Gain on lease termination | | | - | | | | (227 | ) |
| Total reorganization items, net | | $ | 331 | | | $ | 8,188 | |
Recently Issued Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 3, Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10‑K.
Results of Operations
General
We have not generated net income from operations, except for the year ended December 31, 2007, during which we recognized a one‑time license payment from Novartis. At December 31, 2017, we had an accumulated deficit of $262.5 million, primarily as a result of research and development and general and administrative expenses as well as costs incurred in reorganization. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.
Research and Development Expenses
Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We track external research and development costs incurred by project for each of our clinical programs. We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. Our external research and development costs consist primarily of:
| · | expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities; |
| · | the cost of acquiring and manufacturing clinical trial and other materials; and |
| · | other costs associated with development activities, including additional studies. |
Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock‑based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project. The following table shows our total research and development expenses for the years ended December 31, 2017 and 2016 ($000’s):
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| External Costs | | | | | | |
| KB001 | | $ | - | | | $ | 22 | |
| Lenzilumab | | | 2,271 | | | | 304 | |
| Ifabotuzumab | | | 145 | | | | 214 | |
| Benznidazole | | | 6,959 | | | | 5,543 | |
| Internal costs | | | 1,790 | | | | 4,366 | |
| Total research and development | | $ | 11,165 | | | $ | 10,449 | |
We expect to continue to incur substantial expenses related to our research and development activities for the foreseeable future as we continue product development including our development efforts for lenzilumab in the prevention of neurotoxicity and potentially CRS associated with CAR-T-cell treatment and in CMML. Depending on the results of our development efforts we expect to incur substantial costs to prepare for potential clinical trials and activities for lenzilumab.
General and Administrative Expenses
General and administrative expenses consist principally of personnel‑related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. For the years ended December 31, 2017 and 2016, general and administrative expenses were $7.9 million and $8.4 million, respectively.
Comparison of Years Ended December 31, 2017 and 2016 ($000’s)
| | | Year Ended December 31, | | | Increase/ (Decrease) | |
| | | 2017 | | | 2016 | | | $'s | | | % | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | $ | 11,165 | | | $ | 10,449 | | | $ | 716 | | | | 7 | |
| General and administrative | | | 7,866 | | | | 8,376 | | | | (510 | ) | | | (6 | ) |
| Loss from operations | | | (19,031 | ) | | | (18,825 | ) | | | 206 | | | | 1 | |
| Interest expense | | | (3,056 | ) | | | (131 | ) | | | 2,925 | | | | 2,233 | |
| Other income, net | | | 431 | | | | 125 | | | | 306 | | | | 245 | |
| Reorganization items, net | | | (331 | ) | | | (8,188 | ) | | | (7,857 | ) | | | (96 | ) |
| Net loss | | $ | (21,987 | ) | | $ | (27,019 | ) | | $ | (5,032 | ) | | | (19 | ) |
Research and development expenses increased $0.7 million in 2017 from $10.4 million for the year ended December 31, 2016 to $11.2 million for the year ended December 31, 2017. The increase is primarily attributable to increased spending of $1.9 million on lenzilumab primarily related to the CMML study and $1.4 million on benznidazole development for Chagas disease. We expect our research and development expenses will decrease in 2018 compared to 2017, primarily due to the discontinuation of development of benznidazole.
General and administrative expenses decreased $0.5 million in 2017 from $8.4 million for the year ended December 31, 2016 to $7.9 million for the year ended December 31, 2017. The decrease in general and administrative expenses is primarily attributable to lower insurance and accounting services costs. We expect our general and administrative expenses to continue to decrease in 2018 as compared to 2017 levels.
Reorganization items, net decreased $7.9 million in 2017, from $8.2 million for the year ended December 31, 2016 to $0.3 million for the year ended December 31, 2017. Reorganization items, net for the year ended December 31, 2016 primarily consisted of amounts incurred related to the Plan in 2016, including legal fees of $4.9 million, $1.2 million in other professional fees, $0.7 million related to the fair value of common shares issue to our CEO and two directors for their service in bankruptcy, $1.1 million in legal and other costs related to the debtor-in-possession financing, $0.5 million related to the beneficial conversion expense recognized in connection with the debtor-in-possession financing, offset by a net gain on the termination of the South San Francisco lease of $0.2 million. Reorganization items, net for the year ended December 31, 2017 primarily consisted of legal fees.
Interest expense of $0.13 million recognized for the year ended December 31, 2016 is comprised of $0.05 million related to the debtor-in-possession financing entered into on April 1, 2016, $0.06 million related to the promissory notes issued to certain vendors in accordance with the Plan and $0.02 million related to interest and loan issuance costs related to the Term Loans (as defined below). Interest expense recognized of $3.0 million for the year ended December 31, 2017 is comprised of $2.9 million related to interest and loan issuance costs related to the Term Loans and $0.1 million related to the promissory notes issued to certain vendors in accordance with the Plan.
Other income, net for the year ended December 31, 2017 primarily consisted of settlements for a reduction in amounts owed to certain vendors. Other income, net for the year ended December 31, 2016 primarily consisted of foreign currency gains related to the payment of bankruptcy liabilities.
Income Taxes
As of December 31, 2017, we had net operating loss carryforwards of approximately $166 million to offset future federal income taxes which expire in the years 2021 through 2037, and approximately $156 million that may offset future state income taxes which expire in the years 2018 through 2037. Current federal and state tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an ownership change. Even if the carryforwards are available, they may be subject to annual limitations, lack of future taxable income, or future ownership changes that could result in the expiration of the carryforwards before they are utilized. At December 31, 2017, we recorded a 100% valuation allowance against our deferred tax assets of approximately $52 million, as at that time our management believed it was uncertain that they would be fully realized. If we determine in the future that we will be able to realize all or a portion of our deferred tax assets, an adjustment to our valuation allowance would increase net income in the period in which we make such a determination.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through proceeds from the public offerings and private placements of our common stock, private placements of our preferred stock, debt financings, interest income earned on cash, and cash equivalents, and marketable securities, borrowings against lines of credit, and receipts from agreements with Sanofi and Novartis. At December 31, 2017, we had cash and cash equivalents of $0.7 million. As of March 23, 2018, we had cash and cash equivalents of $1.6 million.
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below ($000’s):
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| | | | | | | |
| Net cash (used in) provided by: | | | | | | |
| Operating activities | | $ | (14,249 | ) | | $ | (20,961 | ) |
| Investing activities | | | - | | | | 103 | |
| Financing activities | | | 12,080 | | | | 15,333 | |
| Net decrease in cash and cash equivalents | | $ | (2,169 | ) | | $ | (5,525 | ) |
Net cash used in operating activities was $14.2 million and $21.0 million for the years ended December 31, 2017 and 2016, respectively. The primary use of cash in 2016 was to fund our operations related to the Plan. Cash used in operating activities of $21.0 million for the year ended December 31, 2016 primarily related to our net loss of $27.0 million, adjusted for non-cash items, such as $1.6 million related to reorganization items related to the debtor-in-possession financing, $1.4 million related to the issuance of stock to our CEO and two directors, $0.4 million related to the issuance of warrants to Savant in connection with the acquisition of certain rights related to the benznidazole license, $0.2 million related to a net gain on lease termination, other non-cash items of $1.2 million and net cash outflows of $1.6 million related to changes in operating assets and liabilities, primarily Liabilities subject to compromise, Accounts payable and Accrued expenses. Cash used in operating activities in 2017 primarily related to our net loss of $21.9 million, adjusted for non-cash items, such as $3.0 million in noncash interest expense, $2.1 million in stock-based compensation, and net increases in working capital items, primarily $2.6 million of Accrued expenses.
Net cash provided by investing activities was $0.1 million for the year ended December 31, 2016, primarily related to the reduction in restricted cash related to the termination of our office lease in South San Francisco.
Net cash provided by financing activities was $12.1 million for the year ended December 31, 2017 related to the Term Loans (as defined below). Net cash provided by financing activities was $15.3 million for the year ended December 31, 2016 related to the debtor-in-possession and bankruptcy-related equity financings and proceeds from the Term Loans (as defined below).
In connection with our emergence from bankruptcy, we closed an $11 million financing that provided the funds required to enable our exit from Chapter 11 as well as to fund our current working capital needs. In December 2016, we entered into a Credit and Security Agreement (as amended, the “Term Loan Credit Agreement”) providing for an original $3.0 million credit facility (the “December 2016 Term Loan”), net of certain fees and expenses. On March 21, 2017, we entered into an amendment to the Term Loan Credit Agreement to obtain an additional $5.5 million (the “March 2017 Term Loan”), net of certain fees and expenses, providing additional working capital. On July 8, 2017, we entered into a second amendment to the Term Loan Credit Agreement to obtain an additional $5.0 million (the “July 2017 Term Loan”), net of certain fees and expenses, providing additional working capital. As of the third quarter of 2017, we had received the entire amount available under the Term Loan Credit Agreement.
On December 21, 2017, we entered into a Securities Purchase and Loan Satisfaction Agreement (the “Purchase Agreement”) and a Forbearance and Loan Modification Agreement (the “Forbearance Agreement” and, together with the Purchase Agreement, the “Restructuring Agreements”), each with the Term Loan Lenders, in connection with a series of transactions providing for, among other things, the satisfaction and extinguishment of our outstanding obligations under the Term Loan Credit Agreement and the infusion of $3.0 million of new capital. The Restructuring Transactions were completed on February 27, 2018. For additional information regarding the Restructuring Transactions, see “Restructuring Transactions” in Item 1 of this Annual Report on Form 10-K.
Despite completing the Restructuring Transactions, we will require substantial additional capital to continue as a going concern and to support our business efforts, including obtaining regulatory approvals for our product candidates, lenzilumab and ifabotuzumab, clinical trials and other studies, and, if approved, the commercialization of our product candidates. The amount of capital we will require and the timing of our need for additional capital will depend on many factors, including:
| · | the type, number, timing, progress, costs, and results of the product candidate development programs that we are pursuing or may choose to pursue in the future; |
| · | the scope, progress, expansion, costs, and results of our pre-clinical and clinical trials; |
| · | the timing of and costs involved in obtaining regulatory approvals; |
| · | the success, progress, timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders; |
| · | our ability to re-list our common stock on a national securities exchange, whether through a new listing or by completing a strategic transaction; |
| · | our ability to establish and maintain development partnering arrangements and any associated funding; |
| · | the emergence of competing products or technologies and other adverse market developments; |
| · | the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities; |
| · | the resources we devote to marketing, and, if approved, commercializing our product candidates; |
| · | the scope, progress, expansion and costs of manufacturing our product candidates; and |
| · | the costs associated with being a public company. |
We are pursuing efforts to raise additional capital from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all. If in the best interests of our stockholders, we may also find it appropriate to enter into a strategic transaction that could result in, among other things, a sale, merger, consolidation or business combination.
If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital will not be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern.
Our common stock currently trades on the OTCQB Venture Market under the ticker symbol “HGEN”. Although our common stock is listed for quotation on the OTCQB Venture Market, trading is limited and an active market for our common stock may never develop in the future, which could harm our ability to raise capital to continue to fund operations.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2017 and the effect such obligations are expected to have on our liquidity and cash flow in future years. ($000’s)
| | | Total | | | Less than
1 year | | | 1 to 3
years | | | 4 to 5
years | | | After 5
years | |
| Lease obligations | | $ | 202 | | | $ | 202 | | | $ | - | | | $ | - | | | $ | - | |
| Principal Payments on term loans | | | 16,308 | | | | 16,308 | | | | - | | | | - | | | | - | |
| Interest payments on term loans | | | 1,032 | | | | 1,032 | | | | - | | | | - | | | | - | |
| Commitment fees on term loans | | | 678 | | | | 678 | | | | - | | | | - | | | | - | |
| Principal payments on notes payable to vendors | | | 1,174 | | | | - | | | | 1,174 | | | | - | | | | - | |
| Interest payments on notes payable to vendors | | | 177 | | | | - | | | | 177 | | | | - | | | | - | |
| Total | | $ | 19,571 | | | $ | 18,220 | | | $ | 1,351 | | | $ | - | | | $ | - | |
Operating Leases
Per the terms of our former lease agreement, we had the option to terminate the lease after 36 months, subject to additional fees and expenses. In March 2016, we entered into a termination agreement, or the Lease Termination Agreement, related to the lease of this facility. The Lease Termination Agreement, approved by order of the Bankruptcy Court issued March 15, 2016, waived all damages related to early termination of the lease, relieved us of March rental expenses and set an effective termination date of March 31, 2016.
Concurrent with the termination of this lease, we entered into a lease agreement for a new facility in Brisbane, California. The new lease commenced in April 2016 and was to expire on March 31, 2017. On February 16, 2017, we amended the lease to extend the term of the lease for an additional period of eighteen months such that the lease will expire on September 30, 2018. The minimum lease payments presented in the table above include payments due under the amended lease that expires on September 30, 2018.
2016 Financing Transactions
2016 Credit Agreement
On April 1, 2016, we entered into the Credit Agreement with Black Horse Capital Master Fund Ltd., as administrative agent and lender (“BHCMF” or “Agent”), Black Horse Capital LP, as a lender (“BHC”), Cheval Holdings, Ltd., as a lender (“Cheval”) and Nomis Bay LTD, as a lender (“Nomis” and, together with BHCMF, BHC and Cheval, the “Lenders”). The Credit Agreement provided for a debtor-in-possession credit facility in the original principal amount of $3.0 million (the “Term Loan”). The Credit Agreement provided that the Term Loan will be made by the Lenders at an original discount equal to $0.2 million (the “Upfront Fee”) and required the payment by us to the Lenders of a commitment fee equal to $0.2 million (the “Commitment Fee”). In accordance with the terms of the Credit Agreement, we used the proceeds of the Term Loan for working capital, bankruptcy-related costs, costs related to our plan of reorganization, the payment of certain fees and expenses owed to BHCMF and the Lenders in connection with the Credit Agreement and other costs incurred in the ordinary course of business.
The Credit Agreement provided that the outstanding principal balance of the Term Loan, plus accrued and unpaid interest, plus the Upfront Fee, plus the Commitment Fee and all other non-contingent obligations would mature on the earlier of an event of default under the Credit Agreement or the effective date of our plan of reorganization. The Maturity Date was deemed to occur simultaneously with the Effective Date and, accordingly, on June 30, 2016, 2,350,480 shares of common stock were issued to the Lenders in repayment of our debt obligations under the Credit Agreement, including 201,436 shares to BHC, 470,096 shares to BHCMF, 503,708 shares to Cheval, 940,192 shares to Nomis and 235,048 shares to Cortleigh Limited (“Cortleigh”). Pursuant to the terms of the Credit Agreement, we also paid $0.4 million to BHC in payment of its fees and expenses and $0.3 million to Nomis in payment of its fees and expenses.
2016 Securities Agreement
Also on April 1, 2016, we entered into the Securities Purchase Agreement, or the SPA, with the Lenders. The SPA provides for the sale to the Lenders on the closing date of an aggregate of 5,885,000 shares of common stock, subject to adjustment as provided in the SPA, in respect of exit financing in the amount of $11 million (the “Exit Financing”) plus an exit financing commitment fee of $0.8 million payable by us to the Lenders, plus payment to the Lenders of their fees and expenses incurred in connection with the Exit Financing and the SPA. Nomis subsequently assigned twenty percent (20%) of its interest in the shares of common stock to be purchased by Nomis under the SPA and the Credit Agreement to Cortleigh (collectively with the Lenders, the “Purchasers”).
The issuance of the shares contemplated by the SPA was consummated on the Effective Date, and we issued to the Purchasers an aggregate of 7,147,035 shares of common stock for an aggregate purchase price of $11 million, including 612,501 shares to BHC, 1,429,407 shares to BHCMF, 1,531,610 shares to Cheval, 2,858,814 shares to Nomis and 714,703 shares to Cortleigh. Pursuant to the terms of the SPA, we paid $0.4 million to BHC in payment of its fees and expenses and $0.3 million to Nomis in payment of its fees and expenses.
Notes Payable to Vendors
On June 30, 2016, we issued promissory notes in an aggregate principal amount of approximately $1.2 million to certain claimants in accordance with the Plan. The notes are unsecured, bear interest at 10% per annum and are due and payable in full, including principal and accrued interest on June 30, 2019. As of December 31, 2017, we have accrued $0.2 million in interest related to these promissory notes.
Term Loans
On December 21, 2016, we entered into a Credit and Security Agreement,, as amended on March 21, 2017 and on July 8, 2017 (as amended, the “Term Loan Credit Agreement”), with BHCMF, as administrative agent and lender, and lenders BHC, Cheval and Nomis Bay (collectively the “Term Loan Lenders”). The Term Loan Credit Agreement provided for the following term loans (the “Term Loans”) in 2017 and 2016 ($000’s):
| Term Loan | | Proceeds
to
Company | | | Fees | | | Original
Principal
Amount | | | Commitement
Fee Due at
Maturity | | | Total Due
at
Maturity | |
| December 2016 Loan | | $ | 2,993 | | | $ | 322 | | | $ | 3,315 | | | $ | 153 | | | $ | 3,468 | |
| March 2017 Loan | | | 5,500 | | | | 478 | | | | 5,978 | | | | 275 | | | | 6,253 | |
| July 2017 Loan | | | 5,000 | | | | 435 | | | | 5,435 | | | | 250 | | | | 5,685 | |
In accordance with the terms of the Term Loan Credit Agreement, we used the proceeds of the Term Loans for general working capital, the payment of certain fees and expenses owed to BHCMF and the Term Loan Lenders and other costs incurred in the ordinary course of business. Dr. Chappell, one our former directors, is an affiliate of each of BHCMF, BHC and Cheval. On November 9, 2017, Dr. Chappell resigned from the Board, effective immediately.
The Term Loans bore interest at 9.00% and were subject to certain customary representations, warranties and covenants, as set forth in the Term Loan Credit Agreement.
Upon the occurrence of any event of default set forth in the Term Loan Credit Agreement, BHCMF had the option of terminating the Term Loan Credit Agreement and declaring all of the Company’s obligations immediately payable. The occurrence of an event of default caused the Term Loans to bear interest at a rate per annum equal to 14.00%.
Our obligations under the Term Loan Credit Agreement were secured by a first priority interest in all of our real and personal property, subject only to certain carve outs and permitted liens, as set forth in the Term Loan Credit Agreement.
The outstanding principal balance of the Term Loans, plus accrued interest and fees, were due on the earlier of acceleration after an event of default under the Term Loan Credit Agreement, or October 31, 2017. On October 31, 2017, we obtained a short-term extension of the maturity of our obligations under the Term Loans. On November 16, 2017, we obtained an additional short-term extension of the maturity of our obligations under the Term Loans.
On December 1, 2017, our obligations matured under the Term Loan Credit Agreement. On December 21, 2017, we agreed to enter into a series of transactions (as further described below, the “Restructuring Transactions”) providing for, among other things, the satisfaction and extinguishment of our outstanding obligations under the Term Loan Credit Agreement between us and the Term Loan Lenders, and the infusion into the company of $3.0 million of new capital.
The following chart shows the components of our Term Loans (including the Bridge Loan and the Claims Advances, as discussed below) as of December 31, 2017 and 2016 ($000’s):
| As of December 31, 2017 | | | | | | | | | | | | | | | |
| | | Original
Principal
Amount | | | Accrued
Interest | | | Loan
Balance | | | Fees | | | Balance
Due | |
| December 2016 Loan | | $ | 3,315 | | | $ | 324 | | | $ | 3,639 | | | $ | 153 | | | $ | 3,792 | |
| March 2017 Loan | | | 5,978 | | | | 452 | | | | 6,430 | | | | 275 | | | | 6,705 | |
| July 2017 Loan | | | 5,435 | | | | 249 | | | | 5,684 | | | | 250 | | | | 5,934 | |
| Bridge Loan | | | 1,500 | | | | 6 | | | | 1,506 | | | | - | | | | 1,506 | |
| Claims Advances Loan | | | 80 | | | | 1 | | | | 81 | | | | - | | | | 81 | |
| Totals | | $ | 16,308 | | | $ | 1,032 | | | $ | 17,340 | | | $ | 678 | | | $ | 18,018 | |
| | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| | | Original
Principal
Amount | | | Accrued
Interest | | | Loan
Balance | | | Unamortized
Fees | | | Balance
Due | |
| December 2016 Loan | | $ | 3,315 | | | $ | 8 | | | $ | 3,323 | | | $ | (307 | ) | | $ | 3,016 | |
The Restructuring Transactions were completed on February 27, 2018. For additional information regarding the Restructuring Transactions, see “Restructuring Transactions” in Item 1 of this Annual Report on Form 10-K.
On March 12, 2018, we issued 2,445,557 shares of our common stock for total proceeds of $1.1 million to accredited investors.
Contracts
We are obligated to make future payments to third parties under in‑license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones.
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.
Indemnification
In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
Off‑Balance Sheet Arrangements
We currently have no off‑balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInformation requested by this Item is not applicable as we are electing scaled disclosure requirements available to Smaller Reporting Companies with respect to this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur Consolidated Financial Statements and The Report of Independent Registered Public Accounting Firm are included in this Annual Report on Form 10-K on pages F-1 through F-34.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.
ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and Procedures
Our management, Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, and in light of the weaknesses in our internal control over financial reporting described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2017.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a‑15(f) and 15d‑15(f) under the Exchange Act). Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our Chief Executive Officer and Chief Financial Officer used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework. Based on that assessment and using the COSO criteria, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of December 31, 2017, our internal control over financial reporting was not effective because of the material weaknesses described below.
A material weakness is defined as “a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”
The ineffectiveness of our internal control over financial reporting at December 31, 2017, was due to an insufficient degree of segregation of duties amongst our accounting and financial reporting personnel.
During 2018, we intend to work to remediate the material weaknesses identified above, which could include the addition of accounting and financial reporting personnel and/or the engagement of accounting and personnel consultants on a limited-time basis until we add a sufficient number of personnel. However, our current financial position could make it difficult for us to add the necessary resources.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to a transition period established by the Jumpstart Our Business Startups Act, or JOBS Act, for emerging growth companies.
Changes in Internal Control Over Financial Reporting
Other than as described above, there has been no change in our internal control over financial reporting during the quarter ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost‑benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision‑making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost‑effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATIONNone.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the names, ages and current positions of membersour directors, as of the Board of Directors, or the Board, of Humanigen, Inc., or the Company or us
.April 11, 2023. Following the table is biographical information for each director, including information on specific experiences, qualifications and skills that support the conclusion that the director should currently serve on the Board.| Name | | Age | | Principal Occupation | | Director
Since |
| Cameron Durrant, M.D., MBA | | 57 | | Chairman and Chief Executive Officer, Humanigen, Inc. | | 2016 |
| Ronald Barliant, JD | | 72 | | Of Counsel, Goldberg Kohn, Ltd. | | 2016 |
| Timothy Morris, CPA | | 56 | | Chief Financial Officer, Iovance Biotherapeutics, Inc. | | 2016 |
| Rainer Boehm, M.D., MBA | | 57 | | Former Chief Commercial and Medical Officer and interm Chief Executive Officer at Novartis Pharmaceuticals | | 2018 |
| Robert Savage, MBA | | 64 | | President, Chief Executive Officer and Chairman Strategic Imagery, LLC | | 2018 |
director.
| Name | | Age | | Principal Occupation | |
| | | | | |
| | | | | |
| Cameron Durrant, M.D., MBA | | 62 | | Chairman, Chief Executive Officer, and Acting Chief Financial Officer, Humanigen, Inc. | |
| Dale Chappell, M.D., MBA | | 52 | | Director and Chief Scientific Officer, Humanigen, Inc. | |
| Ronald Barliant, JD(3) | | 77 | | Of Counsel, Goldberg Kohn, Ltd. | |
| Rainer Boehm, M.D., MBA(1)(3) | | 63 | | Former Chief Commercial and Medical Officer and interim Chief Executive Officer at Novartis Pharmaceuticals | |
| Cheryl Buxton, MA(1)(2) | | 63 | | Former Vice Chairman, Global Sector Leader, Pharmaceuticals, Korn Ferry International | |
| John Hohneker, M.D.(2)(3) | | 63 | | Former President and Chief Executive Officer of Anokion SA | |
| Kevin Xie, Ph.D.(1)(2) | | 52 | | Chief Financial Officer, Gracell Biotechnologies | |
_____________________________
| (1) | Member of the Audit Committee |
| (2) | Member of the Compensation Committee |
| (3) | Member of the Nominating and Corporate Governance Committee |
Cameron Durrant, M.D., MBA
, has served as a member andour Chairman of our Boardboard of directors (the “Board”) since January 2016, and as our Chief Executive Officer since March 2016. From May 2014 to January 2016 and as our Acting Chief Financial Officer since October 2022. In addition, Dr. Durrant served as Founder and Director of Taran Pharma Limited, a private semi-virtual specialty pharma company developing and registering treatments in Europe for orphan conditions. Dr. Durrant served as President andour Interim Chief ExecutiveFinancial Officer of ECR Pharmaceuticals Co., Inc., a subsidiary of Hi-Tech Pharmacal Co., Inc., from September 2012July 1, 2019 to April 2014. From January 2010 to September 2012, Dr. Durrant served as a consultant to several biopharma companies, as the Founder, CEO, CFO and director of PediatRx, Inc. and on the boards of several privately-held healthcare companies.July 31, 2020. He previously served as CEO of PediaMed Pharmaceuticals and has been a senior executive at Johnson and Johnson, Pharmacia Corporation, GSK and Merck. Dr. Durrant has been a director of Immune Pharmaceuticals Inc. since July 2014 andcurrently serves on the boards of directors of severaltwo privately held healthcare companies. Dr. Durrant earned his medical degree from the Welsh National School of Medicine, Cardiff, UK, his DRCOG from the Royal College of Obstetricians and Gynecologists, London, UK, his MRCGP from the Royal College of General Practitioners, London, UK, his DipCH from the Melbourne Academy, Australia and his MBA from Henley Management College, Oxford, UK. He was elected as a Fellow of the Learned Society of Wales in 2022. Dr. Durrant brings to the Board extensive experience as a pharma/biotech entrepreneur, operating executive and board member, as well as his day to dayday-to-day operating experience as our Chief Executive Officer.
