Item 1A. Risk Factors.
Investing in shares of our common stock involves a high degree of risk. Before deciding to invest in our company or deciding to maintain or increase or decrease your investment, you should consider carefully the risks and uncertainties described below. The risks and uncertainties described below and in our other filings with the Securities and Exchange Commission, or SEC are not the only onesrisks we face. If one or more of the following risks are realized, our business, financial condition, and results of operations and prospects could be materially and adversely affected. In that event, the market price offor our common stock could decline, and you may lose allyour entire investment.
Risk Factor Summary
The following is a summary of certain important factors that may make an investment in our Company speculative or part of your investment. In January, 2019, we entered into an Exchange Agreement with Immunic AG, or Immunic, pursuant to which, subject torisky. You should carefully consider the approval of our stockholders and the satisfaction or waiver of the conditionsfuller risk factor disclosure set forth in the Exchange Agreement, Immunic would become a wholly-owned subsidiary of Vital Therapies, or the Company, referred to herein as the Transaction. If the Transaction is completed, which could be as early as the first half of April, the business of Immunic will become the business of the Company. Additional information regarding the Transaction including risk factors related to Immunic can be foundthis Annual Report, in our registration statement on Form S-4 filed with the Securities and Exchange Commission in February 2019.
Risks Relatedaddition to the Transactionother information herein, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes.
•Our pursuit of a COVID-19 drug candidate is at an early stage. We may be unable to produce a drug that successfully treats the virus in a timely manner, if at all.
•The Exchange Ratio is not adjustable based on the market pricecoronavirus pandemic has caused interruptions or delays of our common stock so the Transaction consideration at the closingbusiness plan and may have a greater or lesser value than at the time the Exchange Agreement was signed.
The relative proportion of the Company that the our existing stockholders will own when the Transaction closes will be based on the relative valuations of the Company and Immunic as negotiated by the parties and as specified in the Exchange Agreement. Following the completion of the Transaction, (a) our existing stockholders are expected to own approximately 11% of the common stock of the Company and (b) Immunic shareholders are expected to own approximately 89% of the common stock of the Company, on a fully-diluted basis (including shares issued in a concurrent financing by Immunic), assuming that Immunic closes its concurrent financing immediately prior to the effective time of the Transaction. These estimates are based on the anticipated exchange ratio, or the Exchange Ratio, and are subject to adjustment as provided in the Exchange Agreement. Fluctuations in our stock price will not affect our valuation under the Exchange Agreement or the portion of the company to be retained by our existing stockholders. The terms of the Exchange Agreement provide for adjustments to the relative valuations of both Vital Therapies and Immunic in certain events. For example, prior to the consummation of the Transaction, the Exchange Ratio at the closing of the Transaction may be subject to either (i) an upward adjustment to the extent that our net cash at the effective time of the Transaction is less than $4,200,000 (and as a result, our existing securityholders could own less, and Immunic securityholders could own more, of the Company) or (ii) a downward adjustment to the extent that our net cash at the effective time of the Transaction is greater than $5,200,000 (and as a result, our existing securityholders could own more, and Immunic securityholders could own less, of the Company). In addition, if our net cash at the effective time of the Transaction is less than a specified minimum amount of approximately $1,500,000, the Exchange Ratio at the closing of the Transaction may be subject to an additional upward adjustment (and as a result, our existing securityholders could own less, and Immunic securityholders could own more, of the Company). The minimum specified amount will be $1,500,000 if the Transaction closes on or before March 31, 2019, and the minimum cash will be reduced by $5,000 for each day (including any partial day) after March 31, 2019 until the Transaction closes.
Failure to complete the Transaction may result in the Company paying a termination fee to Immunic and could harm the our common stock price and our future business and operations.
If the Transaction is not completed, we are subject to the following risks:
we may be required to pay Immunic a termination fee of $500,000 and/or up to $275,000 in expense reimbursements;
the price of our common stock may decline and remain volatile;
we will have incurred significant expenses related to the Transaction, such as legal and accounting fees, which we estimate will total approximately $1.4 million, many of which must be paid even if the Transaction is not completed; and
we may be forced to cease its operations, dissolve and liquidate its assets.