Dale Chappell, M.D., MBA, has served as a member of our Board since February 2021 and was appointed as our Chief Scientific Officer on July 6, 2020. Dr. Chappell is the managing member of BH Management, a private investment manager that specializes in biopharmaceuticals and a significant stockholder, a position he has held since 2002. Since April 2015, Dr. Chappell has served as CEO, President and CFO of Cheval US Holdings, Inc., a private investment company with holdings in the hospitality industry. Previously, Dr. Chappell was an associate with Chilton Investment Company, covering healthcare, and an analyst at W.P. Carey & Company. Dr. Chappell, who received his MD from Dartmouth Medical School and his MBA from Harvard Business School, began his career as a Howard Hughes Medical Institute fellow at the National Cancer Institute where he studied tumor immunology, worked as a researcher in the labs of Dr. Steven A. Rosenberg (widely thought of as one of the pioneers in CAR-T therapy) and Dr. Nicholas P. Restifo (a leading researcher in the field of immunology) and is published in the field of GM-CSF. Dr. Chappell served as a member of the Board from June 2016 to November 2017. Prior to joining Humanigen in a full-time role as our Chief Scientific Officer, Dr. Chappell advised and consulted with management as our ex-officio chief scientific officer. Dr. Chappell brings to the Board valuable experience in the biopharmaceuticals industry and unparalleled insight into the Company’s development pipeline in his capacity as Chief Scientific Officer, as well as the perspective of a significant stockholder in the Company.
Ronald Barliant, JD
, has served as a member of our Board since January 2016. Mr. Barliant has been Of Counsel to Goldberg Kohn, Ltd. since January 2016, and immediately prior to that had served as a principal in Goldberg Kohn’s Bankruptcy & Creditors’ Rights Group since September 2002. He previously served as U.S. bankruptcy judge for the Northern District of Illinois from 1988 to 2002. Mr. Barliant has represented debtors and creditors in complex bankruptcy cases, and counseled major financial institutions, business firms and boards of directors in connection with workouts.
He is a member of the board of directors of a closely held information technology company and the board of the estate representative supervising the liquidation of assets in the Global Crossing case. Mr. Barliant brings to the Board valuable experience gained from a distinguished legal career as a counselor to numerous boards, considered judgment and experience with bankruptcy in the bankruptcy setting, which continues to be relevant as we address the finalization of matters related to our emergence from bankruptcy.financial sophistication.
Timothy Morris, CPA has served as a member of our Board since June 2016. Mr. Morris has served as the Chief Financial Officer of Iovance Biotherapeutics, Inc., a biopharmaceutical company, since August 2017. From March 2014 to June 2017 Mr. Morris served as Chief Financial Officer and Head of Business Development of AcelRx Pharmaceuticals, Inc., a specialty pharmaceutical company. From November 2004 to December 2013, Mr. Morris served as Senior Vice President Finance and Global Corporate Development, Chief Financial Officer of VIVUS, Inc. a biopharmaceutical company. Mr. Morris received his BS in Business with an emphasis in Accounting from California State University, Chico, and is a Certified Public Accountant (Inactive). Mr. Morris brings to the Board valuable operational experience with public companies in the biopharmaceutical industry, particularly in the areas of finance and corporate development.
Rainer Boehm,
, M.D., MBA, has served as a member of our Board since February 2018.Mr. Boehm has been a biopharmaceutical industry leader for more than three decades. At Novartis for 29 years, he held roles of increasing responsibility culminating with his position as Chief Commercial and Medical Affairs Officer and as ad interim CEO of Novartis’ pharmaceuticals division. His background spans senior leadership, marketing, sales and medical affairs positions in both oncology and pharmaceuticals and he has led regions around the world, including North America, Asia and all emerging markets. Mr. Boehm has overseen the launch and commercialization of many new drugs in his career, including blockbuster breakthroughs Cosentyx and Entresto, and major oncology brands including Afinitor, Exjade, Tasigna, Femara, Zometa and Glivec. Mr. Boehm also currently serves on the board of directors for
the following companies: Cellectis
SA, a clinical-stage biopharmaceutical company focused on immunotherapies based on gene-edited CAR-T cells;
as an advisor in leadershipOmega Therapeutics, Inc., a clinical-stage biopharmaceutical company focused on epigenetics; BioCopy AG, a preclinical-stage company focused on copying of biomolecules; Berlin Cures AG, a clinical-stage biopharmaceutical company focused on the development
for senior executives at the GLG Institute in New York City; and as a consultant to healthcare companies.of therapies against auto-antibodies. He
graduated from the medical school at the University of Ulm in Germany and received his MBA from Schiller University at the Strasbourg campus in France.Mr. Boehm was introduced to the Board by Dr. Durrant as a potential candidate and was elected after a review of the above qualifications. Mr. Boehm brings to the Board significant knowledge and experience within the biopharmaceutical industry, as well as financial acumen and operational experience.Robert Savage, MBA,
Cheryl Buxton, MA, has served as a member of our Board since March 2018. Mr. Savage is a seasonedDecember 2019. Until her retirement in December 2020, Ms. Buxton worked for over 25 years at Korn/Ferry International, the world’s largest executive with more than 40 years of experience in marketing, sales, drug development, operations and business developmentsearch company. Most recently, she served as the Korn Ferry Vice Chairman, Global Sector Leader, Pharmaceuticals, based in the pharmaceuticalPrinceton office. Ms. Buxton conducted senior level assignments, with a special focus on research driven organizations. She also led the R&D sector for the Pharmaceutical and biotechnological industries. Moreover, Mr. Savage has served on 12 boards over two decades helpingConsumer divisions within Korn Ferry. Ms. Buxton joined Korn Ferry’s London office and European headquarters before spending time in Paris and then relocating to guide companies and organizations, both public and private. Recently, he has been a director at Depomed, from October 2016 to August 2017; The Medicines Company, from 2003 – 2016; Medworth Acquisition Corporation, from 2013 – 2015; Savient Pharmaceuticals, Inc., from 2012 – 2013; and Epicept Corporation, from 2004 – 2013. He has led multinational groups to successfully execute on corporate strategies to develop, launch and market multiple pharmaceutical brands with sales exceeding $4 billion. Currently, Mr. Savage is the president, chief executive officer and chairman of Strategic Imagery, LLC. He served as group vice president and president, worldwide general therapeutics & inflammation business, at Pharmacia Corporation from 2002 until its acquisition by Pfizer.Princeton in 1997. Prior to his work with Pharmacia, Mr. Savage held leadership positions atjoining Korn Ferry, Ms. Buxton was human resources director for Johnson & Johnson Pharmaceuticals (Cala Ltd), based in the U.K., where heher focus was on organizational issues and strategic resourcing and guidance on European directives. She also provided human resources support to three smaller companies in the worldwide chairmangroup for Europe. Her human resources career started at Bristol Myers Ltd., where she was responsible for its consumer and pharmaceutical business. Ms. Buxton holds a master’s degree in employment law and industrial relations from Leicester University, a degree in Nursing, a diploma in personnel management and is a member of the pharmaceuticals group, with prior senior roles at Ortho-McNeil PharmaceuticalsInstitute of Personnel and Hoffman La-Roche. Mr. Savage earned his MBA in international marketing from Rutgers University in New Jersey. He received his BS in biology from Upsala College.
Additional Information. UponDevelopment. and the emergence from our bankruptcyAdvisory Board for South Asia Pharmaceutical Council. She previously was on June 30, 2016, Dr. Durrant and Messrs. Barliant and Morris were designated (in the caseboard of Dr. Durrant and Mr. Barliant) or appointed (in the casedirectors of Mr. Morris) to serve on our Board pursuantSIFE. Ms. Buxton brings to the terms ofBoard significant knowledge and experience within the Stock Purchase Agreement discussed in Item 13 below. Accordingly, Dr. Durrant continued to serve on the Boardbiopharmaceutical industry, as a joint designee of the Black Horse Entitieswell as leadership experience and Nomis Bay, and Mr. Barliant was designated by the Black Horse Entities. Mr. Morris was appointed by Nomis Bay.
Executive Officers
The following table sets forth the names, ages and current positions of each of our currentan extensive executive officers. Following the table is biographical information for each executive officer not currently serving as a director.
Name | | Age | | Position |
Cameron Durrant,network.
John Hohneker, M.D., MBA | | 57 | | Chief Executive Officer |
Greg Jester | | 50 | | Chief Financial Officer |
Cameron Durrant, M.D, MBA has served as a member of our Chief Executive OfficerBoard since March 2016. See “Directors” forOctober 2021 and has over 30 years of drug development and leadership experience in the biopharmaceutical industry. Dr. Durrant’s biographical information.
Greg Jester hasHohneker most recently served as
President and CEO of
Chief Financial Officer since September 2017.Anokion SA, a Swiss biotechnology company, from January 2018 to January 2021. Prior to
Anokion SA, he led Research and Development at Forma Therapeutics, a biotechnology company, from August 2015 to January 2018. Prior to Forma, Dr. Hohneker held various leadership roles during his
appointment as Chief Financial Officer, Mr. Jester14 years at Novartis AG, from 2001 to 2015, where he last served as
Senior Vice President
Finance,and Global Head of Development, Immunology and Dermatology. Prior to Novartis, he held several positions of increasing responsibility over a nearly 11-year period beginning at Burroughs Wellcome and then with its successor Glaxo Wellcome. Dr. Hohneker also currently serves on the board of directors for
Tris Pharma,the following companies: Curis, Inc.(Nasdaq: CRIS), a publicly traded biotechnology company focused on the development and commercialization of innovative therapeutics for the treatment of cancer; BioTheryX, Inc., a
specialty pharmaceuticalprivate clinical-stage biopharmaceutical company
from May 2015 to August 2017. From August 2014 to May 2015, Mr. Jester served as interim controller for Virtus Pharmaceuticals, LLC,focused on restoring protein homeostasis; Aravive, Inc. (Nasdaq: ARAV), a
$40 million generic pharmaceutical company.publicly traded biotechnology company focused on cancer treatments; Evelo Biosciences (Nasdaq: EVLO), a publicly traded clinical-stage biotechnology company developing orally delivered product candidates; Inzen Therapeutics, a private research stage biotechnology company, and Trishula Therapeutics, a private clinical-stage biotechnology company targeting cancer immunotherapy. He also served as a
financial consultantdirector of Dimension Therapeutics, Inc., which was a publicly traded biotechnology company, from January 2017 until it was acquired by Ultragenyx Pharmaceutical Inc. in October 2017. Dr. Hohneker received a bachelor’s degree in chemistry from Gettysburg College and a medical degree from the University of Medicine and Dentistry of New Jersey at Rutgers Medical School. He completed his internship and residency in internal medicine and his fellowship in medical oncology, all at the University of North Carolina at Chapel Hill. In addition to
Cormedix,his operational experience and expertise in the biopharmaceutical industry, Dr. Hohneker brings to the Board his direct experience leading business development and licensing deals, raising capital, and serving on corporate boards through acquisitions.
Kevin Xie, Ph.D., has served as a member of our Board since October 2021. Dr. Xie has nearly twenty years of experience evaluating and investing in companies across an array of healthcare-related industries, first for 13 years on the buy-side and then for six years in industry where he also demonstrated the ability to add value through operational improvements. He is currently the Chief Financial Officer of Gracell Biotechnologies Inc. (Nasdaq: GRCL), a global clinical-stage biopharmaceutical company dedicated to discovering and developing breakthrough cell therapies intended to disrupt conventional approaches to CAR-T cell therapies, a position he has held since July 2020. Prior to Gracell, Dr. Xie was the President of Healthcare Holdings for Fosun Group from March 2015 to July 2020, where he focused on investment projects in biotechnology, pharmaceutical, healthcare information technology, and healthcare services industries. Dr. Xie co-founded and served as Portfolio Manager of Locust Walk Capital from April 2010 to January 2012. Dr. Xie had previously served as Healthcare Sector Head at Scopia Capital, and as a Managing Director at Great Point Partners. He previously served on the Board of Directors for ViewRay, Inc. (Nasdaq: VRAY), a publicly traded commercial drugmedical device company that develops advanced radiation therapy technology for the treatment of cancer, from October 2019 to March 20142022. In addition, from July 2020 to August 2014. From July 2013 to December 2013, Mr. JesterSeptember 2021, Dr. Xie served as Chief Financial Officer and Partner for Madden Global Solutions, Inc.on the Board of Directors of Alpha Healthcare Acquisition Corp., a food brokerage serving warehouse club and chain drug stores, and served as Chief Financial Officer of House Party,publicly traded special purpose acquisition company, leading up to its business combination with Humacyte, Inc., a social media marketing company, from January 2011 to June 2013. Mr. Jester Dr. Xie has held CFO roles at numerous private and publicly-owned pharmaceutical companies, including Alvogen Group Inc. and Innovive Pharmaceuticals, Inc. Mr. Jester holds a Bachelor of Science in business administrationMaterial Science and Engineering from Tianjin University, an MBA in Finance from The Wharton School of the University of Richmond.Pennsylvania, and a PhD in Chemistry from The City University of New York. Dr. Xie brings to the Board his extensive experience in raising capital and serving on boards within the biopharmaceutical and biotechnology industries.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
Executive Officers
The information required by this item regarding our executive officers is incorporated by reference to Part I of the Securities Exchange Act2022 Annual Report under the caption “Information About our Executive Officers.”
Process for Recommending and Nominating Candidates for Election to the Board
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board since we last provided disclosure of 1934, as amended, orsuch procedures. However, in addition to satisfying the requirements under our Second Amended and Restated Bylaws, to comply with the SEC’s universal proxy rules, stockholders who intend to solicit proxies in support of director nominees other than the Company’s nominees at any annual meeting of stockholders must provide notice that sets forth the information required by Rule 14a-19 under the Exchange Act requires our directors, executive officers and 10%no later than 60 days prior to the anniversary of the previous year's annual meeting date, except that, if we did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, then notice must be provided by the later of 60 calendar days prior to the date of the annual meeting or the 10th calendar day following the day on which we first announce the date of the annual meeting. For the 2023 annual meeting of stockholders, stockholders must have provided notice that sets forth the information required by Rule 14a-19 under the Exchange Act prior to file reports of ownershipApril 10, 2023. However, if the date of our equity securities. To our knowledge, based solely on review2023 annual meeting of stockholders is not held between May 10, 2023 and July 9, 2023, to be timely, such notice must be received in accordance with the alternative timing requirements of Rule 14a-19, as described above.
Audit Committee
Pursuant to the audit committee charter, the functions of the copiesaudit committee include, among other things:
| ● | appointing, approving the compensation of, and assessing the independence of our registered public accounting firm; |
| ● | overseeing the work of our registered public accounting firm, including through the receipt and consideration of reports from such firm; |
| ● | reviewing and discussing with management and the registered public accounting firm our annual and quarterly financial statements and related disclosures; |
| ● | monitoring our internal control over financial reporting and our disclosure controls and procedures; |
| ● | meeting independently with our registered public accounting firm and management; |
| ● | preparing the audit committee report required by SEC rules; |
| ● | reviewing and approving or ratifying any related person transactions; and |
| ● | overseeing our risk assessment and risk management policies. |
Each member of such reports furnishedour audit committee can read and understand fundamental financial statements in accordance with Nasdaq audit committee requirements and is also independent under Nasdaq’s heightened independence standards for audit committee members. In arriving at this determination, our Board has examined each audit committee member’s scope of experience and the nature of their prior and/or current employment. Additionally, our Board has determined that each of Dr. Xie (who currently serves as chairman) and Mr. Boehm qualifies as an audit committee financial expert within the meaning of SEC regulations and meets the financial sophistication requirements of the Nasdaq listing rules. Both our independent registered public accounting firm and management periodically meet privately with our audit committee.
Our audit committee also has the authority to us relatedretain special legal, accounting or other advisors or consultants as it deems necessary or appropriate to carry out its duties. We believe that the composition and functioning of our audit committee complies with all applicable requirements of the Sarbanes-Oxley Act, and all applicable SEC and Nasdaq listing rules and regulations. We intend to comply with future requirements to the year ended December 31, 2017, all such reports were made on a timely basis, except that a Form 3 and a Form 4 were filed late by Mr. Jester in connection with his appointment as our Chief Financial Officer in September 2017 and the corresponding grant of stock optionsextent they become applicable to purchase 150,000 shares of our common stock in connection with such appointment on September 5, 2017.
We have adopted a Code of Business Conduct that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. The Code of Business Conduct is posted on our website at http://ir.humanigen.com/corporate-governance.cfm. www.humanigen.com/governance. If we make any substantive amendments to, or grant any waivers from, the Code of Business Conduct for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8-K.
Audit Committee Matters
We have established an audit committee
Delinquent Section 16(a) Reports
Section 16(a) of the Board, which is currently comprisedExchange Act requires our executive officers, directors and persons who beneficially own more than 10% of Mr. Morris, as chaira registered class of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Committee, Mr. Boehm, and Mr. Savage. The Board has determined that Mr. Morris is an audit committee financial expert. Because we are not listedCompany.
To the Company’s knowledge, based solely on a national securities exchange and there are no listing standards applicable to us,review of the Board makes determinations as to director independence based on the definition under the NASDAQ rules. Consistentcopies of such reports filed with the discussion in Item 13 below regarding director independence,SEC and written representations that no other reports were required, the Board has determinedCompany believes that each memberall Section 16(a) executive officers, directors and individuals who are greater than 10% beneficial stockholders of the Audit Committee is currently independent.
ITEM 11. EXECUTIVE COMPENSATION
Our “named executive officers” for the year ended December 31, 2022, consisting of our chief executive officer, the two other most highly compensated executive officers serving as of December 31, 2022 and one other former executive officer who would have been included as one of the two most highly compensated executive officers if such person had remained employed by us through December 31, 2022, were:
| ● | Cameron Durrant, our Chairman, Chief Executive Officer, and Acting Chief Financial Officer |
| ● | Dale Chappell, a director and Chief Scientific Officer |
| ● | Edward Jordan, Chief Commercial Officer |
| ● | Timothy Morris, Former Chief Operating and Financial Officer |
Mr. Morris resigned from his position as Chief Operating and Financial Officer on October 23, 2022.
Summary Compensation Table
The following summary compensation table shows, for the fiscal years ended December 31, 20172022 and December 31, 2016,2021, information regarding the compensation awarded to, earned by or paid to our most highly compensatednamed executive officers for 2017, and all individuals serving as our principal financial officer during the fiscal year ended December 31, 2017. We refer to these officers as our “named executive officers.”
| | | | | | | | | | | | | All | | |
| | | | | | | | | Stock | | Option | | Other | | |
| | | | | Salary | | Bonus | | Awards | | Awards | | Compensation | | Total |
| Name and Principal Position | | Year | | ($) | | ($)(8) | | ($)(5) | | ($)(6) | | ($)(7) | | ($) |
Cameron Durrant, M.D., MBA (1) | | 2017 | | 600,000 | | 180,000 | | - | | - | | - | | 780,000 |
| Chairman & Chief Executive Officer | | 2016 | | 500,000 | | 126,000 | | 608,768 | | 2,312,588 | | 16,833 | | 3,564,189 |
Morgan Lam (2) | | 2017 | | 380,000 | | - | | - | | 190,440 | | - | | 570,440 |
| Former Chief Scientific Officer | | 2016 | | 357,500 | | 70,000 | | - | | 221,720 | | - | | 649,220 |
Greg Jester (3) | | 2017 | | 96,667 | | 145,000 | | - | | 33,120 | | - | | 274,787 |
| Chief Financial Officer | | | | | | | | | | | | | | |
David L. Tousley, MBA, CPA (4) | | 2017 | | - | | - | | - | | 184,920 | | 310,385 | | 495,305 |
| Former Interim Chief Financial Officer | | 2016 | | - | | - | | - | | - | | 333,788 | | 333,788 |
Name and Principal Position | | Year | | Salary ($) | | | Bonus ($) | | Option Awards ($)(3) | | | Non-Equity
Incentive Plan
Compensation ($)(4) | | | All Other
Compensation ($) | | | Total ($) | |
| Cameron Durrant(1) | | 2022 | | | 640,000 | | | — | | | 459,058 | | | | — | | | | — | | | | 1,099,058 | |
Chairman, Chief
Executive Officer and Acting Chief Financial Officer | | 2021 | | | 640,000 | | | — | | | 8,874,712 | | | | 203,039 | | | | — | | | | 9,717,751 | |
| Dale Chappell | | 2022 | | | 410,000 | | | — | | | 251,955 | | | | — | | | | — | | | | 661,955 | |
Director and Chief Scientific Officer | | | | | | | | | | | | | | | | | | | | | | | | |
| Edward Jordan | | 2022 | | | 360,000 | | | — | | | 249,309 | | | | — | | | | 4,750 | (5) | | | 614,059 | |
Chief Commercial Officer | | | | | | | | | | | | | | | | | | | | | | | | |
| Timothy Morris(2) | | 2022 | | | 385,038 | | | — | | | 333,997 | | | | — | | | | 5,800 | (5) | | | 724,835 | |
Former Chief Operating and
Financial Officer | | 2021 | | | 475,000 | | | — | | | 152,487 | | | | 143,983 | | | | 5,800 | (5) | | | 777,270 | |
| (1) | (1) | AppointedDr. Durrant has served as Chairman January 7, 2016 and asour Acting Chief ExecutiveFinancial Officer on March 1, 2016.since October 24, 2022. |
| (2) | (2) | AppointedMr. Morris resigned from his position as Chief Operating Officer on February 1, 2016 and promoted to Chief Scientific Officer on September 13, 2016. Mr. Lam resigned as Chief Scientific Officer effective January 15, 2018. |
| (3) | Appointed Chief Financial Officer on September 5, 2017. |
| (4) | Appointed as Interim Chief Financial Officer on October 14, 2016. Mr. Tousley resigned as Interim Chief Financial Officer effective August 11, 2017. |
| (5) | The amounts23, 2022. Compensation reported in this column represent the aggregate grant date fair value of stock awards granted to Dr. Durrant related to his service during bankruptcy proceedings, computed in accordance with FASB ASC Topic 718. See Note 10 of the notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10‑K2022 is for a discussionpartial year of all assumptions made by us in determining the grant date fair value of our equity awards.
employment. |
| (3) | (6) | The amounts in this column represent the aggregate grant date fair value of option awards granted to each named executive officer, computed in accordance with FASB ASC Topic 718. See718, as further described in Note 10 8 of the notes to our Consolidated Financial Statements included elsewhere in thisour 2022 Annual Report, on Form 10‑K forwhich contains a discussion of all assumptions made by us in determining the grant date fair value of our equity awards. See “—Narrative to Summary Compensation Table” for additional information about the option awards granted in 2022. |
| (4) | (7) | Amounts reflectedThe amounts in this column for fiscal year 2016 are (a) for Dr. Durrant, $16,833 in Board fees paid to Dr. Durrant prior to his becoming Chairman and Chief Executive Officer. Amounts for Mr. Tousley represent consulting fees for services rendered in 2017 and 2016, pursuant to his Engagement Agreement.the payouts under our annual cash incentive plan. |
| (5) | (8) | For calendar year 2016, Dr. Durrant’s bonus opportunity was pro-rated forReflects matching contributions made by the period commencing July 1, 2016 and ending on December 31, 2016. The target bonus opportunity for calendar year 2016 amounted to $180,000. The Board determined Dr. Durrant’s bonus for 2016 to be $126,000, for which we have recorded an accrual for this amount in the Consolidated Financial Statements for the year ended December 31, 2016 and 2017. The Compensation Committee of the Board determined Dr. Durrant’s bonus for calendar year 2017 to be $180,000. Dr. Durrant has agreed to defer receipt of the bonus pending completion of a fundraising transaction. Mr. Jester received 100% of his bonus in immediately exercisable stock options. The number of options granted was based on the grant date fair value as of March 9, 2018, reflecting a 10-year term.
Company under its 401(k) Plan. |
Narrative to Summary Compensation Table
We offer
Our executive compensation and corporate governance programs are designed to attract, motivate and retain our executive talent, aligning the interests of our executives with the interests of our stockholders to ensure prudent actions that will drive long-term value. Our executive compensation program includes three primary components: 1) base salary, 2) annual cash incentive opportunities geared toward achievement of goals set by the compensation committee, and 3) long-term incentives in the form of stock option grants.
As described in more detail in the 2022 Annual Report, 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, did not achieve statistical significance on the primary endpoint, as announced in July 2022. Our forward-looking business operations are dependent on our ability to successfully execute our strategic realignment plan, as announced in July 2022, raise additional capital and manage our liabilities in a way that permits us to continue as a going concern. As described in more detail in the 2022 Annual Report, we are currently focused on executing our strategic realignment plan.
In light of the topline results from the ACTIV-5/BET-B trial and resulting failure to attain a regulatory approval and commence revenue generating sales of lenzilumab, our cash position has been constrained to such a degree that our Board and compensation committee determined not to award any salary increases or payouts under the Company's 2022 annual incentive plan. In July 2022, the Board approved the grant of stock option awards to the named executive officers. The grants were intended to enhance the Company’s ability to retain its executive officers and provide them continuing incentives to execute against our strategic realignment plan. The Company granted stock options to our employees, includingpurchase 808,906; 518,205; 455,010; and 600,360 shares of common stock to Dr. Durrant, Dr. Chappell, Mr. Jordan and Mr. Morris, respectively, on July 27, 2022. The options have an exercise price of $0.38 and will vest pursuant to their terms in two equal tranches on the first and second anniversaries of the grant date. The grant date fair values of the awards made to the Company’s named executive officers were approximately 40% of the respective named executive officers’ base salaries for 2022.
For further detail regarding the compensation of our named executive officers, as the long-term incentive component of our compensation program. Our stock options allow our employees to purchase shares of our common stock at a price equal to the fair market value of our common stock on the date of grant.
In 2017, we issued stock options to certain of our named executive officers. On February 21, 2017, Mr. Lam was issued stock options to purchase 100,000 shares of our common stock at an exercise price of $2.92. The options were to vest and become exercisable in 12 equal quarterly increments beginning on April 1, 2017. Mr. Lam’s options were determined to have a grant date fair value of $0.2 million. Mr. Lam resigned effective January 15, 2018. As a result as of January 15, 2018 all of Mr. Lam’s unvested options were forfeited. All remaining vested options will be forfeited on March 16, 2018 unless exercised.
On September 5, 2017, Mr. Jester was issued stock options to purchase 150,000 shares of our common stock at an exercise price of $0.33. The options will vest and become exercisable in 12 equal quarterly increments beginning on October 1, 2017. Mr. Jester’s options were determined to have a grant date fair value of $0.03 million.
On February 21, 2017, Mr. Tousley was issued stock options to purchase 100,000 shares of our common stock at an exercise price of $2.92. Mr. Tousley’s options were determined to have a grant date fair value of $0.2 million. These options were fully vested on the grant date and, unless exercised, will be forfeited on August 10, 2018.
see “—Employment Arrangements.”
Outstanding Equity Awards at 20172022 Fiscal Year End
The following table shows certain information regarding outstanding equity awards held by our named executive officers as of December 31, 2017.
| | | | | Option Awards |
| | | | | | | | | | | | | | |
| | | | | Number of | | | Number of | | | | | | |
| | | | | Securities | | | Securities | | | | | | |
| | | | | Underlying | | | Underlying | | | | | | |
| | | | | Unexercised | | | Unexercised | | | Option | | | Option |
| | | | | Options | | | Options | | | Exercise | | | Expiration |
| Name | | | | (#) Exercisable | | | (#) Unexercisable | | | Price ($) | | | Date |
| Cameron Durrant | | (1) | | | 208,604 | | | | — | | | $ | 16.90 | | | 9/12/2026 |
| | | (2) | | | 1,463,349 | | | | — | | | $ | 3.33 | | | 3/8/2028 |
| | | (3) | | | 28,571 | | | | — | | | $ | 4.20 | | | 1/24/2029 |
| | | (4) | | | 63,620 | | | | — | | | $ | 2.00 | | | 1/27/2030 |
| | | (5) | | | 50,000 | | | | — | | | $ | 4.30 | | | 5/19/2030 |
| | | (6) | | | 82,622 | | | | — | | | $ | 12.14 | | | 10/4/2030 |
| | | (7) | | | 380,706 | | | | 271,934 | | | $ | 16.07 | | | 3/11/2031 |
| | | (8) | | | 25,333 | | | | 50,667 | | | $ | 3.72 | | | 12/30/2031 |
| | | (9) | | | — | | | | 84,385 | | | $ | 2.99 | | | 1/12/2032 |
| | | (10) | | | — | | | | 808,906 | | | $ | 0.38 | | | 7/27/2032 |
| Dale Chappell | | (11) | | | 100,320 | | | | 33,440 | | | $ | 9.65 | | | 9/17/2030 |
| | | (12) | | | 22,626 | | | | — | | | $ | 5.93 | | | 9/30/2031 |
| | | (13) | | | 44,600 | | | | 29,734 | | | $ | 3.72 | | | 12/30/2031 |
| | | (14) | | | — | | | | 36,550 | | | $ | 2.99 | | | 1/12/2032 |
| | | (15) | | | — | | | | 518,205 | | | $ | 0.38 | | | 7/27/2032 |
| | | | | | | | | | | | | | | | | |
| Edward P. Jordan | | (16) | | | 51,450 | | | | 33,440 | | | $ | 9.65 | | | 9/17/2030 |
| | | (17) | | | 9,800 | | | | 19,600 | | | $ | 3.72 | | | 12/30/2031 |
| | | (18) | | | — | | | | 43,763 | | | $ | 2.99 | | | 1/12/2032 |
| | | (19) | | | — | | | | 455,010 | | | $ | 0.38 | | | 7/27/2032 |
| Timothy Morris | | (20) | | | 20,000 | | | | — | | | $ | 16.90 | | | 1/21/2023 |
| | | (21) | | | 17,647 | | | | — | | | $ | 3.33 | | | 1/21/2023 |
| | | (22) | | | 143,175 | | | | — | | | $ | 3.33 | | | 1/21/2023 |
| | | (23) | | | 100,879 | | | | — | | | $ | 9.65 | | | 1/21/2023 |
| | | (24) | | | 12,750 | | | | — | | | $ | 3.72 | | | 1/21/2023 |
| | | | | Option Awards |
| | | | | | | | | | | | | |
| | | | | Number of | | | Number of | | | | | |
| | | | | Securities | | | Securities | | | | | |
| | | | | Underlying | | | Underlying | | | | | |
| | | | | Unexercised | | | Unexercised | | | Option | | Option |
| | | | | Options | | | Options | | | Exercise | | Expiration |
| Name | | | | Exercisable | | | Unexercisable | | | Price ($) | | Date |
| Cameron Durrant, M.D., MBA | (1) | | | | 434,592 | | | | 608,430 | | | $ | 3.38 | | 9/13/2026 |
| Morgan Lam | (2) | | | | 1,875 | | | | 3,125 | | | $ | 4.72 | | 6/1/2025 |
| | (3) | | | | 8,333 | | | | 91,667 | | | $ | 3.38 | | 9/13/2026 |
| | (4) | | | | 24,999 | | | | 75,001 | | | $ | 2.92 | | 2/20/2027 |
| Greg Jester | (5) | | | | 12,500 | | | | 137,500 | | | $ | 0.33 | | 9/4/2027 |
| David L. Tousley, MBA, CPA | (6) | | | | 100,000 | | | | 100,000 | | | $ | 2.92 | | 2/20/2027 |
| (1) | (1) | On September 13, 2016, Dr. Durrant was issued stock options to purchase 1,043,022208,604 shares of the Company’s common stock at an exercise price of $3.38. The$16.90. As of December 31, 2022, the options will vest and become exercisable in 12 equal quarterly increments beginning on October 1, 2016. were fully vested. |
| (2) | (2) | On June 1, 2015, Mr. LamMarch 9, 2018, Dr. Durrant was issued stock options to purchase 5,0001,493,349 shares of the Company’s common stock at an exercise price of $4.72. One quarter$3.33, of the options vested on June 1, 2016 and the remaining options will vest and become exercisable in 36 equal monthly increments thereafter. Mr. Lam resigned effective January 15, 2018 andwhich 30,000 have since been exercised. As of December 31, 2022, all remaining unvestedof these options were forfeited. All remaining vested options will be forfeited on March 16, 2018 unless exercised. fully vested. |
| (3) | (3) | On September 13, 2016, Mr. LamJanuary 25, 2019, Dr. Durrant was issued stock options to purchase 100,00028,571 shares of the Company’s common stock at an exercise price of $3.38. The$4.20 in lieu of cash in respect of 50% of Dr. Durrant’s 2018 bonus. These options were to vest and become exercisable in 12 equal quarterly increments beginningfully vested on October 1, 2016. Mr. Lam resigned effectivethe grant date. |
| (4) | On January 15, 2018 and all remaining unvested options were forfeited. All remaining vested options will be forfeited on March 16, 2018 unless exercised. |
| (4) | On February 21, 2017, Mr. Lam28, 2020, Dr. Durrant was issued stock options to purchase 100,00063,620 shares of the Company’s common stock at an exercise price of $2.92. The$2.00. These stock options were granted in lieu of a portion of the cash bonus payable to vest and become exercisableDr. Durrant in 12 equal quarterly increments beginning April 1, 2017. Mr. Lam resigned effective January 15, 2018 and all remaining unvestedrespect of his services as Chief Executive Officer in 2019. These options were forfeited. All remainingfully vested options will be forfeited on March 16, 2018 unless exercised.
the grant date. |
| (5) | (5) | On September 5, 2017, Mr. JesterMay 20, 2020, Dr. Durrant was issued stock options to purchase 150,00050,000 shares of the Company’s common stock at an exercise price of $0.33. The$4.30. As of December 31, 2022, these options will vest and become exercisable in 12 equal quarterly increments beginning onwere fully vested. |
| (6) | On February 21, 2017, Mr. Tousley5, 2020, Dr. Durrant was issued stock options to purchase 100,00082,622 shares of our common stock at an exercise price of $2.92.$12.14. These stock options were granted to Dr. Durrant as part of his fiscal year 2020 bonus pursuant to our 2020 annual incentive plan. These options were fully vested on the grant date. |
| (7) | On March 12, 2021, Dr. Durrant was issued stock options to purchase 652,640 shares of common stock at an exercise price of $16.07. These stock options vest in 12 ratable quarterly installments commencing June 30, 2021. |
| (8) | On December 31, 2021, Dr. Durrant was issued stock options to purchase 76,000 shares of common stock at an exercise price of $3.72. These stock options vest in 12 ratable quarterly installments commencing March 31, 2022. |
| (9) | On January 12, 2022, Dr. Durrant was issued stock options to purchase 84,385 shares of common stock at an exercise price of $2.99. These stock options were issued in satisfaction of amounts earned under the Company's 2021 annual incentive plan. Subsequent to December 31, 2022, these stock options vested in full on January 12, 2023. |
| (10) | On July 27, 2022, Dr. Durrant was issued stock options to purchase 808,906 shares of common stock at an exercise price of $0.38. The stock options were issued as part of the Company’s retention plan in connection with its strategic realignment and vest in two equal installments on the first and second anniversaries of the grant date, on July 27, 2023 and July 27, 2024, respectively. |
| (11) | On September 18, 2020, Dr. Chappell was issued stock options to purchase 133,760 shares of common stock at an exercise price of $9.65. These stock options vest in 12 ratable quarterly installments commencing December 31, 2020. |
| (12) | On September 30, 2021, Dr. Chappell was issued stock options to purchase 22,626 shares of common stock at an exercise price of $5.93. These stock options were granted in lieu of Dr. Chappell’s base salary for the fourth quarter of 2021. The options vested in three ratable installments on each of October 31, 2021, November 30, 2021 and December 31, 2021, and were fully vested as of December 31, 2022. |
| (13) | On December 31, 2021, Dr. Chappell was issued stock options to purchase 44,600 shares of common stock at an exercise price of $3.72. These stock options vest in 12 ratable quarterly installments commencing March 31, 2022. |
| (14) | On January 12, 2022, Dr. Chappell was issued stock options to purchase 36,550 shares of common stock at an exercise price of $2.99. These stock options were issued in satisfaction of amounts earned under the Company's 2021 annual incentive plan. Subsequent to December 31, 2022, these stock options vested in full on January 12, 2023. |
| (15) | On July 27, 2022, Dr. Chappell was issued stock options to purchase 518,205 shares of common stock at an exercise price of $0.38. The stock options were issued as part of the Company’s retention plan in connection with its strategic realignment and vest in two equal installments on the first and second anniversaries of the grant date, on July 27, 2023 and July 27, 2024, respectively. |
| (16) | On September 18, 2020, Mr. Jordan was issued stock options to purchase 88,200 shares of common stock at an exercise price of $9.65, of which 14,700 have since been exercised. These stock options vest in 12 ratable quarterly installments commencing December 31, 2020. |
| (17) | On December 31, 2021, Mr. Jordan was issued stock options to purchase 29,400 shares of common stock at an exercise price of $3.72. These stock options vest in 12 ratable quarterly installments commencing March 31, 2022. |
| (18) | On January 12, 2022, Mr. Jordan was issued stock options to purchase 43,763 shares of common stock at an exercise price of $2.99. These stock options were issued in satisfaction of amounts earned under the Company's 2021 annual incentive plan. Subsequent to December 31, 2022, these stock options vested in full on January 12, 2023. |
| (19) | On July 27, 2022, Mr. Jordan was issued stock options to purchase 455,010 shares of common stock at an exercise price of $0.38. The stock options were issued as part of the Company’s retention plan in connection with its strategic realignment and vest in two equal installments on the first and second anniversaries of the grant date, on July 27, 2023 and July 27, 2024, respectively. |
| (20) | On September 13, 2016, Mr. Morris was issued stock options to purchase 20,000 shares of common stock at an exercise price of $16.90. As of December 31, 2022, these options were fully vested. The 20,000 vested options remained unexercised and were forfeited in January 2023 following Mr. Morris’s resignation. |
| (21) | On March 9, 2018, Mr. Morris was issued stock options to purchase 17,647 shares of common stock at an exercise price of $3.33. These stock options were granted in lieu of 50% of the cash compensation payable to Mr. Morris in respect of his services as a director during 2017. These options were fully vested on the grant date. Mr. Tousley resigned August 11, 2017. All remainingThe 17,647 vested options will beremained unexercised and were forfeited August 10,in January 2023 following Mr. Morris’s resignation. |
| (22) | On March 9, 2018, unless exercised.Mr. Morris was issued stock options to purchase 143,175 shares of common stock at an exercise price of $3.33. As of December 31, 2021, the options were fully vested. The 143,175 vested options remained unexercised and were forfeited in January 2023 following Mr. Morris’s resignation. |
| (23) | On September 18, 2020, Mr. Morris was issued stock options to purchase 151,316 shares of common stock at an exercise price of $9.65, of which 50,437 were cancelled upon his resignation in October 2022. These stock options vested in 12 ratable quarterly installments commencing December 31, 2020. The 100,879 vested options remained unexercised and were forfeited in January 2023 following Mr. Morris’s resignation. |
| (24) | On December 31, 2021, Mr. Morris was issued stock options to purchase 51,000 shares of common stock at an exercise price of $3.72, of which 38,250 were cancelled upon his resignation in October 2022. These stock options vest in 12 ratable quarterly installments commencing March 31, 2022. The 12,750 vested options remained unexercised and were forfeited in January 2023 following Mr. Morris’s resignation. |
Retirement Benefits
We have established a 401(k) tax-deferred savings plan (the “401(k) Plan”), which permits participants, including our named executive officers, to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. We are responsible for administrative costs of the 401(k) plan.Plan. We may, in our discretion, make matching contributions to the 401(k) plan. No employerPlan. We contributed a total of $24,000 in matching contributions have been made to date.
the 401(k) Plan for the year ended December 31, 2022.
Employment AgreementArrangements
Dr. Durrant
On October 29, 2020, the Company entered into an amended and restated employment agreement (the “Durrant 2020 Agreement”) with Dr. Durrant,
On September 13, 2016, we entered into a new replacing Dr. Durrant’s previous employment agreement with
Cameronthe Company (the “Durrant 2016 Agreement”). Consistent with the terms of the Durrant
MD, our chairman and chief executive officer (the “2016 Agreement,
”). The the Durrant 2020 Agreement provides
for anthat Dr. Durrant’s initial annual base salary
for Dr. Durrant ofwill remain at $600,000
as well as eligibilityand he will remain eligible for an annual bonus targeted at 60% of his
base salary,
based on the achievements of objectives setwith Dr. Durrant’s base salary and
agreedtarget bonus subject to
review by the
Board. Such bonus may be a mix of cashcompensation committee and
stock, as determined by the Board in
connection with its
sole discretion. For calendar year 2016,regular review of the Company’s executive compensation program. Based on a review of Dr. Durrant’s base salary for 2021 in accordance with the terms of the Durrant 2020 Agreement, the compensation committee recommended, and the Board approved, an increase in Dr. Durrant’s annual base salary to $640,000, effective January 1, 2021.
The Durrant 2020 Agreement provided for a term ending December 31, 2021, with such term extending automatically for successive one-year terms thereafter unless either Dr. Durrant’s bonus opportunity was pro-rated for or the period commencing July 1, 2016 and ending on December 31, 2016. The target bonus opportunity for calendar year 2016 amounted to $180,000. The Board determined Dr. Durrant’s bonus for 2016 to be $126,000, for which we have recorded an accrual for this amount inCompany gives six months prior notice of non-renewal.
Under the Consolidated Financial Statements for the year ended December 31, 2016 and 2017. The Compensation Committee of the Board determined Dr. Durrant’s bonus for calendar year 2017 to be $180,000. Both amounts are expected to be paid in cash. Dr. Durrant has agreed to defer receipt of the bonus pending completion of a fundraising transaction. Dr. Durrant is entitled to participate in our benefit plans available to other executives, including its retirement plan and health and welfare programs.
Under the2020 Agreement, Dr. Durrant is entitled to receive certain benefits upon termination of employment under certain circumstances. If we terminatethe Company terminates Dr. Durrant’sDurrant’s employment for any reason other than “Cause”“Cause”, or if Dr. Durrant resigns for “Good Reason”“Good Reason” (each as such term is defined in the Durrant 2020 Agreement), Dr. Durrant will receive twelve monthsa lump sum payment equal to the sum of base(i) his then-current annual salary then in effect and (ii) the amount of the actualannual bonus earned by Dr. Durrant under the agreement for the year prior to the year of termination. In addition, upon such a resignation or termination, pro-rated based on the portion of the year Dr. Durrant was employedwill also be entitled to be reimbursed for certain monthly health plan continuation premiums for up to 12 months, and all outstanding stock options held by us during the year of termination.
Dr. Durrant will immediately vest and become exercisable.
The Durrant 2020 Agreement additionally provides that if Dr. Durrant resigns for Good Reason or we or our successorthe Company terminates his employment other than for Cause within the three monththree-month period prior to andor the 12 monthtwo year period following a Changechange in Controlcontrol (as such term is defined in the Durrant 2020 Agreement), wethe Company must pay or cause its successor to pay Dr. Durrant a lump sum cash payment equal to two times (a) his annual salary as of the day before his resignation or termination plus (b) the aggregate bonus received by Dr. Durrant for the year immediately preceding the Changechange in Controlcontrol. In addition, upon such a resignation or termination, Dr. Durrant will also be entitled to be reimbursed for certain monthly health plan continuation premiums for up to 18 months, and all outstanding stock options held by Dr. Durrant will immediately vest and become exercisable.
Dr. Chappell
The Company entered into an employment agreement with Dr. Chappell in connection with his appointment as Chief Scientific Officer (the “Chappell Agreement”). The Chappell Agreement provides for an initial annual base salary for Dr. Chappell of $410,000 as well as eligibility for an annual bonus targeted at 40% of his base salary. Dr. Chappell is entitled to participate in certain of the Company’s benefit plans available to other executives.
Under the Chappell Agreement, Dr. Chappell is entitled to receive certain benefits upon termination of employment under certain circumstances. If the Company terminates Dr. Chappell’s employment for any reason other than “Cause”, or if Dr. Chappell resigns for “Good Reason” (each as such term is defined in the Chappell Agreement), Dr. Chappell will receive his annual salary and the amount of the actual bonus earned by Dr. Chappell under the Chappell Agreement for the year prior to the year of termination, pro-rated based on the portion of the year Dr. Chappell was employed by the Company during the year of termination, or if no bonus had been received, at minimum50% of his target bonus. In addition, upon such a resignation or termination, Dr. Chappell will also be entitled to be reimbursed for certain monthly health plan continuation premiums for up to 12 months.
The Chappell Agreement additionally provides that if Dr. Chappell resigns for Good Reason or the Company terminates his employment other than for Cause within the three-month period prior to or the two year period following a change in control (as such term is defined in the Chappell Agreement), the Company must pay or cause its successor to pay Dr. Chappell a lump sum cash payment equal to (a) his annual salary plus (b) the aggregate bonus received by Dr. Chappell for the year immediately preceding the change in control or, if no bonus had been received, 50% of the target bonus. In addition, upon such a resignation or termination, Dr. Chappell will also be entitled to be reimbursed for certain monthly health plan continuation premiums for up to 18 months, and all outstanding stock options held by Dr. DurrantChappell will immediately vest and become exercisable.
Offer Letter with Mr. Jester
In
Pursuant to the terms of the Chappell Agreement, in connection with his appointment as CFO, weChief Scientific Officer, in September 2020, Dr. Chappell was issued stock options to purchase 133,760 shares of common stock at an exercise price of $9.65. These stock options vest in 12 ratable quarterly installments commencing December 31, 2020.
Mr. Jordan
The Company entered into an offer letteremployment agreement with Mr. JesterJordan in connection with his appointment as Chief Commercial Officer (the “Offer Letter”“Jordan Agreement”) pursuant to which Mr. Jester will be eligible to receive the following compensation: (i). The Jordan Agreement provides for an initial annual base salary for Mr. Jordan of $290,000; (ii)$360,000 as well as eligibility for an annual bonus pursuanttargeted at 40% of his base salary. Mr. Jordan is entitled to participate in certain of the Company’s benefit plans available to other executives.
Under the Jordan Agreement, Mr. Jordan is entitled to receive certain benefits upon termination of employment under certain circumstances. If the Company terminates Mr. Jordan’s employment for any reason other than “Cause”, or if Mr. Jordan resigns for “Good Reason” (each as such term is defined in the Jordan Agreement), Mr. Jordan will receive his annual salary and the amount of the actual bonus earned by Mr. Jordan under the Jordan Agreement for the year prior to the Company’s annualyear of termination, pro-rated based on the portion of the year Mr. Jordan was employed by the Company during the year of termination, or if no bonus had been received, 50% of his target bonus. In addition, upon such a resignation or termination, Mr. Jordan will also be entitled to be reimbursed for certain monthly health plan continuation premiums for executive officers, as thenup to 12 months.
The Jordan Agreement additionally provides that if Mr. Jordan resigns for Good Reason or the Company terminates his employment other than for Cause within the three-month period prior to or the two year period following a change in effect, withcontrol (as such term is defined in the Jordan Agreement), the Company must pay or cause its successor to pay Mr. Jordan a maximum bonus (if any)lump sum cash payment equal to (a) his annual salary plus (b) the aggregate bonus received by Mr. Jordan for the year immediately preceding the change in control or, if no bonus had been received, 50% of the target bonus. In addition, upon such a resignation or termination, Mr. Jester’s salaryJordan will also be entitled to be reimbursed for the bonus period;certain monthly health plan continuation premiums for up to 18 months, and (iii) certain medical, retirementall outstanding stock options held by Mr. Jordan will immediately vest and other benefits generally availablebecome exercisable.