In addition, if the Exchange Agreement is terminated and our the board of directors determines to seek another business combination, there can be no assurance that we will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided in the Transaction or any partner at all.
If the conditions to the closing of the Transaction are not met, the Transaction may not occur.
Even if the change of control and related share issuance are approved by our stockholders, specified conditions must be
satisfied or waived to complete the Transaction. These conditions are set forth in the Exchange Agreement, including Immunic’s concurrent financing. We cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Transaction may not occur or will be delayed, and we would lose the intended benefits of the Transaction.
The Transaction may be completed even though material adverse changes may result from the announcement of the Transaction, industry-wide changes and other causes.
In general, either the Company or Immunic can refuse to complete the Transaction if there is a material adverse change affecting the other party between January 6, 2019, the date of the Exchange Agreement, and the closing of the Transaction. However, certain types of changes do not permit either party to refuse to complete the Transaction, even if such change could be said to have a material adverse effect on the Company or Immunic, including:
any rejection by a governmental body of a registration or filing by the Company or Immunic relating to their respective intellectual property rights;
any change in the cash position of the Company or Immunic that results from operations in the ordinary course of business;
conditions generally affecting the industries in which the Company or Immunic participates or the U.S. or global economy or capital markets as a whole, to the extent that such conditions do not have a disproportionate impact on the Company or Immunic and their respective subsidiaries, taken as a whole;
any failure by Immunic to meet internal projections or forecasts on or after the date of the Exchange Agreement, provided that any such effect, change, event, circumstance or development causing or contributing to any such failure to meet projections or forecasts may constitute a material adverse effect of the Company or Immunic and may be taken into account in determining whether a material adverse effect has occurred;
our failure to meet internal projections or forecasts or third-party predictions for any period ending (or for which results are released) on or after the date of the Exchange Agreement or any change in the price or trading volume of the our common stock, provided that any such effect, change, event, circumstance or development causing or contributing to any such failure to meet projections or forecasts may constitute a material adverse effect and may be taken into account in determining whether a material adverse effect has occurred;
the execution, delivery, announcement or performance of obligations under the Exchange Agreement or the announcement, pendency or anticipated consummation of the Transaction or Immunic’s concurrent financing;
a transfer, sale, lease, disposition or license of our assets that is permitted under the Exchange Agreement;
any natural disaster or any acts of terrorism, sabotage, military action or war or any escalation or worsening thereof; or
any changes after the date of the Exchange Agreement in U.S. GAAP or applicable laws.
If adverse changes occur and we still complete the Transaction, our stock price following the closing of the Transaction may suffer. This in turn may reduce the value of the Transaction to our stockholders.
Some of our executive officers and directors have interests in the Transaction that are different from yours and that may influence them to support or approve the Transaction without regard to your interests.
Some of our officers and directors are parties to arrangements that provide them with interests in the Transaction that are different from yours, including, among others, service as an officer or director of the company following the closing of the Transaction, severance and retention benefits, the acceleration of equity award vesting, and continued indemnification.
The market price of our common stock following the Transaction may decline as a result of the Transaction.
The market price of our common stock may decline as a result of the Transaction for a number of reasons, including if:
investors react negatively to the prospects of our business and prospects following the closing of the Transaction;
the effect of the Transaction on our business and prospects following the closing of the Transaction is not consistent with the expectations of financial or industry analysts; or
we do not achieve the perceived benefits of the Transaction as rapidly or to the extent anticipated by stockholders or financial or industry analysts.
Our stockholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the Company following the closing of the Transaction as compared to their current ownership and voting interest.
After the completion of the Transaction, our stockholders will own a smaller percentage of the Company than their ownership prior to the Transaction. Immediately after the Transaction, it is currently estimated that Immunic securityholders will own approximately 89% of the common stock of the Company, with our current stockholders, whose shares of our common stock will remain outstanding after the Transaction, will own approximately 11% of the common stock of the Company on a fully-diluted basis, calculated on a pro forma basis including after giving effect to (i) the issuance of common shares by Immunic immediately prior to the effective time of the Transaction pursuant to a concurrent investment, and (ii) the Transaction. These estimates are based on the anticipated Exchange Ratio and are subject to adjustment as provided in the Exchange Agreement.
In addition, the five member board of directors of the Company will initially consist of four individuals with prior affiliations with Immunic and Dr. Duane D. Nash, currently Chief Executive Officer, President and a director of the Company. Consequently, our current stockholders will exercise substantially less influence over the management and policies of the Company following the closing of the Transaction.
During the pendency of the Transaction, we may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Exchange Agreement, which could adversely affect our businesses.
Covenants in the Exchange Agreement impede our ability to make acquisitions, subject to specified exceptions relating to fiduciary duties or complete other transactions that are not in the ordinary course of business pending completion of the Transaction. As a result, if the Transaction is not completed, we may be at a disadvantage to their competitors during that period. In addition, while the Exchange Agreement is in effect, we are generally prohibited from soliciting, initiating, encouraging or entering into specified extraordinary transactions, such as a merger, sale of assets or other business combination, with any third party, subject to specified exceptions, even if any such transactions could be favorable to us.
Certain provisions of the Exchange Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the Exchange Agreement.
The terms of the Exchange Agreement prohibit us from soliciting competing proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when our board of directors determines in good faith, after consultation with its independent financial advisor, if any, and outside counsel, that an unsolicited competing proposal constitutes, or would reasonably be expected to result in, a superior competing proposal and that failure to take such action would be reasonably likely to result in a breach of the fiduciary duties of the board of directors. In addition, if we terminate the Exchange Agreement under specified circumstances, including terminating because of a decision of a board of directors to recommend a superior competing proposal, we may be required to pay Immunic a termination fee of $500,000 and/or up to $275,000 in expense reimbursements. This termination fee may discourage third parties from submitting competing proposals to our stockholders, and may cause our board of directors to be less inclined to recommend a competing proposal.
Because the lack of a public market for Immunic’s capital stock makes it difficult to evaluate the fairness of the Transaction, we may pay more than the fair market value of Immunic’s capital stock.
The outstanding capital stock of Immunic is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Immunic’s capital stock. Because the percentage of the Company’s equity to be issued to Immunic shareholders was determined based on negotiations between the parties, it is possible that we may pay more than the aggregate fair market value for Immunic’s capital stock.
Risks Related to Our Evaluation of Strategic Alternatives
Our activities to evaluate and pursue strategic alternatives may not be successful.
In September 2018, we voluntarily discontinued our development of our product candidate,the ELAD® System, or ELAD, in view of the results of our VTL-308 phase 3 clinical trial in the U.S. and Europe. We have engaged Ladenburg Thalmann & Co. Inc., as a financial advisor to assist us in pursuing strategic alternatives, and on January 7, 2019, we announced that we had entered in to the Exchange Agreement. We continue to evaluate additional strategic alternatives in order to enhance stockholder value, including the possibility of a sale of our assets related to the ELAD System, and we have suspended many of our research and development activities to reduce operating expenses while we evaluate and pursue these opportunities. We have and expect to continue to devote significant time and resources to identifying and evaluating strategic alternatives, including the Transaction; however, there can be no assurance that the Transaction or other such activities will enhance stockholder value. In addition, potential strategic transactions that require stockholder approval, such as the
Transaction and the related matters stockholders are being asked to approve, may not be approved by our stockholders. Further, any strategic transaction that is completed ultimately may not deliver the anticipated benefits or enhance stockholder value.
Any strategic transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:
•exposure to unknown liabilities;
•incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;
•higher than expected acquisition and integration costs;
•write downs of assets or goodwill or impairment charges;
•increased amortization expenses;
difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;
impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership;
the inability to sell assets or to reduce its leased space; and
the inability to retain key employees of our company or any acquired businesses.