Pursuant to the Company’s other employees. Underterms of the Offer Letter,Jordan Agreement, in connection with his appointment as Chief Commercial Officer, in September 2020, Mr. JesterJordan was also eligible to receiveissued stock options to purchase 150,00088,200 shares of common stock at an exercise price of $9.65. These stock options vest in 12 ratable quarterly installments commencing December 31, 2020.
Mr. Morris
The Company entered into an employment agreement with Mr. Morris in connection with his appointment as our Chief Operating and Financial Officer (the “Morris Agreement”). The Morris Agreement provided for an initial annual base salary for Mr. Morris of $475,000 as well as eligibility for an annual bonus targeted at 50% of his base salary. In addition, Mr. Morris was entitled to participate in certain of the Company’s common stock pursuantbenefit plans available to other executives.
On September 23, 2022, Mr. Morris informed the termsCompany of his resignation from his position as Chief Operating and conditions set forth in a stock option agreement governed by the Company’s 2012 Equity Incentive Plan.
Engagement Agreement with Mr. Tousley
Mr. Tousley served as interim Chief Financial Officer
pursuant to an engagement agreement (the “Engagement Agreement”) between himself andof the Company,
until his resignation effective August 11, 2017. UnderOctober 23, 2022. Mr. Morris resigned without “Good Reason” (as defined in the
Engagement Agreement, we paid Mr. Tousley atMorris Agreement), and as a
rate of $225 per hour and reimbursed him for all travel and out of pocket expenses incurredconsequence, did not receive any payments or benefits in connection
therewith.with his termination of employment. In addition, Mr. Morris’s unvested stock options were forfeited on October 23, 2022, and all vested but unexercised stock options expired in January 2023.
2012 Equity Incentive Plan
On September 13, 2016, the Board approved an amendment to our 2012 Equity Plan to increase the number of shares of our common stock available for issuance under the 2012 Equity Plan by 3,000,000 shares and to increase the annual maximum aggregate number of shares subject to stock option awards that may be granted to any one person under the Equity Plan from 125,000 to 1,100,000. On March 9, 2018, the Board approved an amendment to our 2012 Equity Plan to increase the number of shares of our common stock available for issuance under the 2012 Equity Plan by 16,050,000 shares.
Pursuant to our Director Compensation Program, each member ofserving on our Board of Directors during 20172022 who was not our employee was eligible to compensation for his service, as follows. Ator her service. Director retainer fees are payable, at the option of the director, such fees were payable in either cash, common stock or immediately exercisable stock options having a grant date fair value equal to the equivalent cash compensation owed.
For 2022, the retainer fees for service as a director, committee member and/or committee chair were as follows:
| ● | · | Board of Directors member: $40,000; |
| ● | · | Audit committee member: $10,000; |
| ● | · | Audit committee chair: $20,000; |
| ● | · | Compensation committee member: $6,000; |
| ● | · | Compensation committee chair: $12,000; |
| ● | · | Nominating and corporate governance committee member: $4,000; and |
| ● | · | Nominating and corporate governance committee chair: $8,000. |
In addition, in July 2022, the Board approved the grant of stock option awards to the Company’s directors, as further described in the table below. These stock options were granted in recognition of the commitments of the directors in developing and overseeing the Company’s strategic realignment plan. These stock options have an exercise price of $0.38 and will vest pursuant to their terms in two equal tranches on the first and second anniversaries of the grant date.
The following table shows for the fiscal year ended December 31, 20172022 certain information with respect to the compensation of our non-employee directors:
| | | Fees Earned | | | | | | | | | | | | | |
| | | or Paid | | | Option | | | Stock | | | All Other | | | | |
| | | in Cash | | | Awards | | | Awards | | | Compensation | | | Total | |
| Name | | ($)(1) | | | ($) | | | ($) | | | ($) | | | ($) | |
Timothy Morris, CPA(2) | | | 72,000 | | | | - | | | | - | | | | - | | | | 72,000 | |
Ronald Barliant, JD(3) | | | 64,000 | | | | - | | | | - | | | | - | | | | 64,000 | |
Dale Chappell, M.D., MBA (4) | | | 30,000 | | | | - | | | | - | | | | - | | | | 30,000 | |
Ezra Friedberg (5) | | | 40,500 | | | | - | | | | - | | | | - | | | | 40,500 | |
directors. Neither Dr. Durrant nor Dr. Chappell, both named executive officers for 2022, received any additional compensation for services provided as a director, and accordingly compensation information in respect of each of them has been omitted from the table that follows.
| | | | | | Option | | | | |
| | | Fees Earned or Paid in Cash | | | Awards | | | Total | |
| Name | | ($)(1) | | | ($)(2) | | | ($) | |
| Ronald Barliant, JD(3) | | | 44,000 | | | | 17,601 | | | | 61,601 | |
| Rainer Boehm, M.D., MBA (4) | | | 58,000 | | | | 23,202 | | | | 81,202 | |
| Cheryl Buxton, MA (5) | | | 62,000 | | | | 24,802 | | | | 86,802 | |
| John Hohneker, M.D. (6) | | | 50,000 | | | | 20,001 | | | | 70,001 | |
| Kevin Xie, Ph.D. (7) | | | 66,000 | | | | 26,402 | | | | 92,402 | |
| (1) | (1) | The amounts in this column reflect retainers earned under the Board of Directors Compensation Program for fiscal year 2017.2022. |
| (2) | (2) | Mr. Morris electedThe amounts in this column represent the aggregate grant date fair value of option awards granted to receive 50%each director, computed in accordance with FASB ASC Topic 718, as further described in Note 8 of his director compensationthe notes to our Consolidated Financial Statements included in immediately exercisable stock options and 50%our 2022 Annual Report, which contains a discussion of all assumptions made by us in cash. The number of options granted was based ondetermining the grant date fair value as of March 9, 2018, reflecting a ten year term.our equity awards. |
| (3) | (3) | On July 27, 2022, Mr. Barliant electedwas issued stock options to receive 100%purchase 55,612 shares of his director compensationcommon stock as part of the Company’s retention plan in immediately exercisableconnection with its strategic realignment. As of December 31, 2022, Mr. Barliant held options to purchase an aggregate of 274,487 shares of common stock, options. The number of which options granted was based on the grant date fair value as of March 9, 2018, reflecting a ten year term.to purchase 218,875 were vested. |
| (4) | (4) | Dr. Chappell resigned fromOn July 27, 2022, Mr. Boehm was issued stock options to purchase 73,307 shares of common stock as part of the BoardCompany’s retention plan in connection with its strategic realignment. As of Directors on November 9, 2017. In lightDecember 31, 2022, Mr. Boehm held options to purchase an aggregate of his status as a controlling stockholder, Dr. Chappell agreed173,874 shares of common stock, of which options to forego any separate compensation for his service on the Board of Directors.purchase 100,567 were vested. |
| (5) | (5) | Mr. Friedberg resigned fromOn July 27, 2022, Ms. Buxton was issued stock options to purchase 78,362 shares of common stock as part of the BoardCompany’s retention plan in connection with its strategic realignment. As of Directors on November 9, 2017.December 31, 2022, Ms. Buxton held options to purchase an aggregate of 227,060 shares of common stock, of which options to purchase 148,698 were vested. |
| (6) | On July 27, 2022, Dr. Hohneker was issued stock options to purchase 63,195 shares of common stock as part of the Company’s retention plan in connection with its strategic realignment. As of December 31, 2022, Dr. Hohneker held options to purchase an aggregate of 109,599 shares of common stock, of which options to purchase 17,826 were vested. |
| (7) | On July 27, 2022, Dr. Xie was issued stock options to purchase 83,418 shares of common stock as part of the Company’s retention plan in connection with its strategic realignment. As of December 31, 2022, Dr. Xie held options to purchase an aggregate of 130,958 shares of common stock, of which options to purchase 18,962 were vested. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership Information
The following table presents information regarding beneficial ownership of our common stock as of March 23, 2018April 11, 2023 by:
| ● | · | each stockholder or group of stockholders known by us to be the beneficial owner of more than 5% of our common stock; |
| ● | · | each of our named executive officers; and |
| ● | · | all of our current directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC, and thus represents voting or investment power with respect to our securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
Percentage ownership of our common stock is based on 109,207,786119,080,135 shares of our common stock outstanding as of March 23, 2018.
April 11, 2023.
Shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of March 23, 2018April 11, 2023 are deemed to be outstanding and to be beneficially owned by the person holding the options but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each of the individuals and entities named below is c/o Humanigen, Inc., 1000 Marina Boulevard, Suite 250, Brisbane, CA 94005.
| Name and Address of Beneficial Owner | | Shares of Common Stock Beneficially Owned | | | Percentage of Shares Beneficially Owned | |
| 5% Stockholders | | | | | | |
Entities affiliated with Black Horse Capital LP(1) | | | 66,870,851 | | | | 61.2 | % |
Nomis Bay LTD(2) | | | 33,573,530 | | | | 30.7 | % |
| Named Executive Officers and Directors | | | | | | | | |
Cameron Durrant, M.D., MBA(3) | | | 4,390,468 | | | | 4.0 | % |
Morgan Lam(4) | | | 87,810 | | | | * | |
David L. Tousley, MBA, CPA(5) | | | 100,000 | | | | * | |
Greg Jester(6) | | | 488,282 | | | | * | |
Ronald Barliant, JD(7) | | | 300,469 | | | | * | |
Timothy Morris, CPA (8) | | | 138,235 | | | | * | |
| Robert Savage | | | 10,000 | | | | * | |
| Rainer Bohem | | | - | | | | * | |
All current executive officers and directors as a group (8 persons)(9) | | | 5,515,444 | | | | 5.1 | % |
830 Morris Turnpike, 4th Floor, Short Hills, NJ 07078.
| Name and Address of Beneficial Owner | | Shares of
Common
Stock
Beneficially
Owned | | | Percentage
of Shares
Beneficially
Owned | |
| 5% Stockholders | | | | | | |
| Entities affiliated with Black Horse Capital LP and Dr. Chappell(1) | | | 12,323,513 | | | | 10.3 | % |
| | | | | | | | | |
| Named Executive Officers and Directors | | | | | | | | |
| Cameron Durrant, M.D., MBA(2) | | | 2,447,912 | | | | 2.0 | % |
| Dale Chappell, M.D., MBA(1) (3) | | | 12,323,513 | | | | 10.3 | % |
| Edward Jordan (4) | | | 127,313 | | | | * | |
| Ronald Barliant, JD(5) | | | 308,745 | | | | * | |
| Rainer Boehm, M.D., MBA(6) | | | 185,553 | | | | * | |
| Cheryl Buxton(7) | | | 153,062 | | | | * | |
| John Hohneker, M.D. (8) | | | 21,398 | | | | * | |
| Kevin Xie, Ph.D. (9) | | | 22,534 | | | | * | |
| Timothy Morris (10) | | | — | | | | * | |
| All current executive officers and directors as a group (8 persons)(1)(11) | | | 15,660,030 | | | | 12.8 | % |
_____________
* Represents less than 1%
| (1) | Number of shares based solely on information reported on the Schedule 13DForm 4 filed with the SEC on March 1, 2018,May 20, 2022, reporting beneficial ownership as of February 27, 2018, by BHC, BHCMF, Cheval,the Black Horse Capital Management LLC, orEntities (as defined below), BH Management, and Dale Chappell. According to the report, BHCBlack Horse Capital LP (“BHC”) has sole voting and dispositive power with respect to 5,996,7101,075,789 shares, BHCMFBlack Horse Capital Master Fund Ltd. (“BHCMF”) has shared voting and dispositive power with respect to 13,997,8322,383,417 shares, Cheval Holdings, Ltd. (“Cheval” and collectively with BHCMF and BHC, the “Black Horse Entities”) has shared voting and dispositive power with respect to 46,876,3098,675,081 shares, BH Management has sole voting and dispositive power with respect to 52,873,0199,750,870 shares and Dr. Chappell has shared voting and dispositive power with respect to 66,870,85112,242,373 shares. The number of shares reported for Dr. Chappell also includes options to purchase 189,226 shares of common stock that may be exercised within 60 days of April 11, 2023. The business address of each of BHC, BHCMF, BH Management and Dr. Chappell is c/o Opus Equum, Inc. P.O. Box 788, Dolores, Colorado 81323. The business address of Cheval is P.OP.O. Box 309G, Ugland House, Georgetown, Grand Cayman, Cayman Islands KY1-1104. Dr. Chappell, who currently serves as our Chief Scientific Officer and as a director, is the managing member of BH Management and BHC and a director of BHCMF and Cheval. |
| (2) | Number of shares based solely on information reported on the Schedule 13D filed with the SEC on March 5, 2018, reporting beneficial ownership as of February 27, 2018, by Nomis. Nomis has sole voting and dispositive power over all 33,573,530 shares. The business address of Nomis is West Essex House, 3rd Floor, 45 Reid Street, Hamilton, Bermuda HM12.
|
(3) | Includes options to purchase 4,254,8852,447,912 shares of common stock that may be exercised within 60 days of March 23, 2018. April 11, 2023. |
| (4)(3) | Includes options to purchase 87,810189,226 shares of common stock that may be exercised within 60 days of March 23, 2018. April 11, 2023. |
| (5)(4) | Includes options to purchase 100,000114,813 shares of common stock that may be exercised within 60 days of March 23, 2018. April 11, 2023. |
| (6)(5) | Includes options to purchase 488,282218,875 shares of common stock that may be exercised within 60 days of March 23, 2018. April 11, 2023. |
| (7)(6) | Includes options to purchase 300,649100,567 shares of common stock that may be exercised within 60 days of March 23, 2018. April 11, 2023. |
| (8)(7) | Includes options to purchase 138,235148,698 shares of common stock that may be exercised within 60 days of March 23, 2018. April 11, 2023. |
| (9)(8) | Includes options to purchase 5,088,26521,398 shares of common stock that may be exercised within 60 days of March April 11, 2023. |
| (9) | Includes options to purchase 22,534 shares of common stock that may be exercised within 60 days of April 11, 2023. |
| (10) | Mr. Morris resigned from his position as Chief Operating and Financial Officer on October 23,, 2018. 2022. |
| (11) | Includes options to purchase 3,264,023 shares of common stock that may be exercised within 60 days of April 11, 2023. |
Equity Compensation Plan Information
The following table sets forth information as of December 31, 20172022 with respect to shares of common stock that may be issued under our existing equity compensation plans.
| | | | | | | | | Number of | |
| | | | | | | | | Securities | |
| | | | | | | | | Remaining | |
| | | Number of | | Weighted- | | | Available for | |
| | | Securities to be | | Average | | | Issuance Under | |
| | | Issued Upon | | Exercise | | | Equity | |
| | | Exercise of | | Price of | | | Compensation | |
| | | Outstanding | | Outstanding | | | Plans (Excluding | |
| | | Options, | | Options, | | | Securities | |
| | | Warrants | | Warrants | | | Reflected in | |
| | | and Rights | | and Rights | | | Column (a)) | |
| Plan Category | | (a) | | (b) | | | (c) | |
| Equity compensation plans approved by security holders(1) | | | 734,835 | | | $ | 5.33 | | | | - | |
| | | | | | | | | | | | | |
| Equity compensation plans not approved by security holders | | | 1,713,548 | | | | 2.97 | | | | 1,286,452 | |
| Total | | | 2,448,383 | | | $ | 3.67 | | | | 1,286,452 | |
| | | | | | | | | Number of | |
| | | | | | | | | Securities | |
| | | | | | | | | Remaining | |
| | | | | | | | | Available for | |
| | | | | | | | | Issuance Under | |
| | | Number of | | | Weighted- | | | Equity | |
| | | Securities to be | | | Average | | | Compensation | |
| | | Issued Upon | | | Exercise | | | Plans (Excluding | |
| | | Exercise of | | | Price of | | | Securities | |
| | | Outstanding | | | Outstanding | | | Reflected in | |
| | | Options | | | Options | | | Column (a)) | |
| Plan Category | | (a) | | | (b) | | | (c) | |
| Equity compensation plans approved by security holders(1) | | | 5,018,389 | | | $ | 4.04 | | | | 1,948,135 | |
| Equity compensation plans not approved by security holders(2) | | | 2,453,667 | | | | 4.64 | | | | — | |
| Total | | | 7,472,056 | | | $ | 4.23 | | | | 1,948,135 | |
| (1) | Represents shares reserved for issuance under the 2001 Stock2020 Omnibus Incentive Compensation Plan and(the “2020 Equity Plan”). |
| (2) | As of December 31, 2022, there were no shares available for grant under the 2012 Equity IncentivePlan. The 2020 Equity Plan as amendedhas replaced the 2012 Equity Plan and restated. no further grants will be made under the 2012 Equity Plan. However, outstanding awards under the 2012 Equity Plan will continue in accordance with the terms of the 2012 Equity Plan and any award agreement executed in connection with such outstanding awards. On September 13, 2016 and March 9, 2018, the Board approved an amendment to the 2012 Equity Incentive Plan (the “Equity“2012 Equity Plan Amendment”Amendments”) to increase the number of shares of our common stock available for issuance under the 2012 Equity Plan by 3,000,000 shares.120,000 and 642,000 shares, respectively. The 2012 Equity Plan Amendment wasAmendments were not approved by our stockholders. See Note 10 of the notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10‑K for a discussion of the material features of the 2012 Equity Incentive Plan. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Party Transactions
Term Loans
There has not been since January 1, 2021, nor is there currently proposed, any transaction or series of similar transactions to which we were or are to be a party in which the amount involved exceeds $120,000 and Restructuring Transactions
The Restructuring Transactionsin which any current director, executive officer, holder of more than 5% of our common stock or any immediate family member of any of the foregoing persons had or will have a direct or indirect material interest other than compensation arrangements, described under Item 11 titled “Executive Compensation” and indemnification agreements described below.
Indemnification Agreements
We have entered into indemnification agreements with each of our current directors and officers. These agreements provide for the indemnification of such persons for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were completed on February 27, 2018. For additional information regarding the Restructuring Transactions, see “Restructuring Transactions”serving in Item 1 of this Annual Report on Form 10-K.
such capacity. We believe that these indemnification agreements are necessary to attract and retain qualified persons as directors and officers. Furthermore, we have obtained director and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us.
Director Independence
We are not currently a listed issuer. However, we use the definition of “independent” set forth in NASDAQ MarketplaceNasdaq listing rules in determining whether a director is independent in the capacity of director. Consistent with NASDAQ’s independence criteria, our Board has affirmatively determined that each of our current directors, and all of our directors who served in 2017, other than Dr. Chappell and Dr. Durrant, our Chief Executive Officer, is independent. NASDAQ'sNasdaq’s independence criteria include a series of objective tests, such as that the director is not an employee of the Company and has not engaged in various types of business dealings with us. In addition, as further required by NASDAQNasdaq listing rules, our Board has subjectively determined as to each independent director that nowhether any relationship exists that, in the opinion of the board of directors,Board, would interfere with each such person's exercising independent judgment in carrying out his or her responsibilities as a director. In making these determinations on the independence of our directors, our Board considered the relationships that each suchnon-employee director has with us and all other facts and circumstances the boardBoard deemed relevant in determining independence, including the beneficial ownership of our capital stock by each such person.
We have established an
Consistent with the foregoing independence criteria, our Board affirmatively determined that all of our current directors, each of whom served throughout 2022, other than Dr. Durrant, our Chief Executive Officer, and Dr. Chappell, our Chief Scientific Officer, are independent. In addition, each member of the audit, committee, a compensation, committee and a nominating and corporate governance committee.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm’s Fees
The following table represents aggregate fees billed to us for the years ended December 31, 20172022 and 20162021 by our independent registered accounting firm, HORNE LLP.
| | | Year ended December 31, | |
| | | 2017 | | 2016 | |
| Audit fees(1) | | $ | 246,354 | | | $ | 250,140 | |
| Tax fees (2) | | | 15,695 | | | | 12,000 | |
| Total fees | | $ | 262,049 | | | $ | 262,140 | |
LLP (Ridgeland, Mississippi, PCAOB ID: 171).
| | | Fiscal Year Ended December 31, | |
| | | 2022 | | | 2021 | |
| Audit Fees (1) | | $ | 375,000 | | | $ | 408,192 | |
| Tax Fees (2) | | | 16,000 | | | | 14,000 | |
| Total Fees | | $ | 391,000 | | | $ | 422,192 | |
| (1) | (1) | Audit fees in 20172022 and 20162021 include fees billed or incurred by HORNE LLP for professional services rendered in connection with the annual audit of our Consolidated Financial Statements for each yearfinancial statements in 2022, the audit of our financial statements and internal controls over financial reporting in 2021, and the review of our quarterly reports on Form 10-Q and consents associated with registration statements. statements and comfort letters associated with public offerings for each year. |
| (2) | (2) | Fees for services consist of tax compliance, including the preparation and review of federal and state tax returns. |
All fees described above were pre-approved by the audit committee in accordance with the requirements of Regulation S-X under the Exchange Act.
Pre-Approval Policies and Procedures
The audit committee’s policy is to pre-approve all audit and permissible non-audit services rendered by our independent registered public accounting firm. The audit committee can pre-approve specified services in defined categories of audit services, audit-related services and tax services up to specified amounts, as part of the audit committee’s approval of the scope of the engagement of our independent registered public accounting firm or on an individual case-by-case basis before our independent registered public accounting firm is engaged to provide a service. The audit committee has determined that the rendering of tax-related services by our independent registered public accounting firm is compatible with maintaining the principal accountant’s independence for audit purposes. Our independent registered public accounting firm has not been engaged to perform any non-audit services other than tax-related services and as indicated above.services.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
| (a) | The following documents are filed as part of the 2022 Annual Report filed with the SEC on March 30, 2023: |
| (1) | Financial Statements—See Index to Consolidated Financial Statements at Part I,II, Item 8 on page F-1 of thisthe 2022 Annual Report on Form 10-K.Report. |
| (2) | (2) | AllFinancial Statement Schedules— Reference is made to the financial statement schedules have beenincluded under Item 8 of Part II in the 2022 Annual Report. All other schedules are omitted because they are not applicable, or not required or because the information is included elsewhereshown in the financial statements or the Notesnotes thereto. |
| (3) | See the accompanying Index to Exhibits filed as a part of this Annual Report, which list is incorporated by reference in this Item.exhibits listed under Part (b) below. |
(b) See the accompanying Index to Exhibits filed as a part of this Annual Report.
(c)Other schedules are not applicable.