Accordingly, although there can be no assurance that we will undertake or successfully complete any strategic transactions of the nature described above, any transactions that we do complete may be subject to the foregoing or other risks and could have a material adverse effect on our business.
•Immunic has a limited operating history with its current business financial conditionplan, has incurred significant losses since 2016, anticipates that it will continue to incur significant and prospects.increasing losses for the foreseeable future and may never achieve or maintain profitability. The absence of any commercial sales and Immunic’s limited operating history make it difficult to assess its future viability.
If we do•Immunic currently has no source of product sales revenue and may never be profitable.
•Immunic will require substantial additional funding, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force Immunic to delay, limit, reduce or terminate its product development, other operations or future commercialization efforts.
•Raising additional capital may cause dilution to Immunic’s existing stockholders, restrict its operations or require Immunic to relinquish rights to its technologies or product candidates.
•The marketing approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming and inherently unpredictable, and if Immunic is ultimately unable to obtain marketing approval for its product candidates, its business will be substantially harmed.
•Clinical drug development involves a lengthy and expensive process with an uncertain outcome.
•Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not successfully consummate a strategic transaction, our boardnecessarily predictive of directorsfuture results, any product candidate Immunic advances through clinical trials may decide to pursue a dissolution and liquidationnot have favorable results in later clinical trials or receive marketing approval.
•Immunic’s product candidates may cause undesirable adverse effects or have other properties that could delay or prevent their marketing approval, limit the commercial profile of our company. In such an event, the amount of cash available for distribution to our stockholders will depend significantly on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
There can be no assurance that the Transactionapproved label or any other strategic transactions we may identify or undertake, including the possible sale of our assets, will result in one or more successfully consummated transactions. If the Transactionsignificant negative consequences following marketing approval, if obtained.
•Immunic is not completed, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as we fund our operations while we continue to pursue our strategic alternatives. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of our company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include (i) regulatory and clinical obligations; (ii) obligations under our employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of our company; (iii) potential litigation against us, and other various claims and legal actions arising in the ordinary course of business; and (iv) non-cancelable facility lease obligations. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our company. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of our company.
Our business to date has been almost entirely dependent on the success of ELADits product candidates, which are in the early stages of clinical development. Immunic cannot give any assurance that it will generate data for any of its product
candidates sufficient to receive regulatory approval in its planned indications, which will be required before they can be commercialized.
•Due to Immunic’s limited resources and we have recently decidedaccess to discontinue furthercapital, it must decide to prioritize development of ELAD in the U.S.its current product candidates for certain indications and Europe,at certain doses. These decisions may prove to have been wrong and devote significant time and resources to identifying and evaluating strategic alternatives, which may not be successful.
To date, we have invested substantially all of our efforts andmaterially adversely affect Immunic’s business, financial resources into the research and development of the ELAD System, which was our only product candidate to enter clinical trials. In September 2018, we voluntarily discontinued our development of ELAD in the U.S. and Europe in view of thecondition, results of our VTL-308 phase 3 clinical trial.operations and prospects.
We are evaluating•If Immunic fails to attract and pursuing strategic alternatives with a goal to enhance stockholder value , including the Transactionretain key management and the potential sale of assets, and have suspended most of our research and development activities, other than our early stage normothermic liver perfusion program, to reduce operating expenses while we focus on closing the Transaction and pursuing other strategic alternatives with respect to the sale of assets.
There canscientific personnel, it may be no assurance that our efforts to sell certain of our assets will result in any definitive agreement to buy such assets or if made, what the terms thereof will be or that the Transaction or any asset sale will be approved or consummated. In addition, there can be no assurance that any transactions, involving our company and/or assets, that is consummated would enhance stockholder value. There also can be no assurance that we will conduct additional research or development activities in the future.
We are substantially dependent on our remaining employees to facilitate the consummation of a strategic transaction. We could lose such key employees, in particular, as a result of the VTL-308 data and the reduction in our workforce that we announced in September 2018.