ITEM 16. Form 10-K Summary.None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | Incorporated by Reference | | Filed or |
| Exhibit No. | | Exhibit Description | | Form+ | | Date | | Number | | Furnished
Herewith |
| 3.1 | | Amended and Restated Certificate of Incorporation of the Registrant. | | 8-K | | July 6, 2016 | | 3.1 | | |
| 3.1.1 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant. | | 8-K | | August 7, 2017 | | 3.1 | | |
| 3.1.2 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant, as amended. | | 8-K | | February 28, 2018 | | 3.1 | | |
| 3.1.3 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant, as amended | | 8-K | | September 11, 2020 | | 3.1 | | |
| 3.2 | | Second Amended and Restated Bylaws of the Registrant. | | 8-K | | August 7, 2017 | | 3.2 | | |
| 4.1 | | Warrant to Purchase Stock, by and between the Registrant and MidCap Financial SBIC, LP, dated as of June 19, 2013. | | 8-K | | June 24, 2013 | | 10.2 | | |
| 4.2 | | Registration Rights Agreement, dated as of February 27, 2018, by and among the Registrant and Black Horse Capital Master Fund, Black Horse Capital, Cheval Holdings, Ltd., and Nomis Bay LTD. | | 10-Q | | May 8, 2018 | | 4.6 | | |
| 4.3 | | Registration Rights Agreement, dated as of June 2, 2020, by and among the Registrant and the investors party thereto. | | S-1 | | June 15, 2020 | | 10.21 | | |
| 4.4 | | Description of Securities. | | 10-K | | March 10, 2021 | | 4.5 | | |
| 10.1** | | 2012 Equity Incentive Plan, as amended and restated. | | 10-Q | | August 10, 2015 | | 10.2 | | |
| 10.1.1** | | Amendment to the 2012 Equity Incentive Plan, dated as of September 13, 2016. | | S-8 (File No. 333-214110) | | October 14, 2016 | | 10.2 | | |
| 10.1.2** | | Amendment to the 2012 Equity Incentive Plan, effective March 9, 2018. | | 10-Q | | May 8, 2018 | | 10.2 | | |
| 10.2** | | Form of Notice of Grant and Stock Option Agreement under the 2012 Equity Incentive Plan. | | 10-12G (File No. 000-54735) | | June 12, 2012 | | 10.8 | | |
| 10.3** | | Form of Notice of Grant and Stock Option Agreement under the 2012 Equity Incentive Plan (Outside Directors). | | 10-K | | March 13, 2014 | | 10.37 | | |
| 10.4** | | Form of Notice of Stock Unit Award under the 2012 Equity Incentive Plan. | | 8-K | | April 24, 2015 | | 10.1 | | |
| | Humanigen, Inc. | |
| | |
| By:
| /s/ Cameron Durrant, M.D., MBA
| |
Cameron Durrant, M.D., MBA
Chief Executive Officer and Chairman of the Board of
Directors
| |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Cameron Durrant | | (Principal Executive Officer)
| | March 23, 2018
|
Cameron Durrant | |
| | | | |
/s/ Greg Jester | | Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
| | March 23, 2018
|
Greg Jester | |
| | | | |
/s/ Ronald Barliant, JD | | Director | | March 23, 2018
|
Ronald Barliant, JD | |
| | | | |
/s/ Rainer Boehm | | | | |
Rainer Boehm | | Director | | March 23, 2018
|
| | | | |
/s/ Timothy Morris | | | | |
Timothy Morris | | Director | | March 23, 2018
|
| | | | |
/s/ Robert G. Savage | | | | |
Robert G. Savage | | Director | | March 23, 2018
Contents |
| | | | | Incorporated by Reference | | Filed or |
| Exhibit No. | | Exhibit Description | | Form+ | | Date | | Number | | Furnished
Herewith |
| 10.5** | | Form of Director and Officer Indemnification Agreement. | | 10-K | | March 10, 2021 | | 10.5 | | |
| 10.6 | | Development and License Agreement, dated May 11, 2004, by and between the Registrant and the Ludwig Institute for Cancer Research. | | 10-12G/A (File No. 000-54735) | | August 7, 2012 | | 10.13 | | |
| 10.7 | | License Agreement, dated April 7, 2006, by and between the Registrant and the Ludwig Institute for Cancer Research. | | 10-12G/A (File No. 000-54735) | | August 7, 2012 | | 10.14 | | |
| 10.7.1 | | Amendment to License Agreement, dated October 9, 2008, by and between the Registrant and the Ludwig Institute for Cancer Research. | | 10-Q | | May 8, 2014 | | 10.8 | | |
| 10.7.2 | | Amendment to License Agreement, dated June 8, 2011, by and between the Registrant and the Ludwig Institute for Cancer Research. | | 10-Q | | May 8, 2014 | | 10.9 | | |
| 10.8† | | Non-Exclusive License Agreement, dated October 15, 2010, by and between the Registrant, BioWa, Inc. and Lonza Sales AG. | | 10-12G/A (File No. 000-54735) | | September 12, 2012 | | 10.16 | | |
| 10.9 | | Clinical Trial Agreement, dated as of July 24, 2020, by and between the Registrant and The National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes of Health (NIH), as represented by the Division of Microbiology and Infectious Diseases (DMID). | | 8-K | | July 30, 2020 | | 10.1 | | |
| 10.10** | | Humanigen, Inc. 2020 Omnibus Incentive. Compensation Plan, effective September 11, 2020. | | 8-K | | September 11, 2020 | | 10.1 | | |
| 10.11** | | Form of Incentive Stock Option Award Agreement under 2020 Omnibus Incentive Plan. | | 10-Q | | August 12, 2021 | | 10.1 | | |
| 10.12** | | Form of Non-qualified Stock Option Award. Agreement under 2020 Omnibus Incentive Plan. | | 10-Q | | August 12, 2021 | | 10.2 | | |
| 10.13** | | Amended and Restated Employment Agreement, dated as of October 29, 2020, by and between the Registrant and Dr. Cameron Durrant. | | 10-K | | March 10, 2021 | | 10.14 | | |
| 10.14** | | Amended and Restated Employment Agreement, dated as of September 24, 2020, by and between the Registrant and Dr. Dale Chappell. | | 10-K | | March 10, 2021 | | 10.17 | | |
| 10.15†† | | License Agreement, dated as of November 3, 2020, by and among the Registrant, KPM Tech Co., Ltd and Telcon RF Pharmaceutical, Inc. | | 10-K | | March 10, 2021 | | 10.18 | | |
| 10.16†† | | Master Services Agreement effective as of January 8, 2021 between the Registrant and EVERSANA Life Science Services, LLC. | | 8-K | | January 14, 2021 | | 10.1 | | |
| 10.17§ | | Loan and Security Agreement, dated March 10, 2021, by and between the Registrant and Hercules Capital, Inc. | | 10-Q | | May 13, 2021 | | 10.3 | | |
| 10.18§ | | First amendment to Loan and Security Agreement, dated as of April 23, 2022, by and between the Registrant and Hercules Capital, Inc. | | 10-Q | | May 5, 2022 | | 10.1 | | |
| 10.19** | | Description of Registrant’s Director Compensation Policy. | | 10-K | | March 30, 2023 | | 10.19 | | |
| 10.20†† | | Settlement Agreement dated as of December 16, 2022, by and between the Registrant and Catalent Pharma Solutions, LLC. | | 10-K | | March 30, 2023 | | 10.20 | | |
Index to Consolidated Financial Statements
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Shareholders and the Board of Directors of Humanigen, Inc.
Opinion on Financial Statement
We have audited the accompanying consolidated balance sheets of Humanigen, Inc. (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, shareholders' equity (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and its total liabilities exceed its total assets. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ HORNE LLP
We have served as the Company's auditor since 2015.
Ridgeland, Mississippi
March 27, 2018
Consolidated Balance Sheets
(in thousands, except share and per share data)
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 737 | | | $ | 2,906 | |
| Prepaid expenses and other current assets | | | 813 | | | | 1,643 | |
| Total current assets | | | 1,550 | | | | 4,549 | |
| | | | | | | | | |
| Property and equipment, net | | | 19 | | | | 68 | |
| Restricted cash | | | 101 | | | | 101 | |
| Total assets | | $ | 1,670 | | | $ | 4,718 | |
| | | | | | | | | |
| Liabilities and stockholders’ deficit | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 3,330 | | | $ | 4,072 | |
| Accrued expenses | | | 3,307 | | | | 736 | |
| Term loans payable | | | 18,018 | | | | 3,016 | |
| Total current liabilities | | | 24,655 | | | | 7,824 | |
| Notes payable to vendors | | | 1,351 | | | | 1,273 | |
| Total liabilities | | | 26,006 | | | | 9,097 | |
| | | | | | | | | |
| Stockholders’ deficit: | | | | | | | | |
| Common stock, $0.001 par value: 85,000,000 shares authorized at December 31, | | | | | | | | |
2017 and December 31, 2016; 14,946,712 and 14,977,397 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively | | | 15 | | | | 15 | |
| Additional paid-in capital | | | 238,246 | | | | 236,216 | |
| Accumulated deficit | | | (262,597 | ) | | | (240,610 | ) |
| Total stockholders’ deficit | | | (24,336 | ) | | | (4,379 | ) |
| Total liabilities and stockholders’ deficit | | $ | 1,670 | | | $ | 4,718 | |
See accompanying notes.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| Operating expenses: | | | | | | |
| Research and development | | $ | 11,165 | | | $ | 10,449 | |
| General and administrative | | | 7,866 | | | | 8,376 | |
| Total operating expenses | | | 19,031 | | | | 18,825 | |
| | | | | | | | | |
| Loss from operations | | | (19,031 | ) | | | (18,825 | ) |
| | | | | | | | | |
| Other expense: | | | | | | | | |
| Interest expense | | | (3,056 | ) | | | (131 | ) |
| Other income, net | | | 431 | | | | 125 | |
| Reorganization items, net | | | (331 | ) | | | (8,188 | ) |
| Net loss | | | (21,987 | ) | | | (27,019 | ) |
| Other comprehensive income | | | - | | | | - | |
| Comprehensive loss | | $ | (21,987 | ) | | $ | (27,019 | ) |
| | | | | | | | | |
| Basic and diluted net loss per common share | | $ | (1.47 | ) | | $ | (2.78 | ) |
| | | | | | | | | |
| Weighted average common shares outstanding used to | | | | | | | | |
| calculate basic and diluted net loss per common share | | | 14,975,370 | | | | 9,707,877 | |
See accompanying notes.
Consolidated Statements of Stockholders’ Deficit
(in thousands, except share and per share data)
| | | | | | | | | Additional | | | | | | Total | |
| | | Common Stock | | | Paid-In | | | Accumulated | | | Stockholders’ | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Deficit | |
| Balances at January 1, 2016 | | | 4,450,994 | | | $ | 4 | | | $ | 219,319 | | | $ | (213,591 | ) | | $ | 5,732 | |
| Issuance of common stock to officer and directors | | | 323,155 | | | | 1 | | | | 1,451 | | | | - | | | | 1,452 | |
| Issuance of common stock, net of issuance costs | | | 7,147,035 | | | | 7 | | | | 10,125 | | | | - | | | | 10,132 | |
| Issuance of common stock in settlement of litigation | | | 631,358 | | | | 1 | | | | (1 | ) | | | - | | | | - | |
| Issuance of common stock for services | | | 65,000 | | | | - | | | | 198 | | | | - | | | | 198 | |
| Issuance of common stock upon exercise of options | | | 5,625 | | | | - | | | | 10 | | | | - | | | | 10 | |
| Issuance of common stock upon vesting of restricted stock units | | | 3,750 | | | | - | | | | - | | | | - | | | | - | |
| Issuance of warrants in connection with acquisition of licenses | | | - | | | | - | | | | 361 | | | | - | | | | 361 | |
| Issuance of warrants in exchange for services | | | - | | | | - | | | | 40 | | | | - | | | | 40 | |
| Conversion of notes payable and related accrued interest and fees to common stock | | | 2,350,480 | | | | 2 | | | | 3,385 | | | | - | | | | 3,387 | |
| Beneficial conversion feature | | | - | | | | - | | | | 484 | | | | - | | | | 484 | |
| Stock-based compensation expense | | | - | | | | - | | | | 844 | | | | - | | | | 844 | |
| Comprehensive loss | | | - | | | | - | | | | - | | | | (27,019 | ) | | | (27,019 | ) |
| Balances at December 31, 2016 | | | 14,977,397 | | | | 15 | | | | 236,216 | | | | (240,610 | ) | | | (4,379 | ) |
| Issuance of stock in connection with financing agreement | | | 9,315 | | | | - | | | | 12 | | | | - | | | | 12 | |
| Return of share of stock by advisor | | | (40,000 | ) | | | - | | | | - | | | | - | | | | - | |
| Stock-based compensation expense | | | - | | | | - | | | | 2,115 | | | | - | | | | 2,115 | |
| Write down in fair value of warrants | | | - | | | | - | | | | (97 | ) | | | - | | | | (97 | ) |
| Comprehensive loss | | | - | | | | - | | | | - | | | | (21,987 | ) | | | (21,987 | ) |
| Balances at December 31, 2017 | | | 14,946,712 | | | $ | 15 | | | $ | 238,246 | | | $ | (262,597 | ) | | $ | (24,336 | ) |
See accompanying notes.
Consolidated Statements of Cash Flows
(in thousands)
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| Operating activities: | | | | | | |
| Net loss | | $ | (21,987 | ) | | $ | (27,019 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 48 | | | | 102 | |
| Gain on lease termination | | | - | | | | (227 | ) |
| Noncash interest expense | | | 3,037 | | | | 69 | |
| Reorganization items related to debtor-in-possession financing | | | - | | | | 1,627 | |
| Stock-based compensation expense | | | 2,115 | | | | 844 | |
| Loss on sale of property and equipment | | | - | | | | 22 | |
| Issuance of warrants in exchange for services | | | - | | | | 40 | |
| Issuance of common stock for services | | | 12 | | | | - | |
| Issuance of warrants in connection with acquisition of licenses | | | - | | | | 361 | |
| Change in fair value of warrants issued in connection with acquisition of licenses | | | (97 | ) | | | - | |
| Issuance of common stock in exchange for services | | | - | | | | 198 | |
| Issuance of common stock to officer and directors | | | - | | | | 1,452 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Prepaid expenses and other assets | | | 831 | | | | 592 | |
| Accounts payable | | | (520 | ) | | | 4,474 | |
| Accrued expenses | | | 2,571 | | | | (25 | ) |
| Liabilities subject to compromise | | | (259 | ) | | | (3,471 | ) |
| Net cash used in operating activities | | | (14,249 | ) | | | (20,961 | ) |
| | | | | | | | | |
| Investing activities: | | | | | | | | |
| Proceeds from sale of property and equipment | | | - | | | | 11 | |
| Changes in restricted cash | | | - | | | | 92 | |
| Net cash provided by investing activities | | | - | | | | 103 | |
| | | | | | | | | |
| Financing activities: | | | | | | | | |
| Net proceeds from issuance of common stock | | | - | | | | 10,132 | |
| Net proceeds of stock option exercise | | | - | | | | 10 | |
| Net proceeds from term loans | | | 12,080 | | | | 2,993 | |
| Net proceeds from convertible notes payable | | | - | | | | 2,198 | |
| Net cash provided by financing activities | | | 12,080 | | | | 15,333 | |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (2,169 | ) | | | (5,525 | ) |
| Cash and cash equivalents, beginning of period | | | 2,906 | | | | 8,431 | |
| Cash and cash equivalents, end of period | | $ | 737 | | | $ | 2,906 | |
| | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
| Conversion of notes payable and related accrued interest and fees to common stock | | $ | - | | | $ | 3,387 | |
| Issuance of common stock for services | | $ | 12 | | | $ | - | |
| Issuance of warrants in connection with acquisition of licenses | | $ | - | | | $ | 361 | |
| Issuance of warrants in exchange for services | | $ | - | | | $ | 40 | |
| Issuance of common stock in exchange for services | | $ | - | | | $ | 198 | |
| Issuance of common stock to officer and directors | | $ | - | | | $ | 1,452 | |
| Issuance of notes payable to vendors | | $ | - | | | $ | 1,273 | |
See accompanying notes.
Notes to Consolidated Financial Statements(in thousands unless otherwise indicated, except share and per share data)
1. Organization and Description of Business
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. The Company completed its initial public offering in January 2013. Effective August 7, 2017, the Company changed its legal name to Humanigen, Inc.
The Company has undergone a significant transformation since December 2015. As a result of challenges facing it at the time, on December 29, 2015, the Company filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On June 30, 2016, the Company’s Second Amended Plan of Reorganization, dated May 9, 2016, as amended (the “Plan”), became effective and the Company emerged from its Chapter 11 bankruptcy proceedings. Refer to Note 2 for additional details regarding the Company’s bankruptcy proceedings.
From the time of its emergence from bankruptcy to August 29, 2017, the Company’s focus was on its lead product candidate benznidazole for the treatment of Chagas disease, a parasitic illness that can lead to serious and potentially life-threatening long-term heart, intestinal and neurological problems. As more fully described in Note 6, the Company acquired certain worldwide rights to benznidazole on June 30, 2016 and, until August 29, 2017, was primarily focused on the development necessary to seek and obtain approval by the United States Food and Drug Administration (“FDA”) for benznidazole and the subsequent commercialization, if approved. According to FDA issued guidance, benznidazole is eligible for review pursuant to a 505(b)(2) regulatory pathway as a potential treatment for Chagas disease and, if it became the first FDA-approved treatment for Chagas disease, the Company would have been eligible to receive a Priority Review Voucher (“PRV”).
However, on August 29, 2017, the FDA announced it had granted accelerated and conditional approval of a benznidazole therapy manufactured by Chemo Research, S.L. (“Chemo”) for the treatment of Chagas disease and had awarded that manufacturer a neglected tropical disease PRV. Chemo’s benznidazole also has received Orphan Drug designation. As a result of FDA’s actions and with the information currently available, the Company no longer expects to be eligible to receive a PRV with its own benznidazole candidate for the treatment of Chagas disease. Accordingly, the Company has ceased development of benznidazole and is currently assessing a full range of options with respect to its benznidazole assets and development program. We also began an accelerated scientific assessment of emerging new possibilities for our monoclonal antibody assets and development programs.
On December 21, 2017, we reached an agreement with our Term Loan Lenders (as defined below) on a series of transactions, including the transfer and assignment of all of our assets related to benznidazole to an affiliate of one of the Term Loan Lenders, providing for, among other things, the satisfaction and extinguishment of our outstanding obligations under our Term Loan Credit Agreement (as defined below). We refer to these transactions herein as the “Restructuring Transactions.” On February 27, 2018, we completed the Restructuring Transactions. For further information regarding the Restructuring Transactions, see Notes 7 and 10.
Since the FDA’s August 29, 2017 announcement relating to benznidazole, we have shifted our primary focus toward developing our proprietary monoclonal antibody portfolio, which comprises lenzilumab and ifabotuzumab, for use in addressing significant, serious and potentially life-threatening unmet needs in oncology and immunology. Both of these product candidates are in the early stage of development and will require substantial time, expenses, clinical development, testing, and regulatory approval prior to commercialization. Furthermore, neither of these product candidates has advanced into a pivotal registration study and it may be years before such a study is initiated, if at all.
Lenzilumab is a recombinant monoclonal antibody, or mAb, that neutralizes soluble granulocyte-macrophage colony-stimulating factor, or GM-CSF, a critical cytokine in the inflammatory cascade associated with CAR-T-related side effects and in the growth of certain hematologic malignancies, solid tumors and other serious conditions. The Company expects to study lenzilumab’s potential in reducing serious adverse events associated with CAR-T therapy. The Company has begun to explore lenzilumab’s effectiveness in preventing or ameliorating neurotoxicity associated with CAR-T therapy, and potentially cytokine release syndrome (CRS). In addition, the Company continues dosing in a Phase 1 clinical trial in patients with CMML to identify the maximum tolerated dose, or MTD, or recommended Phase 2 dose of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity. The Company has fully enrolled the total of 12 patients in the 200, 400 and 600 mg dose cohorts of its CMML trial, and are currently evaluating subjects in the highest dose cohort of 600 mg for continuing accrual. The Company also plans to review preliminary safety and efficacy results and anticipate completion of the ad hoc interim analysis in the first half of 2018. The Company may also use the interim data from the lenzilumab CMML Phase 1 study to determine the feasibility of rapidly commencing a Phase 1 study in JMML patients, or to explore progressing the CMML development program. JMML is a rare pediatric cancer, is associated with poor outcomes and a very high unmet medical need, for which there are no FDA-approved therapies.
Ifabotuzumab is an anti-Ephrin Type-A receptor 3, or EphA3, mAb that has the potential to offer a novel approach to treating solid tumors and hematologic malignancies, serious pulmonary conditions and as a CAR construct. EphA3 is aberrantly expressed on the surface of tumor cells and stroma cells in certain cancers. The Company has completed the Phase 1 dose escalation portion of a Phase 1/2 clinical trial in ifabotuzumab in multiple hematologic malignancies for which the preliminary results were published in the journal Leukemia Research in 2016. An investigator-sponsored Phase 0/1 radio-labeled imaging trial of ifabotuzumab in glioblastoma multiforme, a particularly aggressive and deadly form of brain cancer, has begun at the Olivia-Newton John Cancer Institute in Melbourne, Australia. The Company is currently exploring partnering opportunities to enable further development of ifabotuzumab.
Lenzilumab and ifabotuzumab were each developed with our proprietary, patent-protected Humaneered® technology, which consists of methods for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use, typically for chronic conditions.
Liquidity and Going Concern
The Company has incurred significant losses since its inception in March 2000 and had an accumulated deficit of $262.6 million as of December 31, 2017. At December 31, 2017, the Company had a working capital deficit of $23.1 million, including $18.0 million in term loans payable. On February 27, 2018, the Company issued 91,815,517 shares of common stock in exchange for the extinguishment of all term loans, related fees and accrued interest and received $1.5 million in cash proceeds. See Notes 7 and 10 for a more detailed discussion of the Restructuring Transactions. On March 12, 2018 the Company issued 2,445,557 shares of common stock for proceeds of $1.1 million to accredited investors. The Company will require additional financing in order to meet its anticipated cash flow needs during the next twelve months. The Company has financed its operations primarily through the sale of equity securities, debt financings, interest income earned on cash and cash equivalents, grants and the payments received under its agreements with Novartis Pharma AG and Sanofi Pasteur S.A. (“Sanofi”). To date, none of the Company’s product candidates have been approved for sale and therefore the Company has not generated any revenue from product sales. Management expects operating losses to continue for the foreseeable future. As a result, the Company will continue to require additional capital through equity offerings, debt financing and/or payments under new or existing licensing or collaboration agreements. If sufficient funds are not available on acceptable terms when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm its business, financial condition and results of operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Condensed Consolidated Financial Statements for the twelve months ended December 31, 2017 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 $26.0 million at December 31, 2017 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. See Note 14 – “Subsequent Events.”
Delisting of Common Stock
On January 13, 2016, the Company’s common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the KBIOQ symbol. On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of the common stock, and the delisting was effective on February 5, 2016. On June 30, 2016, upon emergence from bankruptcy, the ticker symbol for the trading of the Company’s common stock on the over-the-counter market reverted back to KBIO. On August 7, 2017, following the effectiveness of our previously reported name change, the Company’s common stock began trading on the OTCQB Venture Market under the new ticker symbol “HGEN”.
2. Chapter 11 Filing
On December 29, 2015, the Company filed a voluntary petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The filing was made in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) (Case No. 15-12628 (LSS)).
In connection with financing efforts related to the Company’s bankruptcy proceedings, on April 1, 2016, the Company entered into a Debtor-in-Possession Credit and Security Agreement (the “Credit Agreement”) with a group of lenders (the “DIP Lenders”), pursuant to which the Company received $3.0 million in funds for working capital, bankruptcy-related costs, costs related to its plan of reorganization, payment of certain fees to the DIP Lenders and other costs associated with the ordinary course of business. Funds received under the Credit Agreement bore interest at a rate of 12% and were due and payable upon the Effective Date of the Plan, as defined below. Payment due under the Credit Agreement was convertible into shares of the Company’s common stock, with share amounts subject to calculation as provided in the Credit Agreement.
On April 1, 2016, the Company also entered into a Securities Purchase Agreement (the “SPA”) with the DIP Lenders. The SPA provided for the sale of the Company’s common stock, with share amounts subject to calculation as provided in the SPA, in respect of exit financing in the amount of $11 million to be received upon the Effective Date of the Plan, as defined below.
Plan of Reorganization
On May 9, 2016, the Company filed with the Bankruptcy Court the Plan and related amended disclosure statement pursuant to Chapter 11 of the Bankruptcy Code. On June 16, 2016, the Bankruptcy Court entered an order confirming the Plan.
The Plan became effective on June 30, 2016 (the “Effective Date”) and the Company emerged from its Chapter 11 bankruptcy proceedings. In connection with such emergence, the Company consummated the transactions and other items described below.
· | Pursuant to the SPA and in repayment of its obligations under the Credit Agreement, the Company issued an aggregate of 9,497,515 shares of its common stock to the DIP Lenders. |
· | The Company reserved 300,000 shares of common stock for issuance to the plaintiffs in class action litigation related to the events surrounding the Company’s former Chairman and Chief Executive Officer. As of December 31, 2016, all of the shares related to this settlement stipulation had been issued. |
· | The Company became obligated to issue 3,750 shares of common stock to a former director in satisfaction of claims against the Company. As of December 31, 2016, all of the shares related to this settlement stipulation had been issued. |
· | The Company reserved for issuance shares of common stock in an amount as yet to be determined in connection with the settlement of certain other claims and interests as set forth in the Plan. As of December 31, 2017, management does not believe the issuance of additional common stock for any such claims is probable. As such, no accrual has been made in the Consolidated Financial Statements. |
· | The Company issued promissory notes in an aggregate principal amount of approximately $1.2 million to certain vendors in accordance with the Plan. The notes are unsecured, bear interest at 10% per annum and are due and payable in full, including principal and accrued interest on June 30, 2019. The Company has accrued $0.1 million and $0.2 million in interest expense related to these promissory notes as of December 31, 2016 and December 31, 2017, respectively. |
· | The Company issued an aggregate of 323,155 shares of common stock to Cameron Durrant, Ronald Barliant, and David Moradi pursuant to an order by the Bankruptcy Court approving a one-time equity award for the Company’s Chief Executive Officer and two other directors. The Company recorded a charge of $1.5 million representing the fair value of the shares issued and classified $0.7 million and $0.8 million as Reorganization items, net and General and administrative expenses, respectively. |
Bankruptcy Claims Administration
On February 29, 2016, the Company filed its schedules of assets and liabilities and statement of financial affairs (the “Schedules”) with the Bankruptcy Court. The Bankruptcy Court entered an order setting April 1, 2016 as the deadline for filing proofs of claim for creditors other than governmental units and June 27, 2016 as the bar date for filing proofs of claim by governmental units (together, the “Bar Date”). The Bar Date is the date by which non-government claims against the Company relating to the period prior to the commencement of the Company's Chapter 11 case were required to be filed if such claims were not listed in liquidated, non-contingent and undisputed amounts in the Schedules, or if the claimant disagrees with the amount, characterization or classification of its claim as reflected in the Schedules. Claims that are subject to the Bar Date and that were not filed on or prior to the Bar Date are barred from participating in any distribution that may be made under the Plan.