In September 2018, we instituted across the board expense reductions to conserve capital, including a workforce reduction of approximately 85%. Our cash conservation activities may yield unintended consequences, such as attrition beyond our planned reduction in workforce and reduced employee morale, which may cause remaining employees to seek alternative employment. Our abilityunable to successfully complete a strategic transaction, includingdevelop or commercialize its product candidates.
•Even if Immunic obtains the Transaction, depends in large part on our ability to retain certain of our remaining personnel, particularly Duane D. Nash M.D., our Chief Executive Officer and President, Robert A. Ashley, our Executive Vice President and Chief Scientific Officer, Michael V. Swanson, our Executive Vice President and Chief Financial Officer, and John M. Dunn, our General Counsel and Secretary. Despite our efforts to retain these employees, one or more may terminate their employment with us on short notice. The loss of the services of any of these employees could potentially harm our ability to evaluate and pursue strategic alternatives, as well as fulfill our reporting obligations as a public company.
Competition among biotechnology companies for qualified employees is intense, and the ability to retain our key employees is critical to our ability to effectively manage our resources and to consummate a strategic transaction. Although we have suspended most of our research and development activities, if we resume the development of ELAD outside the U.S. or of new therapeutic products, such development requires expertise from a number of different disciplines, some of which are not widely available. The failure of the VTL-308 clinical trial will likely make it more challenging to retain qualified personnel and difficult to recruit personnel in the future, if necessary. The inability to recruit or loss of the services of any executive, key employee, consultant or advisor may impede our ability to identify and execute on a strategic path forward.
Our key employees have a significant amount of know-how and experience in our company, and the loss of one or more of them could have a material and adverse effect on our operations or ability to consummate a strategic transaction. While we have taken steps to retain our employees, including the granting of equity awards, paying competitive salaries and implementing appropriate bonus programs, these factors may not be enough to retain the employees that we need, particularly in light of the recent failure of our VTL-308 clinical trial and the scaling back of our operations.
The loss of the services of existing personnel or the failure to recruit additional, suitable key scientific, managerial, clinical,required regulatory operational and other personnel in a timely manner, if required, could harm our business. We may experience difficulty in hiring and retaining highly-skilled employees with appropriate qualifications as needed, particularly in light of the recent failure of our VTL-308 clinical trial. If we fail to retain and motivate our current personnel or fail to attract new personnel, our business and future growth prospects and our ability to consummate a strategic transaction would be harmed.
Furthermore, while we have entered into employment letters with each of our executive officers, any of them could leave our employment at any time, as all of our employees are “at will” employees. It can be challenging to retain qualified personnel. The inability to recruit or loss of the services of any executive, key employee, consultant or advisor may impede our ability to identify and execute on our strategy.
Risks Related to Our Business
We were dependent on the success of the ELAD System, and we do not expect be able to complete the development of, successfully obtain regulatory or marketing approval for, or successfully commercialize, the ELAD Systemapprovals in the United States orand other territories, the U.S., or Europe.
We are subject to allcommercial success of the uncertainties and complexities affecting a clinical-stage, combination product, biologic and medical device company. We have not successfully completed clinical development for any of the ELAD System’s potential indications in the U.S. or Europe where the ELAD System is regulated as a combination biologic and medical device, and as a combined somatic cell Advanced Therapy Medicinal Product, respectively. In September 2018, we announced that our VTL-308 clinical trial failed to meet both its primary and secondary endpoints. In light of these results, we do not believe that the ELAD System can be approved in the U.S. or Europe, if ever, without additional clinical trials that would require substantial capital and time to complete. Consequently, we have ceased any further development of the ELAD System and are exploring strategic options including the potential sale of these assets. We do not have any other product candidates in our near-termwill depend on market awareness and acceptance of its product pipeline, other than our normothermic liver perfusion program whichcandidates.
•Immunic currently has limited marketing and sales experience. If Immunic is early in development.
Our VTL-308 clinical trial was performed in certain subjects with severe alcoholic hepatitis, or sAH. Any additional indications we electunable to pursue in future trials will require the initiation and completion of additional phase 3 clinical trials demonstrating safety and efficacy for each such indication. For example, even prior to our VTI-208 clinical trial, the Food and Drug Administration, or FDA, had noted its view that preliminary clinical evidence did not indicate that the ELAD System may demonstrate a substantial improvement over standard of care. Since then, our VTI-208 and VTL-308 clinical trials failed to meet both their primary and secondary endpoints. There is no guarantee that any potential future clinical trials would be completed in a timely fashion or would succeed. Further, there can be no assurance that any potential future clinical trials will be timely, successful, or that regulators will approve the ELAD System in a timely manner, or at all. Finally, even if clinical testing of the ELAD System is resumed in the future and the ELAD System is subsequently proven to be safe and effective and ultimately receives regulatory approval, there is no guarantee that its commercialization would be successful.
We are a clinical-stage company with no approved products, which makes assessment of our future viability and performance difficult.
We are a clinical-stage company, and we have no approved products or revenues from the sale of products. Our operations to date have been limited to organizing, staffing and financing our company, applying for patent rights, manufacturing on a clinical scale, undertaking clinical trials, and engaging in research and development. Our VTL-308, VTI-208, VTI-210 and VTI-212 trials failed to reach both their primary and secondary endpoints or were terminated. We have not yet demonstrated an ability to obtain regulatory approval, manufacture products on a commercial scale, or conduct theestablish sales and marketing activities necessary for successful product commercialization. As a result, there is limited information about us for investors to use when assessing our future viability and our potential to successfully develop product candidates, conduct clinical trials, manufacture our products on a commercial scale, obtain regulatory approval or profitably commercialize any approved products.
We have not obtained regulatory approval for any of our product candidates in the U.S. or any other country, and we do not believe that the ELAD System can obtain regulatory approval in the U.S. or Europe, if ever, without additional clinical trials that would require substantial capital and time to complete.
We must obtain regulatory approval for each indication we seek before we can market and sell the ELAD System in a particular jurisdiction for such indication. To date, we have not applied for or received the regulatory approvals required for the commercial sale of the ELAD System for any indication in the United States or Europe. In light of the clinical results from our VTL-308 clinical trial, we do not believe that the ELAD System can be approved in the U.S. or Europe, if ever, without additional clinical trials that would require substantial capital and time to complete.
Although we have suspended our research and development activities related to the ELAD System, if we resume development, and if we were able to secure marketing approval, our commercial success would be determined by our ability to obtain acceptable pricing and reimbursement for the ELAD System.
Although we have suspended our research and development activities related to the ELAD System, if we resume the development of the ELAD System, therapies such as the ELAD System are paid for primarily by private and government insurance, although in some markets payment may be made by private individuals and their families. Reimbursement policies and decisions for medical products is a highly bureaucratic, politicized and regulated process that includes consideration of factors such as cost effectiveness and meaningful patient benefit. Government and third-party payors are under great pressure to reduce costs. Furthermore, there are no therapies approved to restore liver function and the lack of an established reimbursement structure introduces additional uncertainty with regard to reimbursement for the ELAD System. Although we do not expect to pursue regulatory approval of the ELAD System at this time, we believe it may be difficult to sustain a commercial price outside of the U.S. at or above the commercial price within the U.S. In addition, we will have no control over the reimbursement or conditions that may be set by the government or private insurers, if any, assuming we were able to secure marketing approval for the ELAD System. In markets where payment would be made by private individuals and their families, such private payors may not be prepared to pay an acceptable price.
Although we have suspended our research and development activities related to the ELAD System, if we resume development, and if we are unable to implement our sales, marketing, distribution, training and support strategies in the U.S. and Europecapabilities or enter into agreements with third parties to perform these functionsmarket and sell its product candidates, Immunic may be unable to generate any revenue.
•If Immunic fails to enter into strategic relationships or collaborations, its business, financial condition, commercialization prospects and results of operations may be materially adversely affected.
•Immunic faces substantial competition, which may result in markets outsideothers discovering, developing or commercializing products before, or more successfully, than Immunic does.