As of the Effective Date, approximately 195 proofs of claim were outstanding (including claims that were previously identified on the Schedules) totaling approximately $32 million. Prior to the Bar Date, certain investors filed a class action claim in the amount of $20 million in connection with events surrounding the Company’s former Chairman and Chief Executive Officer. On June 15, 2016, a settlement stipulation related to the class action suit was approved under order of the Bankruptcy Court. The settlement stipulation required the Company to issue 300,000 shares of common stock and submit a payment of $0.3 million to the claimants. During the year ended December 31, 2016, the 300,000 shares were issued and the $0.3 million payment was made. See Note 13 for additional information on this matter and settlement.
Separately, a claim was filed by certain investors in the Company’s 2015 private financing transaction totaling approximately $6.9 million. On May 9, 2016, a settlement stipulation related to this suit was approved under order of the Bankruptcy Court. The settlement stipulation required the Company to issue 327,608 shares of common stock and submit a payment of $0.3 million to an escrow account on behalf of the claimants. During the year ended December 31, 2016, the 327,608 shares were issued and the $0.3 million payment was made. See Note 13 for additional information on this matter and settlement.
As of June 30, 2016, the Company emerged from bankruptcy. The Company expects the amounts remaining in Liabilities subject to compromise as of the Effective Date to be paid in accordance with the Plan. Accordingly, as of December 31, 2016, Liabilities subject to compromise have been reduced to zero and reclassified according to their payment terms.
In March 2016, the Company entered into a termination agreement (the “Lease Termination Agreement”) related to the lease of its prior facility in South San Francisco, California. The Lease Termination Agreement, approved by order of the Bankruptcy Court issued March 15, 2016, waived all damages related to early termination of the lease, relieved the Company of March rental expenses and set an effective termination date of March 31, 2016. In accordance with the termination of the lease, the Company wrote off remaining deferred rent liabilities of approximately $0.3 million and disposed of certain leasehold improvements and furniture and fixtures with a net book value of approximately $0.1 million. The resulting gain of $0.2 million is included in Reorganization items, net in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2016. Concurrent with the termination of its prior lease, the Company entered into a lease agreement for a new office facility in Brisbane, California. The new lease commenced in April 2016 and expired in March 2017. On February 16, 2017, the Company amended the lease to extend the term of the lease for an additional period of eighteen months such that the lease will expire on September 30, 2018.
The reconciliation of certain proofs of claim filed against the Company in the Bankruptcy Case, including certain General Unsecured Claims, Convenience Class Claims and Other Subordinated Claims, is ongoing. As a result of its examination of the claims, the Company may ask the Bankruptcy Court to disallow, reduce, reclassify or otherwise adjudicate certain claims the Company believes are subject to objection or otherwise improper. Under the terms of the Plan, the Company had until December 27, 2016 to file additional objections to disputed claims, subject to the Company’s right to seek an extension of this deadline from the Bankruptcy Court. By Order, dated February 6, 2017, the Bankruptcy Court extended the claims objection deadline to June 26, 2017. By Order dated July 10, 2017, the Bankruptcy Court extended the claims objection deadline to September 25, 2017. By Order dated October 23, 2017, the Bankruptcy Court extended the claims objection deadline to December 26, 2017. By Order dated January 19, 2018, the Bankruptcy Court extended the claims objection deadline to March 26, 2018. The Company may compromise certain claims with or without specific prior approval of the Bankruptcy Court as set forth in the Plan and may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise. The resolution of such claims could result in material adjustments to the Company’s financial statements.
As of December 31, 2017, approximately $0.5 million in claims remain subject to review and reconciliation by the Company. The Company may file objections to these claims after it completes the reconciliation process. As of December 31, 2017, the Company has recorded $0.06 million related to these claims in Accounts payable and Notes payable to vendors, which represents management’s best estimate of claims to be allowed by the Bankruptcy Court.
Although the Bankruptcy Case remains open, other than with respect to certain matters relating to the implementation of the Plan, the administration of certain claims, or over which the Bankruptcy Court may have otherwise retained jurisdiction, the Company is no longer operating under the direct supervision of the Bankruptcy Court. The Company anticipates that the Bankruptcy Case will be closed following the completion of the claims reconciliation process.
Bankruptcy Related Financing Arrangements
On April 1, 2016, the Company entered into the Credit Agreement with Black Horse Capital Master Fund Ltd., as administrative agent and lender (“BHCMF” or “Agent”), Black Horse Capital LP, as a lender (“BHC”), Cheval Holdings, Ltd., as a lender (“Cheval”) and Nomis Bay LTD, as a lender (“Nomis” and, together with BHCMF, BHC and Cheval, the “Lenders”). The Credit Agreement provided for a debtor-in-possession credit facility in the original principal amount of $3.0 million (the “Term Loan”). The Credit Agreement provided that the Term Loan will be made by the Lenders at an original discount equal to $0.2 million (the “Upfront Fee”) and required the payment by the Company to the Lenders of a commitment fee equal to $0.2 million (the “Commitment Fee”). In accordance with the terms of the Credit Agreement, the Company used the proceeds of the Term Loan for working capital, bankruptcy-related costs, costs related to the Company’s plan of reorganization, the payment of certain fees and expenses owed to the Agent and the Lenders in connection with the Credit Agreement and other costs incurred in the ordinary course of business.
Pursuant to the terms of the Credit Agreement, the Term Loan bore interest at a rate per annum equal to 12.00%.
In accordance with the bidding procedures order entered by the Bankruptcy Court, the Term Loan and the SPA were together subject to competing, higher and better offers.
In connection with the Company’s obligations under the Credit Agreement, the Company executed in favor of the Agent an Intellectual Property Security Agreement, dated as of April 1, 2016 (the “IP Security Agreement”). Under the terms of the IP Security Agreement, the Company pledged all of its intellectual property to the Agent for the ratable benefit of the Lenders, as collateral for its obligations under the Credit Agreement.
The Credit Agreement provided that the outstanding principal balance of the Term Loan, plus accrued and unpaid interest, plus the Upfront Fee, plus the Commitment Fee and all other non-contingent obligations would mature on the earlier of an event of default under the Credit Agreement or the effective date of the Company’s plan of reorganization. The Maturity Date was deemed to occur simultaneously with the Effective Date and, accordingly, on June 30, 2016, 2,350,480 shares of common stock were issued to the Lenders in repayment of the Company’s debt obligations under the Credit Agreement, including 201,436 shares to BHC, 470,096 shares to BHCMF, 503,708 shares to Cheval, 940,192 shares to Nomis and 235,048 shares to Cortleigh Limited (“Cortleigh”). Pursuant to the terms of the Credit Agreement, the Company also paid $0.4 million to BHC in payment of its fees and expenses and $0.3 million to Nomis in payment of its fees and expenses.
The Company records discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the fair value of the underlying common stock at the commitment date of the note transaction exceeding the effective conversion price embedded in the note. The Company evaluated the Credit Agreement for beneficial conversion features and calculated a value of approximately $0.5 million, all of which was expensed as of the Effective Date.
In conjunction with the Credit Agreement, during the year ended December 31, 2016, the Company incurred the following expenses which have been charged to Reorganization items, net in the accompanying Consolidated Statements of Operations and Comprehensive Loss:
| | | Year ended | |
| | | December 31, 2016 | |
| Upfront fee | | $ | 191 | |
| Commitment fee | | | 150 | |
| Beneficial conversion feature | | | 484 | |
| Legal fees | | | 802 | |
| Total Credit Agreement expense | | $ | 1,627 | |
On April 1, 2016, the Company also entered into the SPA with the Lenders. The SPA provides for the sale to the Lenders on the closing date of an aggregate of 5,885,000 shares of common stock, subject to adjustment as provided in the SPA, in respect of exit financing in the amount of $11 million (the “Exit Financing”) plus an exit financing commitment fee of $0.8 million payable by the Company to the Lenders, plus payment to the Lenders of their fees and expenses incurred in connection with the Exit Financing and the SPA. Nomis subsequently assigned twenty percent (20%) of its interest in the shares of common stock to be purchased by Nomis under the SPA and the Credit Agreement to Cortleigh (collectively with the Lenders, the “Purchasers”).
The consummation of the transactions contemplated by the SPA were contingent on, among other things, the funding of the Term Loan, the approval of the Bankruptcy Court of the Company’s plan of reorganization, and the simultaneous closing of the Company’s transaction with Savant. In addition, the closing of the transactions under the SPA were contingent upon the board of directors of the Company, upon the effectiveness of the confirmed plan of reorganization, consisting of (i) one director to be designated by Nomis; (ii) one director to be jointly designated by BHC, BHCF, and Cheval; (iii) the Chief Executive Officer of the Company to be designated jointly and unanimously by the Lenders; and (iv) two independent directors to be designated jointly and unanimously by the Lenders.
The issuance of the shares contemplated by the SPA was consummated on the Effective Date, and the Company issued to the Purchasers an aggregate of 7,147,035 shares of common stock for an aggregate purchase price of $11 million, including 612,501 shares to BHC, 1,429,407 shares to BHCMF, 1,531,610 shares to Cheval, 2,858,814 shares to Nomis and 714,703 shares to Cortleigh. Pursuant to the terms of the SPA, the Company paid $0.4 million to BHC in payment of its fees and expenses and $0.3 million to Nomis in payment of its fees and expenses.
Under the terms of the SPA, the Company was required to use commercially reasonable efforts to cause a registration statement registering the resale by the Purchasers of the shares issuable under the SPA to be declared effective by the SEC no later than December 27, 2016. The Company was obligated to keep the registration statement effective until all of the shares issued pursuant to the SPA are eligible for resale by the Purchasers without volume restrictions under an exemption from registration under the Securities Act. If the registration statement has not been declared effective by December 27, 2016 and any of the shares issued pursuant to the SPA are not eligible to be sold under Rule 144, then during each subsequent thirty day period (or portion thereof) until the registration statement is declared effective, the Company agrees to issue additional shares of common stock to the Purchasers in an amount equivalent to 10.0% of the shares originally purchased under the SPA that are then held by the Purchasers. On October 28, 2016, the SPA was amended to require the Company to file a registration statement by January 10, 2017 with effectiveness to be no later than March 31, 2017. On December 19, 2016, the SPA was amended again to require the Company to file a registration statement by March 17, 2017 with effectiveness to be no later than June 20, 2017. The Company timely filed a registration statement on Form S-1 on March 17, 2017. On June 20, 2017 the SPA was amended again to require the Company to obtain effectiveness of the registration statement no later than July 30, 2017. On July 14, 2017, the registration statement was declared effective by the SEC.
Governance Arrangements
On the Effective Date, the Company and Martin Shkreli, the Company’s former Chief Executive Officer, former Chairman and former controlling stockholder, entered into a Corporate Governance Agreement (the “Governance Agreement”), which provides for certain terms and conditions regarding the acquisition, disposition, holding and voting of securities of the Company by Mr. Shkreli. The Governance Agreement applies to all common stock owned by Mr. Shkreli or affiliates he controls.
Under the terms of the Governance Agreement, for 180 days following the Effective Date, Mr. Shkreli could not sell his shares of common stock at a price per share that was less than the greater of (x) $2.50 and (y) a 10% discount to the prior two week volume-weighted average price (the “Market Discount Price”). In addition, for 180 days following the 61st day after the Effective Date, the Company had a right to purchase any or all of Mr. Shkreli’s shares at a purchase price per share equal to the Market Discount Price. For a limited time, the Company also had a right of first refusal to purchase shares that Mr. Shkreli proposed to sell. Mr. Shkreli was also prohibited from transferring any shares to his affiliates or associates unless such transferee agreed to be subject to the terms of the Governance Agreement. Transfers of shares by Mr. Shkreli not made in compliance with the Governance Agreement would be null and void.
Under the terms of the Governance Agreement, Mr. Shkreli will not have any right to nominate directors to the Board of Directors of the Company and agreed in connection with any stockholder vote to vote his shares in proportion to the votes of the Company’s public stockholders. The Governance Agreement also prohibits Mr. Shkreli or his affiliates for a period of 24 months after the date of the Governance Agreement, from, among other things:
| · | purchasing any stock or assets of the Company; |
| · | participating in any proposal for any merger, tender offer or other business combination, or similar extraordinary transaction involving the Company or any of its subsidiaries; |
| · | seeking to control or influence the management, the Company’s Board or the policies of the Company; or |
| · | submitting any proposal to be considered by the stockholders of the Company. |
In addition, any material transaction between Mr. Shkreli or his associates and the Company, or relating to the Governance Agreement, cannot be taken without the prior approval of the Company’s Board.
The Governance Agreement provides for a mutual release between the Company and Mr. Shkreli of all claims and liabilities existing as of the date of execution.
On August 25 and August 26, 2016, Mr. Shkreli sold all of his shares of the Company to third party investors in private transactions.
Financial Reporting in Reorganization
The Company applied Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. It requires that the financial statements for periods subsequent to the Chapter 11 filing distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be subject to a plan of reorganization must be reported at the amounts expected to be allowed in the Company’s Chapter 11 case, even if they may be settled for lesser amounts as a result of the plan of reorganization or negotiations with creditors.
As of December 31, 2015, the Company had approximately $5.4 million recorded as Liabilities subject to compromise. In conjunction with the Company’s exit from bankruptcy, the Company reclassified remaining Liabilities subject to compromise totaling approximately $2.8 million, $0.8 million and $1.2 million to Accounts payable, Accrued expenses and Notes payable to vendors, respectively. For year ended December 31, 2016, the Company paid approximately $3.4 million related to Liabilities subject to compromise, issued $1.2 million in promissory notes to vendors, wrote off approximately $0.3 million in deferred rent liabilities related to its lease termination and reversed approximately $0.1 million in accrued expenses related to a claim that has been denied by the court, which as discussed above, were previously included in Liabilities subject to compromise. As of December 31, 2016, approximately $0.4 million and $1.2 million remain in Accounts payable and Notes payable to vendors, respectively. For the year ended December 31, 2017, the Company wrote off approximately $0.2 million in claims that had been reduced or for which a settlement had been reached at a lower amount than what had been previously accrued and also paid approximately $0.1 million in claims. As of December 31, 2017, approximately $0.06 million and $1.3 million remain in Accounts payable and Notes payable to vendors, respectively. Remaining amounts will be paid based on terms of the Plan.
For the years ended December 31, 2017 and 2016, Reorganization items, net consisted of the following charges:
| | | Year ended December 31, | |
| | | 2017 | | | 2016 | |
| Legal fees | | $ | 297 | | | $ | 4,870 | |
| Professional fees | | | 34 | | | | 1,218 | |
| Debtor-in-possession financing costs | | | - | | | | 1,143 | |
| Beneficial conversion on debtor-in-possession financing | | | - | | | | 484 | |
| Fair value of shares issued to officer and directors for service in bankruptcy | | | - | | | | 700 | |
| Gain on lease termination | | | - | | | | (227 | ) |
| Total reorganization items, net | | $ | 331 | | | $ | 8,188 | |
Cash payments for reorganization items totaled $0.9 million and $5.0 million for the years ended December 31, 2017 and 2016, respectively.
3. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments necessary for the presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared on a basis that assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The Company believes judgment is involved in determining the valuation of the financing derivative, the fair value‑based measurement of stock‑based compensation, accruals, liabilities subject to compromise and warrant valuations. The Company evaluates its estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the Consolidated Financial Statements.
Concentration of Credit Risk
Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration of credit risk in the event of a default by the related financial institution holding the securities, to the extent of the value recorded in the balance sheet. The Company invests cash that is not required for immediate operating needs primarily in highly liquid instruments with lower credit risk. The Company has established guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk.
Fair Value of Financial Instruments
Cash, accounts payable and accrued liabilities are carried at cost, which approximates fair value given their short‑term nature. Marketable securities and cash equivalents are carried at fair value.
The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company measures the fair value of financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets (marketable securities) that are measured at fair value, and the classification by level of input within the fair value hierarchy:
| | | Fair Value Measurements as of December 31, 2017 | |
| Investments: | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | | | | | |
| Money market funds | | $ | 101 | | | $ | — | | | $ | — | | | $ | 101 | |
| Total assets measured at fair value | | $ | 101 | | | $ | — | | | | — | | | $ | 101 | |
| | | Fair Value Measurements as of December 31, 2016 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | |
| Money market funds | | $ | 101 | | | $ | — | | | $ | — | | | $ | 101 | |
| Total assets measured at fair value | | $ | 101 | | | $ | — | | | | — | | | $ | 101 | |
The estimated fair value of the Term Loans payable and the Notes payable to vendors as of December 31, 2017 and 2016, based upon current market rates for similar borrowings, as measured using Level 3 inputs, approximate the carrying amounts as presented in the Consolidated Balance Sheets.
Cash, Cash Equivalents, and Marketable Securities
The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits with commercial banks in checking, interest‑bearing and demand money market accounts.
Restricted Cash
Restricted cash at December 31, 2017 and 2016 of $0.1 million related to a standby letters of credit in the amount of $0.05 million issued in connection with certain insurance policy coverage maintained by the Company and restricted cash related to a credit card facility in the amount of $0.05 million.
Property and Equipment, Net
Property and equipment is stated at cost, less accumulated depreciation and amortization, and depreciated over the estimated useful lives of the respective assets of three years using the straight‑line method. Leasehold improvements are amortized on a straight‑line basis over the shorter of the useful lives or the non-cancelable term of the related lease. Maintenance and repair costs are charged as expense in the Statements of Operations and Comprehensive Loss as incurred.
Long‑Lived Assets
The Company evaluates the carrying value of its long‑lived assets, including intangible assets, whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset, including disposition, are less than the carrying value of the asset. To date, the Company has not recorded any impairment charges on its long‑lived assets.
Debt Issue Costs
As of January 1, 2016, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-03 and No. 2015-15, which require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. As a result of our adoption of the guidance, as of December 31, 2016, $0.5 million of deferred financing costs were reclassified to reduce the Term loan payable in the Consolidated Balance Sheet. As of December 31, 2017 all debt issuance costs had been fully amortized. The guidance did not have a material impact on the consolidated financial statements.
Research and Development Expenses
Development costs incurred in the research and development of new product candidates are expensed as incurred, including expenses that may or may not be reimbursed under research and development collaboration arrangements. Research and development costs include, but are not limited to, salaries, benefits, stock‑based compensation, laboratory supplies, allocated overhead, fees for professional service providers and costs associated with product development efforts, including preclinical studies and clinical trials. Research and development expenses under collaborative agreements approximate or exceed the revenue recognized under such agreements.
The Company estimates preclinical study and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.
The Company records upfront and milestone payments made to third parties under licensing arrangements as an expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.
Research and Development Services
Internal and external research and development costs incurred in connection with collaboration agreements are recognized as revenue in the same period as the costs are incurred and are presented on a gross basis when the Company acts as a principal, has the discretion to choose suppliers, bears credit risk, and performs at least part of the services.
Revenue Recognition
The Company recognizes revenue when: (i) persuasive evidence of an arrangement exists, (ii) transfer of technology has been completed, delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. Payments received in advance of work performed are recorded as deferred revenue and recognized when earned. All revenue recognized to date under the Company’s collaborative agreements has been nonrefundable.
Multiple Element Arrangements
The Company evaluates revenue from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. Management considers whether components of an arrangement represent separate units of accounting based upon whether certain criteria are met, including whether the delivered element has stand‑alone value to the customer. To date, all of the Company’s research and development collaboration and license agreements have been assessed to have one unit of accounting. Up‑front and license fees received for a combined unit of accounting are deferred and recognized ratably over the projected performance period. Nonrefundable fees where the Company has no continuing performance obligations are recognized as revenue when collection is reasonably assured and all other revenue recognition criteria have been met.
Stock‑Based Compensation Expense
The Company measures employee and director stock‑based compensation expense for stock awards at the grant date, based on the fair value‑based measurement of the award, and the expense is recorded over the related service period, generally the vesting period, net of estimated forfeitures. The Company calculates the fair value‑based measurement of stock options using the Black‑Scholes valuation model and the single‑option method and recognizes expense using the straight‑line attribution approach.
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505, Equity, using a fair-value approach and the provisions of ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.. The equity instruments are valued using the Black-Scholes valuation model. Measurement of share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and performance conditions are satisfied. The related expense is recognized as an expense over the term services are received.
Income Taxes
The Company accounts for income taxes under an asset‑and‑liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for tax and financial reporting purposes measured by applying enacted tax rates and laws that will be in effect when the differences are expected to reverse, net operating loss carryforwards and tax credits. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for income taxes.
Comprehensive Loss
Comprehensive loss represents net loss adjusted for the change during the periods presented in unrealized gains and losses on available‑for‑sale securities less reclassification adjustments for realized gains or losses included in net loss. The unrealized gains or losses are reported on the Consolidated Statements of Operations and Comprehensive Loss.
Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted‑average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted‑average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury‑stock and if‑converted methods. For purposes of the diluted net loss per share calculation, stock options, restricted stock units and common stock warrants are considered to be potentially dilutive securities but are excluded from the calculation of diluted net loss per share because their effect would be anti‑dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.
The Company’s potential dilutive securities, which include stock options, restricted stock units and warrants have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per common share and be antidilutive. Therefore, the denominator used to calculate both basic and diluted net loss per common share is the same in all periods presented.
The following shares subject to outstanding potentially dilutive securities have been excluded from the computations of diluted net loss per common share as the effect of including such securities would be antidilutive:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| Options to purchase common stock | | | 2,448,383 | | | | 1,835,835 | |
| Warrants to purchase common stock | | | 331,193 | | | | 356,193 | |
| | | | 2,779,576 | | | | 2,192,028 | |
Deferred Rent
The Company records its costs under facility operating lease agreements as rent expense. Rent expense is recognized on a straight‑line basis over the non‑cancelable term of the operating lease. The difference between the actual amounts paid and amounts recorded as rent expense is recorded to deferred rent.
Segment Reporting
The Company determines its segment reporting based upon the way the business is organized for making operating decisions and assessing performance. The Company operates in only one segment, which is related to the development of pharmaceutical products.
Recent Accounting Pronouncements
The Company qualifies as an “emerging growth company” (“EGC”) pursuant to the provisions of the JOBS Act and has elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act which permits EGCs to defer compliance with new or revised accounting standards (the “EGC extension”) until non-issuers are required to comply with such standards. Accordingly, so long as the Company continues to qualify as an EGC, the Company will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2017. EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2018. Early application is not permitted and entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company's Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires lessees to recognize on the balance sheet a right-of use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Stock Compensation – Improvements to Employee Share-Based Payment Accounting. This new accounting standard simplifies accounting for share-based payment transactions, including income tax consequences and the classification of the tax impact on the statement of cash flows. EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2017. Early application is permitted. The Company is assessing the potential impact to its financial statements and disclosures.
4. Investments
At December 31, 2017, the amortized cost and fair value of investments, with gross unrealized gains and losses, were as follows:
| | | Amortized Cost | | | Gains | | | Losses | | | Fair Value | |
| Money market funds | | $ | 101 | | | $ | — | | | $ | — | | | $ | 101 | |
| Total investments | | $ | 101 | | | $ | — | | | $ | — | | | $ | 101 | |
| Reported as: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | | | | | | | | | | | $ | — | |
| Restricted cash | | | | | | | | | | | | | | | 101 | |
| Total investments | | | | | | | | | | | | | | $ | 101 | |
At December 31, 2016, the amortized cost and fair value of investments, with gross unrealized gains and losses, were as follows:
| | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | | |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| Money market funds | | $ | 101 | | | $ | — | | | $ | — | | | $ | 101 | |
| Total investments | | $ | 101 | | | $ | — | | | $ | — | | | $ | 101 | |
| | | | | | | | | | | | | | | | | |
| Reported as: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | | | | | | | | | | | $ | - | |
| Restricted cash, long-term | | | | | | | | | | | | | | | 101 | |
| Total investments | | | | | | | | | | | | | | $ | 101 | |
5. Property and Equipment
Property and equipment consists of the following:
| | | December 31, | |
| | | 2017 | | | 2016 | |
| Computer equipment and software | | $ | 216 | | | $ | 216 | |
| | | | | | | | | |
| Accumulated depreciation and amortization | | | (197 | ) | | | (148 | ) |
| Property and equipment, net | | $ | 19 | | | $ | 68 | |
Depreciation and amortization expense for the years ended December 31, 2017 and December 31, 2016 was $0.05 million and $0.1 million, respectively.
6. Savant Arrangements
On February 29, 2016, the Company entered into a binding letter of intent (the “LOI”) with Savant Neglected Diseases, LLC (“Savant”). The LOI provided that the Company would acquire certain worldwide rights relating to benznidazole (the “Compound”) from Savant. Under the LOI, the Company made a non-refundable deposit to Savant of $0.5 million, which was credited towards the Initial Payment (as defined below), and agreed to make monthly payments to Savant equal to $0.1 million for development services performed by Savant relating to the Compound.
The LOI provided that in consideration for the assets to be acquired, the Company would provide consideration to Savant, including:
| · | $3.0 million (the “Initial Payment”) payable as soon as practicable but in no event later than the Company emerging from its Chapter 11 bankruptcy pursuant to a plan of reorganization (the “Bankruptcy Exit”); |
| · | a five-year warrant from the date of the Bankruptcy Exit to purchase up to 200,000 shares of common stock at a per share price of $2.25, exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain milestones related to regulatory approval of the Compound; and |
| · | certain additional payments to be further specified in the definitive agreements. |
On the Effective Date, as authorized by the Plan and the Confirmation Order, the Company and Savant entered into an Agreement for the Manufacture, Development and Commercialization of Benznidazole for Human Use (the “MDC Agreement”), pursuant to which the Company acquired certain worldwide rights relating to the Compound. The MDC Agreement consummates the transactions contemplated by the LOI.
Under the terms of the MDC Agreement, the Company acquired certain regulatory and non-intellectual property assets relating to the Compound and any product containing the Compound and an exclusive license of certain intellectual property assets related to the Compound. Savant retained the right to use the licensed intellectual property for veterinary uses. The MDC Agreement provides that the Company and Savant will jointly conduct research and development activities with respect to the Compound, while the Company will be solely responsible for commercializing the Compound.
As required by the MDC Agreement, on the Effective Date, the Company made payments to Savant totaling $2.7 million, consisting of the remaining portion of the Initial Payment less the deposit in the amount of $2.5 million, an initial monthly Joint Development Program Cost payment of $0.1 million, and reimbursement of Savant’s legal fees capped at $0.1 million. The MDC Agreement provides for milestone payments, including payments related to U.S. and foreign regulatory submissions of up to $21 million and certain other contingent payments. Additionally, the Company will pay Savant royalties on any net sales of the Compound, which royalty would increase if a PRV is granted subsequent to regulatory approval of the Compound. The MDC Agreement also provides that Savant is entitled to a portion of the amount the Company receives upon the sale, if any, of a PRV relating to the Compound.
In addition, on the Effective Date the Company and Savant also entered into a Security Agreement (the “Security Agreement”), pursuant to which the Company granted Savant a continuing senior security interest in the assets and rights acquired by the Company pursuant to the MDC Agreement and certain future assets developed from those acquired assets.
On the Effective Date, the Company issued to Savant a five year warrant (the “Warrant”) to purchase 200,000 shares of the Company’s Common Stock, at an exercise price of $2.25 per share, subject to adjustment. The Warrant is exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain regulatory related milestones. In addition, pursuant to the MDC Agreement, the Company has granted Savant certain “piggyback” registration rights for the shares issuable under the Warrant (See Note 8 “Warrants to Purchase Common Stock”).
The Company will continue to reevaluate the performance conditions and expected vesting of the Warrant on a quarterly basis until all performance conditions have been met.
Before a compound receives regulatory approval, the Company records upfront and milestone payments made to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.
The Company determined that the acquisition of the Compound should be treated as a purchase of in-process research and development. Accordingly, during the year ended December 31, 2016, the Company recorded $3.3 million, which includes an additional $0.3 million payment made in 2015 to Savant, as Research and development expense in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss. In addition, during the year ended December 31, 2016, the Company recorded $0.3 million in connection with the Joint Development Program and recorded $0.1 million in legal fee reimbursement as Research and development expense in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.
On May 26, 2017, the Company submitted its benznidazole IND to FDA which became effective on June 26, 2017. The Company recorded expense of $1.0 million during the year ended December 31, 2017 as Research and development expense related to the milestone achievement associated with the IND being declared effective.
On July 10, 2017 FDA notified the Company that it granted Orphan Drug Designation to benznidazole for the treatment of Chagas disease. The Company recorded expense of $1.0 million during the year ended December 31, 2017 as Research and development expense related to the milestone achievement associated with Orphan Drug Designation.
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. The aggregate cost overages as of December 31, 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 December 31, 2017, 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. See Part I, Item 3 of this Form 10-K for more information about this pending matter.
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 are due and payable in full, including principal and accrued interest on June 30, 2019. As of December 31, 2017 and 2016, the Company has accrued $0.2 million and $0.1 million in interest related to these promissory notes, respectively.
Term Loans
Term Loans consisted of the following at December 31, 2017 and 2016:
| As of December 31, 2017 | | | | | | | | | | | | | | | |
| | | Original Principal Amount | | | Accrued Interest | | | Loan Balance | | | Fees | | | Balance Due | |
| December 2016 Loan | | $ | 3,315 | | | $ | 324 | | | $ | 3,639 | | | $ | 153 | | | $ | 3,792 | |
| March 2017 Loan | | | 5,978 | | | | 452 | | | | 6,430 | | | | 275 | | | | 6,705 | |
| July 2017 Loan | | | 5,435 | | | | 249 | | | | 5,684 | | | | 250 | | | | 5,934 | |
| Bridge Loan | | | 1,500 | | | | 6 | | | | 1,506 | | | | - | | | | 1,506 | |
| Claims Advances Loan | | | 80 | | | | 1 | | | | 81 | | | | - | | | | 81 | |
| Totals | | $ | 16,308 | | | $ | 1,032 | | | $ | 17,340 | | | $ | 678 | | | $ | 18,018 | |
| | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| | | Original Principal Amount | | | Accrued Interest | | | Loan Balance | | | Unamortized Fees | | | Balance Due | |
| December 2016 Loan | | $ | 3,315 | | | $ | 8 | | | $ | 3,323 | | | $ | (307 | ) | | $ | 3,016 | |
On December 21, 2016, the Company entered into a Credit and Security Agreement, as amended on March 21, 2017 and on July 8, 2017 (as amended, the “Credit Agreement”), with BHCMF as administrative agent and lender, and lenders BHC, Cheval and Nomis Bay (collectively the “Lenders”). The Credit Agreement provided for the December 2016 Loan, the March 2017 Loan and the July 2017 Loan (the “Term Loans”).
In accordance with the terms of the Credit Agreement, the Company used the proceeds of the Credit Facility for general working capital, the payment of certain fees and expenses owed to BHCMF and the Lenders and other costs incurred in the ordinary course of business. Dr. Chappell, one of the Company’s former directors, is an affiliate of each of BHCMF, BHC and Cheval.
The Term Loans bore interest at 9.00% and are subject to certain customary representations, warranties and covenants, as set forth in the Credit Agreement.
On December 1, 2017 the Term Loans matured and began bearing interest at the default rate of 14.00%. The Company’s obligations under the Credit Agreement are secured by a first priority interest in all of the Company’s real and personal property, subject only to certain carve outs and permitted liens, as set forth in the agreement.
On December 21, 2017, the Company obtained a $1.5 million bridge loan (the "Bridge Loan") from Cheval. The Bridge Loan bears interest at 14.00% and is treated as a secured loan under the Credit Agreement.
On February 27, 2018 the Term Loans and the Bridge Loans along with all related fees and accrued interest, were extinguished in connection with the Restructuring Transactions described in Note 10.
8. Warrants to Purchase Common Stock
On June 30, 2016, in connection with the benznidazole acquisition the Company issued to Savant a five year warrant (the “Savant Warrant”) to purchase 200,000 shares of the Company’s Common Stock, at an exercise price of $2.25 per share, subject to adjustment. The Savant Warrant is exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain regulatory related milestones. In addition, pursuant to the MDC Agreement, the Company has granted Savant certain “piggyback” registration rights for the shares issuable under the Warrant.
The Company determined the initial fair value of the Savant Warrant to be approximately $0.7 million as of June 30, 2016. The Company reevaluated the performance conditions and expected vesting of the Savant Warrant as of September 30 and December 31, 2016 and recorded total expense of approximately $0.4 million during the year ended December 31, 2016, which is included in Research and development expenses in the accompanying Consolidated Statement of Operations and Comprehensive Loss. The Company reevaluated the performance conditions and expected vesting of the Warrant quarterly during 2017 and recorded a reduction of expense of approximately $0.1 million during the year ended December 31, 2017. The expense reduction was due to a decline in the fair value, which reduction is included in Research and development expenses in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss. Specifically, as a result of the FDA granting accelerated and conditional approval of a benznidazole therapy manufactured by Chemo for the treatment of Chagas disease and awarding Chemo a neglected tropical disease PRV, the Company re-evaluated the final two vesting milestones and concluded that the probability of achievement of these milestones had decreased to 0%.
The Company will continue to reevaluate the performance conditions and expected vesting of the Savant Warrant on a quarterly basis until all performance conditions have been met.
On December 1, 2016 the Company issued a warrant to purchase up to an aggregate of 25,000 shares of common stock at an exercise price of $4.00 per share. The warrant expires on the one year anniversary of its issuance and had a fair value of approximately $0.04 million which is included in General and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss. The warrant provided that if the Company declared a dividend, or made any other distribution of its assets, to holders of common stock, then the warrant holder would be entitled to participate in such dividend or distribution to the same extent that the holder would have participated had it held the number of shares of common stock acquirable upon complete exercise of the warrant. The warrant was issued in connection with the engagement agreement related to certain investor relations activities. The warrant expired on December 1, 2017.
9. Commitments and Contingencies
Operating Leases
In December 2013, the Company entered into a lease agreement for a facility in South San Francisco, California. The lease commenced in July 2014 and was set to expire in 2019. Per the terms of the lease agreement, the Company had the option to terminate the lease after 36 months, subject to additional fees and expenses. In March 2016, the Company entered into a termination agreement (the “Lease Termination Agreement”) related to the lease of this facility. The Lease Termination Agreement, approved by order of the Bankruptcy Court issued March 15, 2016, waived all damages related to early termination of the lease, relieved the Company of March rental expenses and set an effective termination date of March 31, 2016.
Concurrent with the termination of this lease, the Company entered into a lease agreement for a new facility in Brisbane, California. The new lease commenced in April 2016 and was to expire on March 31, 2017. On February 16, 2017, the Company amended the lease to extend the term of the lease for an additional period of eighteen months such that the lease will expire on September 30, 2018.
As of December 31, 2017, future minimum lease payments due under the Company’s lease, are as follows:
Rent expense was $0.3 million for each of the years ended December 31, 2017 and December 31, 2016.
Indemnification
The Company has certain agreements with service providers with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third‑party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. As the Company has not incurred any indemnification losses to date, there were no accruals for or expenses related to indemnification issues for any period presented.
10. Stockholders’ Equity
Restructuring Transactions
On December 21, 2017, the Company entered into a Securities Purchase and Loan Satisfaction Agreement (the “Purchase Agreement”) and a Forbearance and Loan Modification Agreement (the “Forbearance Agreement” and, together with the Purchase Agreement, the “Agreements”), each with the Lenders. The Agreements provide for a series of transactions (the “Restructuring Transactions”) pursuant to which, at the closing of the Restructuring Transactions (the “Transaction Closing”), the Company will: (i) in exchange for the satisfaction and extinguishment of the entire balance of the Term Loans, (a) issue to the Lenders an aggregate of 59,786,848 shares of Common Stock (the “New Lender Shares”), and (b) transfer and assign to an affiliate of Nomis Bay (the “JV Entity”), all of the assets of the Company related to benznidazole (the “Benz Assets”), the Company’s former drug candidate; and (ii) issue to Cheval an aggregate of 32,028,669 shares of Common Stock (the “New Black Horse Shares” and, collectively with the New Lender Shares, the “New Common Shares”) for total consideration of $3.0 million.
Issuance of the New Lender Shares
Under the Purchase Agreement, at the Transaction Closing, the Company will issue to the Lenders the New Lender Shares, of which 29,893,424 shares of Common Stock will be issued to the Black Horse Entities and 29,893,424 shares of Common Stock will be issued to Nomis Bay. The issuance of the New Lender Shares to the Lenders and the assignment of the Benz Assets to the JV Entity will result in the satisfaction and extinguishment of the Company’s outstanding obligations under the Credit Agreement and the cancellation of the Term Loans, other than the Bridge Loan described below. At the Transaction Closing, the Company will no longer be liable for repayment of its outstanding obligations under the Credit Agreement, and all security interests of the Lenders in the Company’s assets will be released.
Transfer of the Benz Assets; Claims Advances
Under the Purchase Agreement, at the Transaction Closing, the Company will transfer and assign the Benz Assets to the JV Entity. The Company also will agree to retain, but provide the JV Entity the benefits of, any Benz Assets which are not permitted to be assigned absent receipt of third-party consents. The JV Entity (at the election of Nomis Bay, which will control the JV Entity) will have 90 days from the date of the Rule 2004 Discovery Order granting the Rule 2004 Discovery Motion (each as defined below), or 180 days from the Transaction Closing if a Rule 2004 Discovery Order is either entered denying the Rule 2004 Discovery Motion or has not been entered on or before the Transaction Closing, to decide, in its sole discretion, whether to elect to keep the Benz Assets (a “Positive Election”). The Benz Assets will revert back to the Company in the event that the JV Entity (at the election of Nomis Bay) elects not to make a Positive Election.
In connection with the transfer of the Benz Assets to the JV Entity, Nomis Bay will pay certain amounts incurred by the Company and the JV Entity after December 21, 2017 in investigating certain causes of action and claims related to or in connection with the Benz Assets (the “Claims”), including the right to pursue causes of action and claims related to potential misappropriation of the Company’s trade secrets by a competitor in connection with such competitor’s submissions to the U.S. Food and Drug Administration. In addition, if the JV Entity (at the election of Nomis Bay) makes a Positive Election: (i) Nomis Bay will assume certain legal fees and expenses owed by the Company to its litigation counsel, and (ii) the Company will be entitled to receive 30% of any amounts realized from the successful prosecution of the Claims or otherwise from the Benz Assets, after Nomis Bay is reimbursed for certain expenses in connection with funding the Claims and after giving effect to any payments that the JV Entity may be required to make to any third parties.
Nomis Bay will have full control, in its sole discretion, over the management of the JV Entity, any development of or realization on the Benz Assets and the prosecution of the Claims. In addition, the Company has agreed that, as soon as practicable after entering into the Agreements, the Company will make appropriate motion to the Bankruptcy Court currently responsible for the Company’s pending Chapter 11 proceeding dating from December 2015 (the “Bankruptcy Court”) to permit discovery in relation to the Claims pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure (the “Rule 2004 Discovery Motion”), and commence such discovery promptly after entry of an order of the Bankruptcy Court authorizing such discovery (the “Rule 2004 Discovery Order”). Nomis Bay has agreed to fund these litigation efforts from the date of the Agreements to the Transaction Closing or termination of the Restructuring Transactions as secured loans under the Credit Agreement (“Claims Advances”). Pursuant to the Forbearance Agreement, the Claims Advances will have priority over the Bridge Loan (as defined below) and all other Term Loans in the Benz Assets. At the Transaction Closing, the entire amount of the Claims Advances will be deemed satisfied and extinguished along with the other Term Loans, and all security interests of Nomis Bay in the Benz Assets will be released.
Issuance of the New Black Horse Shares; Bridge Loan
Under the Purchase Agreement, at the Transaction Closing, the Company will also issue to Cheval the New Black Horse Shares for total consideration of $3.0 million (including extinguishment of the Bridge Loan described below). The Company plans to use the proceeds from the issuance of the New Black Horse Shares for working capital and other costs incurred in the ordinary course of business, including additional fundraising. On December 21, 2017, concurrently with entering into the Agreements, Cheval agreed to make a bridge loan to the Company of $1.5 million (the “Bridge Loan”). Pursuant to the Forbearance Agreement, until the Transaction Closing, the Bridge Loan will be treated as a secured loan under the Credit Agreement. The Bridge Loan will have priority over the Claims Advances and the Term Loans in certain of the Company’s non-benznidazole related assets, including lenzilumab and ifabotuzumab. At the Transaction Closing, the entire amount of the Bridge Loan will be credited to Cheval’s $3.0 million payment obligation and will be converted into New Black Horse Shares and all security interests of Cheval in the non-benznidazole assets will be released.
Bankruptcy Related Common Stock Issuances
As more fully described in Note 2, on June 30, 2016, pursuant to the SPA and in repayment of its obligations under the Credit Agreement, the Company issued an aggregate of 9,497,515 shares of its common stock to the DIP Lenders.
As more fully described in Note 2, on June 30, 2016, the Company issued 327,608 shares of common stock to the plaintiffs in litigation related to the Company’s 2015 private financing transaction in accordance with the settlement stipulation.
As more fully described in Note 2, on June 30, 2016, the Company issued 3,750 shares of common stock to a former director in satisfaction of claims against the Company.
As more fully described in Note 2, on June 30, 2016, the Company issued 300,000 shares of common stock for issuance to the plaintiffs in a class action litigation related to the events surrounding the Company’s former Chairman and Chief Executive Officer.
Other Common Stock Transactions
In June 2014, the Company amended and restated its certificate of incorporation to increase the authorized common stock to 85,000,000 shares. In February 2018, the Company amended and restated its certificate of incorporation to increase the authorized common stock to 225,000,000 shares and authorize 25,000,000 shares of preferred stock.
On November 7, 2016, the Company issued 25,000 shares of restricted common stock to an investor relations consultant. The fair value of the shares issued based on the closing price on November 7, 2016 was $0.1 million and was recorded as stock based compensation in the attached Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2016.
On November 15, 2016, the Company issued 40,000 shares of restricted common stock to a financial advisor in return for services. The fair value of the shares issued based on the closing price on November 15, 2016 was $0.1 million and was recorded as stock based compensation in the attached Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2016. In November 2017, the financial advisor returned the shares for no consideration.
The Company had reserved the following shares of common stock for issuance as of December 31, 2017:
Warrants to purchase common stock | | | 331,193 | |
Options: | | | | |
Outstanding under the 2012 Equity Incentive Plan | | | 2,439,183 | |
Outstanding under the 2001 Equity Incentive Plan | | | 9,200 | |
Available for future grants under the 2012 Equity Incentive Plan | | | 1,367,566 | |
Total common stock reserved for future issuance | | | 4,147,142 | |
Committed Equity Financing Facility
On August 24, 2017, the Company entered into a Common Stock Purchase Agreement, dated as of August 23, 2017 (the “ELOC Purchase Agreement”), with Aperture Healthcare Ventures Ltd. (“Aperture”) pursuant to which the Company may, subject to certain conditions and limitations set forth in the ELOC Purchase Agreement, require Aperture to purchase up to $15 million worth of newly issued shares (the “Put Shares”) of the Company’s common stock, over the 36-month term following the effectiveness of the initial resale registration statement described below (the “Investment Period”). From time to time over the Investment Period, and in the Company’s sole discretion, the Company may present Aperture with one or more notices requiring Aperture to purchase a specified dollar amount of Put Shares, based on the price per share per day over five consecutive trading days (a “Pricing Period”). The per share purchase price for these shares equals the daily volume weighted average price of the common stock on each date during the Pricing Period on which shares are purchased, less a discount of 6.0% based on a minimum price as set forth in the ELOC Purchase Agreement. In addition, in the Company’s sole discretion, but subject to certain limitations, the Company may require Aperture to purchase a percentage of the daily trading volume of common stock for each trading day during the Pricing Period.
Under the ELOC Purchase Agreement, the Company paid Aperture a document preparation fee of $0.02 million by issuing to Aperture 9,315 shares of common stock (the “Fee Shares” and, together with the Put Shares, the “ELOC Shares”).
On August 23, 2017, in connection with the ELOC Purchase Agreement, the Company entered into a Registration Rights Agreement (the "ELOC RRA") with Aperture, pursuant to which the Company granted to Aperture certain registration rights related to the ELOC Shares issuable in accordance with the ELOC Purchase Agreement. Under the ELOC RRA, the Company agreed to use its commercially reasonable efforts to prepare and file with the SEC one or more registration statements for the purpose of registering the resale of the maximum ELOC Shares issuable pursuant to the ELOC Purchase Agreement. The Company agreed to file the initial registration statement with the SEC within 90 days after the date of the ELOC Purchase Agreement and to use commercially reasonable efforts to cause that registration statement to be declared effective within 120 days of the date of the ELOC Purchase Agreement (180 days if the registration statement is reviewed by the SEC).
The actual amount of funds that can be raised under the Aperture facility will depend on the number of shares sold under the ELOC Purchase Agreement and the market value of the Company’s common stock during the Pricing Period of each sale. The Company has not yet filed a registration statement under the ELOC RRA. Sales of common stock under the ELOC Purchase Agreement cannot commence until such registration statement is filed and declared effective by the SEC. There can be no assurance that the Company will use the Aperture facility to raise funds in the future.
2012 Equity Incentive Plan
Under the Company’s 2012 Equity Incentive Plan, the Company may grant shares, stock units, stock appreciation rights, performance cash awards and/or options to employees, directors, consultants, and other service providers. For options, the per share exercise price may not be less than the fair market value of a Company common share on the date of grant. Awards generally vest and become exercisable over three to four years and expire 10 years from the date of grant. Options generally become exercisable as they vest following the date of grant.
In general, to the extent that awards under the 2012 Plan are forfeited or lapse without the issuance of shares, those shares will again become available for awards.
The 2012 Plan will continue in effect for 10 years from its adoption date, unless the Company’s board of directors decides to terminate the plan earlier.
On September 13, 2016, the Board of Directors of the Company approved an amendment to the Company’s 2012 Equity Incentive Plan to increase the number of shares of the Company’s common stock available for issuance under the Plan by 3,000,000 shares and to increase the annual maximum aggregate number of shares subject to stock option awards that may be granted to any one person under the Plan from 125,000 to 1,100,000.
As of December 31, 2017, there were 1,367,566 shares available for grant under the 2012 Equity Incentive Plan.
2001 Equity Incentive Plan
Under the Company’s 2001 Stock Plan (the “2001 Plan”), the Company was able to grant shares and/or options to purchase up to 426,030 shares of common stock to employees, directors, consultants, and other service providers. In connection with the 2012 Plan taking effect, the 2001 Plan was terminated in August 2012. However, the awards under the 2001 Plan outstanding as of the termination of the 2001 Plan continued to be governed by their existing terms.
2012 Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “ESPP”) provided eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions, based on a six-month look-back period, at a price equal to the lesser of 85% of the fair market value of the ordinary shares at either the beginning of the offering period, or the fair market value on the purchase date. The ESPP was structured as a qualified employee stock purchase plan under Section 423 stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and was not subject to the provisions of the Employee Retirement Income Security Act of 1974. There were 21,058 shares initially authorized for issuance under the plan, and the first offering period commenced on June 1, 2014 and ended on October 31, 2014. The second offering period commenced on November 1, 2014 and ended on April 30, 2015. Offerings subsequent to the second offering commence on May 1 and November 1 and end on April 30 and October 31 each year. On May 3, 2016, the ESPP was terminated.
Stock Option Activity
The following table summarizes stock option activity for the years ended December 31, 2017:
| | | Number of Shares | | | Weighted Average Exercise Price (per share)(1) | | | Weighted- Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value (2) | |
| Outstanding at January 1, 2016 | | | 465,401 | | | $ | 19.29 | | | | | | | |
| Granted | | | 1,778,022 | | | | 3.38 | | | | | | | |
| Exercised | | | (5,625 | ) | | | 1.77 | | | | | | | |
| Forfeited | | | (3,416 | ) | | | 5.86 | | | | | | | |
| Expired | | | (398,547 | ) | | | 18.38 | | | | | | | |
| Outstanding at December 31, 26016 | | | 1,835,835 | | | $ | 4.15 | | | | | | | |
| Granted | | | 765,000 | | | | 2.41 | | | | | | | |
| Forfeited | | | (152,365 | ) | | | | | | | | | | |
| Expired | | | (87 | ) | | | 1.99 | | | | | | | |
| Outstanding at December 31, 2017 | | | 2,448,383 | | | $ | 3.67 | | | | 8.7 | | | $ | 11 | |
| Options vested and expected to vest | | | 2,440,058 | | | $ | 3.67 | | | | 8.7 | | | $ | 11 | |
| Exercisable | | | 1,307,236 | | | $ | 4.28 | | | | 8.6 | | | $ | 1 | |
_______________________
(1) | The weighted average price per share is determined using exercise price per share for stock options. |
(2) | The aggregate intrinsic value is calculated as the difference between the exercise price of the option and the fair value of the Company’s common stock for in‑the‑money options at December 31, 2017. |
The stock options outstanding and exercisable by exercise price at December 31, 2017 are as follows:
| | | Stock Options Outstanding | | | Stock Options Exercisable | |
| | | | | | Weighted- | | | | | | | | | | |
| | | | | | Average | | Weighted- | | | | | Weighted- | |
| | | | | | Remaining | | Average | | | | | Average | |
| | | Number of | | | Contractual Life | | Exercise Price | | | Number of | | Exercise Price | |
| Range of Exercise Prices | | Shares | | | In Years | | Per Share | | | Shares | | Per Share | |
| $0.33 - $0.33 | | | 150,000 | | | | 9.68 | | | $ | 0.33 | | | | 12,500 | | | $ | 0.33 | |
| $1.91 - $3.30 | | | 598,353 | | | | 9.10 | | | | 2.94 | | | | 508,352 | | | | 2.95 | |
| $3.38 - $3.38 | | | 1,602,604 | | | | 8.71 | | | | 3.38 | | | | 690,837 | | | | 3.38 | |
| $3.40 - $4.72 | | | 55,625 | | | | 8.65 | | | | 3.52 | | | | 53,750 | | | | 3.48 | |
| $8.24 - $17.36 | | | 9,200 | | | | 0.13 | | | | 9.78 | | | | 9,200 | | | | 9.78 | |
| $42.88 - $48.00 | | | 32,601 | | | | 0.08 | | | | 45.52 | | | | 32,597 | | | | 45.52 | |
| | | | 2,448,383 | | | | 8.72 | | | $ | 3.65 | | | | 1,307,236 | | | $ | 4.28 | |
The total fair value of options vested for the years ended December 31, 2017 and 2016 was $2.1 million and $0.8 million, respectively.
Stock‑Based Compensation
The Company’s stock‑based compensation expense for stock options is estimated at the grant date based on the award’s fair value as calculated by the Black‑Scholes option pricing model and is recognized as expense over the requisite service period. The Black‑Scholes option pricing model requires various highly judgmental assumptions including expected volatility and expected term. The expected volatility is based on the historical stock volatilities of several of the Company’s publicly listed peers over a period equal to the expected terms of the options as the Company does not have a sufficient trading history to use the volatility of its own common stock. To estimate the expected term, the Company has opted to use the simplified method, which is the use of the midpoint of the vesting term and the contractual term. If any of the assumptions used in the Black‑Scholes option pricing model changes significantly, stock‑based compensation expense may differ materially in the future from that recorded in the current period. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience and its expectations regarding future pre‑vesting termination behavior of employees. The Company reviews its estimate of the expected forfeiture rate annually, and stock‑based compensation expense is adjusted accordingly.
The weighted‑average fair value‑based measurement of stock options granted under the Company’s stock plans in the years ended December 31, 2017 and 2016 was $1.54 and $2.41 per share, respectively. The fair value‑ based measurement of stock options granted under the Company’s stock plans was estimated at the date of grant using the Black‑Scholes model with the following assumptions:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| Expected term | | 5-6 years | | | 5-6 years | |
| Expected volatility | | 83 - 88% | | | 85 - 90% | |
| Risk-free interest rate | | 1.8 - 2.1% | | | 1.3 - 1.4% | |
| Expected dividend yield | | 0% | | | 0% | |
Total stock‑based compensation expense recognized was as follows:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| General and administrative | | $ | 1,753 | | | $ | 547 | |
| Research and development | | | 362 | | | | 297 | |
| | | $ | 2,115 | | | $ | 844 | |
At December 31, 2017, the Company had $2.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted‑average period of 1.8 years.
11. Income Taxes
No provision for federal income taxes has been recorded for the years ended December 31, 2017 and 2016 due to net losses and the valuation allowance established.
Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryovers and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
| | | December 31, | |
| | | 2017 | | | 2016 | |
| Deferred tax assets: | | | | | | |
| Net operating losses | | $ | 45,791 | | | $ | 57,903 | |
| Research and other credits | | | 2,178 | | | | 2,121 | |
| Stock based compensation | | | 1,585 | | | | 2,164 | |
| In-Process research and development | | | 1,375 | | | | 1,246 | |
| Other | | | 676 | | | | 761 | |
| Total deferred tax assets | | | 51,605 | | | | 64,195 | |
| | | | | | | | | |
| Valuation allowance | | | (51,605 | ) | | | (64,195 | ) |
| Net deferred tax assets | | $ | - | | | $ | - | |
A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 2017 and 2016 is as follows:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| Statutory rate | | | 34.0 | % | | | 34.0 | % |
| Valuation allowance | | | 57.6 | % | | | (34.8 | )% |
| Deferred tax expense from enacted rate reduction | | | (98.7 | )% | | | - | % |
| Nondeductible stock compensation | | | (0.1 | )% | | | (0.1 | )% |
| Other | | | 7.2 | % | | | 0.9 | % |
| Effective tax rate | | | - | % | | | - | % |
The Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, among other things, permanently lowered the statutory federal corporate rate from 35% to 21%, effective for tax years including or beginning January 1, 2018. Under the guidance of ASC 740, "Income Taxes" ("ASC 740"), the Company revalued its net deferred tax assets on the date of enactment based on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by the new legislation. After reviewing the Company's inventory of deferred tax assets on the date of enactment and giving consideration to the future impact of the lower corporate tax rates and other provisions of the new legislation, the Company's revaluation of its net deferred tax assets resulted in a decrease of $21.6 million and a corresponding reduction in the valuation allowance on net deferred tax assets. Although in the normal course of business the Company is required to make estimates and assumptions for certain tax items which cannot be fully determined at period end, the Company did not identify items for which the income tax effects of the Tax Act have not been completed as of December 31, 2017 and, therefore, considers its accounting for the tax effects of the Tax Act on its deferred tax assets to be complete as of December 31, 2017.
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $12.6 million during 2017 and increased by $10.5 million during 2016.
At December 31, 2017, the Company had federal net operating loss carryforwards of approximately $166 million, which expire in the years 2021 through 2037, and state net operating loss carryforwards of approximately $156 million, which expire in the years 2018 through 2037.
At December 31, 2017, the Company had federal research and development credit carryforwards of approximately $1.3 million, which expire in the years 2022 through 2035 and state research and development credit carryforwards of approximately $2.2 million. The state research and development credit carryforwards can be carried forward indefinitely.
During 2013, the Company completed a Section 382 study in accordance with the Internal Revenue Code of 1986, as amended, and similar state provisions. The study concluded that the Company has experienced several ownership changes since inception. This causes the Company's utilization of its net operating loss and tax credit carryforwards to be subject to substantial annual limitations. These results are reflected in the above carryforward amounts and deferred tax assets. The Company's ability to utilize its net operating loss and tax credit carryforwards may be further limited as a result of subsequent ownership changes. All such limitations could result in the expiration of carryforwards before they are utilized. An ownership change may have occurred during 2015, 2016 and 2017, or all three years and in connection with the Restructuring Transactions described in Note 10. As a result, tax attributes such as net operating losses and research and development credits may be subject to further limitation.
The Company adopted FASB Interpretation ASC 740, Income Taxes (previously Accounting for Uncertainties in Income Taxes - an interpretation of FASB Statement No. 48 ("FIN 48") effective January 1, 2009. FASB ASC 740 requires that the Company recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Balance at December 31, 2015 | | $ | 1,068 | |
| Additions based on tax positions related to prior year | | | (9 | ) |
| Additions based on tax positions related to current year | | | 68 | |
| Balance at December 31, 2016 | | | 1,127 | |
| Additions based on tax positions related to prior year | | | (67 | ) |
| Additions based on tax positions related to current year | | | - | |
| Balance at December 31, 2017 | | $ | 1,060 | |
There were no interest or penalties related to unrecognized tax benefits. Substantially all of the unrecognized tax benefit, if recognized to offset future taxable income would affect the Company’s tax rate. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Because of net operating loss carryforwards, substantially all of the Company’s tax years remain open to federal tax and state tax examination.
The Company files income tax returns in the U.S. federal jurisdiction and California. Federal and California corporation income tax returns beginning with the 2001 tax year remain subject to examination by the Internal Revenue Service and the California Franchise Tax Board, respectively.
12. Employee Benefit Plan
The Company has established a 401(k) tax‑deferred savings plan (the “401(k) Plan”), which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. The Company is responsible for administrative costs of the 401(k) Plan. The Company may, at its discretion, make matching contributions to the 401(k) Plan. No employer contributions have been made to date.
13. Litigation
Bankruptcy Proceeding
The Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code on December 29, 2015. See Note 2 for additional information related to the bankruptcy.
Securities Class Action Litigation
On December 18, 2015, a putative class action lawsuit (captioned Li v. KaloBios Pharmaceuticals, Inc. et al., 5:15-cv-05841-EJD) was filed against the Company in the United States District Court for the Northern District of California (the “Class Action Court”), alleging violations of the federal securities laws by the Company, Herb Cross and Martin Shkreli, the Company’s former Chairman and Chief Executive Officer. On December 23, 2015, a putative class action lawsuit was filed against the Company in the Class Action Court (captioned Sciabacucchi v. KaloBios Pharmaceuticals, Inc. et al., 3:15-cv-05992-CRB), similarly alleging violations of the federal securities laws by the Company and Mr. Shkreli. On December 31, 2015, a putative class action lawsuit was filed against the Company in the Class Action Court (captioned Isensee v. KaloBios Pharmaceuticals, Inc. et al., Case No. 15-cv-06331-EJD) also alleging violation of the federal securities laws by the Company, a former officer and Mr. Shkreli. On April 18, 2016, and amended complaint was filed in the Isensee suit, adding Herb Cross and Ronald Martell as defendants. On April 28, 2016, the Class Action Court consolidated these cases (the “Securities Class Action Litigation”) and appointed certain plaintiffs as the lead plaintiffs. The lead plaintiffs in the Securities Class Action Litigation were seeking damages of $20 million on behalf of all the affected members of the class represented in the Securities Class Action Litigation, (the “Securities Class Action Members”).
On June 15, 2016, a settlement stipulation (the “Securities Class Action Settlement”), was approved by the Bankruptcy Court. Subject to the approval of the Class Action Court, the Securities Class Action Settlement required the Company to issue 300,000 shares of common stock and submit a payment of $0.3 million to the Securities Class Action Members and advance insurance proceeds of $1.25 million to the Securities Class Action Members (collectively, the consideration is the “Securities Class Action Settlement Consideration”). On January 20, 2017, the Class Action Court preliminarily approved the Securities Class Action Settlement and set a final settlement approval hearing for May 11, 2017. Subject to the final approval of the Securities Class Action Settlement, any Securities Class Action Member is entitled to share in the Securities Class Action Settlement Consideration. The Securities Class Action Settlement provides for releases and related injunctions to be granted for the benefit of, among others, the Company, Ronald Martell, Herb Cross and all of the Company’s past, present and future directors, officers and employees, excluding Mr. Shkreli. Alternatively, Securities Class Action Members may exclude themselves from the Securities Class Action Settlement and are thereby not bound by the terms of the Securities Class Action Settlement nor entitled to receive any amount of the Securities Class Acton Settlement Consideration. Such Securities Class Action Members, to the extent they properly exclude themselves from the Securities Class Action Settlement and have timely and properly filed a proof of claim in the bankruptcy case, may have certain rights under the Plan with respect to such claims. Pursuant to the Plan and Confirmation Order, such claims are subordinated to the level of the Company’s common stock that was issued and outstanding when the Company’s bankruptcy case was filed. Such claims are also subject to the Company’s objection.
The Company’s agreement to the Securities Class Action Settlement was not in any way an admission of the Company’s wrongdoing or liability. As of December 31, 2016, the 300,000 shares have been issued and the $0.3 million payment has been made.
PIPE Litigation
On January 7, 2016, certain investors (the “PIPE Claimants”), commenced an adversary proceeding (captioned Gregory Rea, et al. v. KaloBios Pharmaceuticals, Inc., Adv. Pro. No. 16-50001 (LSS)) in the Bankruptcy Court against the Company alleging implied trust theories, breach of contract, fraud and violations of the federal securities laws in connection with the PIPE Claimants’ purchase of the Company’s common stock in the Private Placement (the “PIPE Litigation”). The PIPE Claimants also raised certain other objections to the Company’s bankruptcy proceeding. The PIPE Claimants sought an aggregate total of approximately $6.9 million in damages.
On May 9, 2016, the Bankruptcy Court entered an order approving a settlement stipulation between the Company and the PIPE Claimants (the “Settlement Stipulation”). Under the Settlement Stipulation, in connection with the effectiveness of the Plan, and per the terms of the Settlement Stipulation, the Company became obligated to issue 327,608 shares to the PIPE Claimants and make a payment of $0.3 million to the PIPE Claimants for the purpose of satisfying expenses related to the PIPE Litigation. As of December 31, 2016, the 327,608 shares have been issued and the $0.3 million payment has been made.
Claim by Marek Biestek
Marek Biestek was a director of the Company who, while not a plaintiff in the above described PIPE Litigation, filed a proof of claim alleging damages from the PIPE transaction and filed an objection to the confirmation of the Plan. To resolve his objection to the Plan and his proof of claim, the Company settled with him individually by issuing him 3,750 additional shares of common stock. Mr. Biestek, as a former director of the Company, was excluded from the Securities Class Action Members and therefore received nothing from the Securities Class Action Litigation.
As of December 31, 2016, all of the above claims have been satisfied and shares issued.
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 6 - “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 United States District Court for the District of Delaware, claiming that the action is related to or arises under the bankruptcy court case from which we emerged in July 2016. In re KaloBios Pharmaceuticals, Inc., No. 15-12628-LSS (Bankr. D. Del.). 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 we 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 Superior Court. Briefing on that motion is completed and awaiting determination by the Bankruptcy Court.
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 Superior Court.
On February 13, 2018 Savant made a letter request to the Delaware Superior Court to dissolve the TRO. Also on February 13, 2018, Humanigen filed its Answer and Affirmative defenses to Savant’s Counterclaims. On February 15, 2018 Humanigen filed a letter opposition to Savant’s request to dissolve the TRO and requesting a status conference. There have been no further proceedings in this matter to date.
The $2.0 million in milestone payments due Savant are included in Accrued expenses in the accompanying balance sheet as of December 31, 2017. Recovery of the cost overages from Savant, if any, will be recorded in the period received.
14. Related Party Transactions
On May 24, 2016, the board of directors approved a one-time equity award (the “Equity Award”) to each of Cameron Durrant, Ronald Barliant and David Moradi. On June 30, 2016, in accordance with the Plan, the Company issued an aggregate of 323,155 shares of common stock under the Equity Award. The Company recorded a charge of $1.5 million representing the fair value of the shares issued and classified $0.7 million and $0.8 million as Reorganization items, net and General and administrative expenses, respectively.
On June 30, 2016, in connection with the settlement of the Term Loan, as defined in Note 2 above, 2,115,432 shares of common stock were issued to certain Lenders in repayment of the Company’s debt obligations who were deemed to be affiliates of the Company.
On December 21, 2016, the Company entered into a Credit and Security Agreement, as amended on March 21, 2017 and on July 8, 2017 as more fully described in Note 7, with certain lenders who were deemed to be affiliates of the Company.
On December 21, 2017, the Company entered into a Purchase Agreement and a Forbearance Agreement as more fully described in Note 10, with certain lenders and investors who were deemed to be affiliates of the Company.
15. Subsequent Events
On February 27, 2018 the Company closed the Restructuring Transaction describe in Note 10 and issued 91,815,517 shares of common stock in exchange for extinguishment of all outstanding term loans, accrued interest and fees totaling $18.4 million and received cash proceeds of $1.5 million. In addition, all of the Company’s assets related to benznidazole were transferred to a new joint venture entity as contemplated in the Restructuring Transactions.
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.
EXHIBIT INDEX
| | | | | | | | | | | Filed or |
| | | | | Incorporated by Reference | | Furnished |
| Exhibit No. | | Exhibit Description | | Form | | Date | | Number | | Herewith |
| | | | | | | | | | | |
| 2.1 | | | | 8-K | | June 22, 2016 | | 2.1 | | |
| | | | | | | | | | | |
| 3.1 | | | | 8-K | | July 6, 2016 | | 3.1 | | |
| | | | | | | | | | | |
| 3.2 | | | | 8-K | | August 7, 2017 | | 3.1 | | |
| | | | | | | | | | | |
| 3.3 | | | | 8-K | | February 28, 2018 | | 3.1 | | |
| | | | | | | | | | | |
| 3.4 | | | | 8-K | | August 7, 2017 | | 3.2 | | |
| | | | | | | | | | | |
| 4.1 | | | | S-1 | | January 15, 2013 | | 4.1 | | |
| | | | | | | | | | | |
| 4.2 | | | | 8-K | | June 24, 2013 | | 10.2 | | |
| | | | | | | | | | | |
| 4.3 | | | | 8-K | | December 9, 2015 | | 4.1 | | |
| | | | | | | | | | | |
| 4.4 | | | | 8-K | | December 9, 2015 | | 4.2 | | |
| | | | | | | | | | | |
| 4.5† | | | | 10-Q | | September 23, 2016 | | 4.1 | | |
| | | | | | | | | | | |
| 4.6 | | | | 8-K | | August 25, 2017 | | 4.1 | | |
| | | | | | | | | | | |
| 10.1* | | | | 10-Q | | August 10, 2015 | | 10.2 | | |
| 10.2* | | | | S-8 | | October 14, 2016 | | 10.2 | | |
| | | | | | | | | | | |
| 10.3* | | | | 10-12G | | June 12, 2012 | | 10.8 | | |
| | | | | | | | | | | |
| 10.4* | | | | 10-K | | March 13, 2014 | | 10.37 | | |
| | | | | | | | | | | |
| 10.5* | | | | 8-K | | April 24, 2015 | | 10.1 | | |
| | | | | | | | | | | |
| 10.6* | | | | 10-12G | | June 12, 2012 | | 10.11 | | |
| | | | | | | | | | | |
| 10.7 | | | | 10-12G/A | | September 12, 2012 | | 10.12 | | |
| | | | | | | | | | | |
| 10.8 | | | | 10-12G/A | | August 7, 2012 | | 10.13 | | |
| | | | | | | | | | | |
| 10.9 | | | | 10-12G/A | | August 7, 2012 | | 10.14 | | |
| | | | | | | | | | | |
| 10.10 | | | | 10-Q | | May 8, 2014 | | 10.8 | | |
| | | | | | | | | | | |
| 10.11 | | | | 10-Q | | May 8, 2014 | | 10.9 | | |
| | | | | | | | | | | |
| 10.12† | | | | 10-12G/A | | September 12, 2012 | | 10.16 | | |
| | | | | | | | | | | |
| 10.13† | | | | 10-12G/A | | August 7, 2012 | | 10.17 | | |
| | | | | | | | | | | |
| 10.14†* | | | | 10-K | | March 13, 2014 | | 10.38 | | |
| 10.15 | | | | 10-Q | | November 6, 2014 | | 10.1 | | |
| | | | | | | | | | | |
| 10.16 | | | | 10-Q | | May 11, 2015 | | 10.1 | | |
| | | | | | | | | | | |
| 10.17† | | | | 8-K | | December 9, 2015 | | 10.1 | | |
| | | | | | | | | | | |
| 10.18† | | | | 8-K | | December 16, 2015 | | 10.1 | | |
| | | | | | | | | | | |
| 10.19† | | | | 8-K | | December 9, 2015 | | 10.2 | | |
| | | | | | | | | | | |
| 10.20† | | | | 10-Q | | September 23, 2016 | | 10.1 | | |
| | | | | | | | | | | |
| 10.21 | | | | 8-K | | April 7, 2016 | | 10.1 | | |
| | | | | | | | | | | |
| 10.22 | | | | 8-K | | April 7, 2016 | | 10.2 | | |
| | | | | | | | | | | |
| 10.23 | | | | 8-K | | April 7, 2016 | | 10.7 | | |
| | | | | | | | | | | |
| 10.24 | | | | 8-K | | July 6, 2016 | | 10.1 | | |
| | | | | | | | | | | |
| 10.25† | | | | 10-Q/A | | December 30, 2016 | | 10.9 | | |
| | | | | | | | | | | |
| 10.26* | | | | 10-Q | | September 23, 2016 | | 10.2 | | |
| 10.27* | | | | 10-Q | | November 10, 2016 | | 10.2 | | |
| | | | | | | | | | | |
| 10.28 | | | | 8-K | | December 23, 2016 | | 10.1 | | |
| | | | | | | | | | | |
| 10.29 | | | | 8-K | | December 23, 2016 | | 10.2 | | |
| | | | | | | | | | | |
| 10.30 | | | | 10-K | | March 9, 2017 | | 10.40 | | |
| | | | | | | | | | | |
| 10.31 | | | | 8-K | | March 23, 2017 | | 10.1 | | |
| | | | | | | | | | | |
| 10.32 | | | | 8-K | | July 12, 2017 | | 10.1 | | |
| | | | | | | | | | | |
| 10.33 | | | | 8-K | | August 25, 2017 | | 10.1 | | |
| | | | | | | | | | | |
| 10.34† | | | | | | | | | | Furnished herewith |
| | | | | | | | | | | |
| 10.35+ | | | | | | | | | | Furnished herewith |
| | | | | | | | | | | |
| 10.36+ | | | | | | | | | | Furnished herewith |
| | | | | | | | | | | |
| 21.1 | | | | | | | | | | Furnished herewith |
| | | | | | | | | | | |
| 23.1 | | | | | | | | | | Furnished herewith |
| | | | | | | | | | | |
| 31.1 | | | | | | | | | | Furnished herewith |
| | | | | | | | | | | |
| 31.2 | | | | | | | | | | Furnished herewith |
| | | | | | | | | | | |
| 32.1** | | | | | | | | | | Furnished herewith |
| | | | | | | | | | | |
| 32.2** | | | | | | | | | | Furnished herewith |
101.INS | | XBRL Instance Document | |
| | | |
101.SCH | | XBRL Taxonomy Extension Schema | |
| | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | |
| | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | |
| | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | |
| | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | |
†Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
| | | | | Incorporated by Reference | | Filed or |
| Exhibit No. | | Exhibit Description | | Form+ | | Date | | Number | | Furnished
Herewith |
| 10.21** | | Employment Agreement, dated as of August 24, 2020, by and between the Registrant and Edward P. Jordan. | | | | | | | | X |
| 21.1 | | List of Subsidiaries. | | 10-K | | March 30, 2023 | | 21.1 | | |
| 23.1 | | Consent of Horne LLP. | | 10-K | | March 30, 2023 | | 23.1 | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)or 15d-14(a) of the Securities Exchange Act of 1934, as amended. | | 10-K | | March 30, 2023 | | 31.1 | | |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended. | | 10-K | | March 30, 2023 | | 31.2 | | |
| 31.3 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)or 15d-14(a) of the Securities Exchange Act of 1934, as amended. | | | | | | | | X |
| 31.4 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended. | | | | | | | | X |
| 32.1 | | Certification of Chief Executive Officer pursuant to 18 USC. §1350. | | 10-K | | March 30, 2023 | | 32.1 | | |
| 32.2 | | Certification of Chief Financial Officer pursuant to 18 USC. §1350. | | 10-K | | March 30, 2023 | | 32.2 | | |
| 101.INS | | XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | 10-K | | March 30, 2023 | | 101.INS | | |
| 101.SCH | | Inline XBRL Taxonomy Schema Document | | 10-K | | March 30, 2023 | | 101.SCH | | |
| 101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document | | 10-K | | March 30, 2023 | | 101.CAL | | |
| 101.DEF | | Inline XBRL Taxonomy Definition Linkbase Document | | 10-K | | March 30, 2023 | | 101.DEF | | |
| 101.LAB | | Inline XBRL Taxonomy Label Linkbase Document | | 10-K | | March 30, 2023 | | 101.LAB | | |
| 101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document | | 10-K | | March 30, 2023 | | 101.PRE | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, and 101.PRE). | | 10-K | | March 30, 2023 | | 104 | | |
**Indicates management contract or compensatory plan
plan.***The certifications attached as Exhibits 32.1 and 32.2 that accompaniesaccompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.
†Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
††Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The Company will furnish supplementally an unredacted copy of such exhibit to the Securities and Exchange Commission or its staff upon request.
§ Schedules omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of any omitted schedule upon request by the SEC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Amendment No. 1 to its Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized on April 25, 2023.
| Humanigen, Inc. | |
| | |
| By: | /s/ Cameron Durrant, M.D., MBA | |
Cameron Durrant, M.D., MBA Chief Executive Officer and Chairman of the Board of Directors | |
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