•The size of the U.S.potential market for our product candidates is difficult to estimate and, Europe, we wouldif any of our assumptions are inaccurate, the actual markets for our product candidates may be smaller than our estimates.
•Immunic may be unable to realize the potential benefits of any collaboration.
•Immunic’s proprietary rights may not adequately protect its technologies and product candidates.
•Immunic may not be able to effectively commercializeprotect its intellectual property rights throughout the ELAD System orworld.
•Intellectual property rights do not protect against all potential threats to Immunic’s competitive advantage.
•Immunic incurs significant costs and demands upon management as a result of complying with the laws and regulations affecting public companies.
•The market price of Immunic’s common stock is volatile.
•Immunic does not anticipate that it will pay any other product candidatescash dividends in the foreseeable future.
Risks Related to COVID-19
Our pursuit of a COVID-19 drug candidate is at an early stage. We may be unable to produce a drug that successfully treats the virus in a timely manner, if at all.
In response to the global coronavirus pandemic and may not reach profitability.
Althoughbased on preclinical data, we have suspendedstarted and are in the process of conducting an antiviral clinical trial for IMU-838, our researchlead product candidate and a selective oral DHODH inhibitor. Our clinical development activities, ifprogram for IMU-838 as a potential treatment option for patients with COVID-19 is in early stages, we resumemay be unable to recruit enough patients based on limited disease prevalence in the development of the ELAD System or of any other product candidates,
countries in which we are recruiting trial participants, we may not be able to effectively commercializeshow any potentialactivity of IMU-838 in COVID-19, our COVID-19 drug candidate may not prove to be safe for the treatment of COVID-19, and we may be unable to produce a drug that successfully treats COVID-19 in a timely manner, if at all. We are also committing financial resources and personnel to the development of a drug to target COVID-19, which may cause delays in or otherwise negatively impact our other development programs. Our business could be negatively impacted by our allocation of significant resources to a global health threat that is unpredictable and could rapidly dissipate or against which, our drug, if developed, may not be effective or safe. Furthermore, there are a number of preventative vaccines in development with two having received an Emergency Use Authorization approval and others potentially nearing regulatory approval. Additionally, the United States and other countries throughout the world have recently begun to approve and commence distributing COVID-19 vaccines in their jurisdictions. The broad distribution of COVID-19 vaccines may limit the availability of governmental and quasi-governmental funding and limit the commercial viability of any approved product candidate for the treatment of COVID-19.
The coronavirus pandemic has caused interruptions or delays of our business plan and may have a significant adverse effect on our business.
In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada, the European Union and China, have imposed unprecedented restrictions on travel, quarantines and other public health safety measures. The extent to which the pandemic may continue to impact our business will depend on future developments, which are highly uncertain and cannot be predicted, but the development of clinical supply materials could be delayed and enrollment of patients in our ongoing studies may be delayed or suspended, as hospitals and clinics in areas where we are conducting trials have shifted resources to cope with the COVID-19 pandemic and may limit access or close clinical facilities due to the COVID-19 pandemic. Additionally, if our trial participants are unable to travel to our clinical study sites as a result of quarantines or other restrictions resulting from the COVID-19 pandemic, we may experience higher discontinuation rates or delays in our clinical studies, as occurred in our investigator-sponsored trial of IMU-838 in PSC being conducted at the Mayo Clinic. Government-imposed quarantines and restrictions may also require us to temporarily terminate our clinical sites. Furthermore, if we determine that our trial participants may suffer from exposure to COVID-19 as a result of their participation in our clinical trials, we may voluntarily terminate certain clinical sites as a safety measure until we reasonably believe that the likelihood of exposure has subsided. As a result, our expected development timelines for our product candidates may be negatively impacted. In addition, the COVID-19 pandemic has affected and may continue to affect the operations of the U.S. Food and Drug Administration and other regulatory authorities, which could result in delays of reviews and approvals with respect to our product candidates. Our technology is newWe cannot predict the continuing impact of the COVID-19 pandemic, as consequences of such an event are highly uncertain and complex,subject to change. We do not yet know the full extent of potential delays or impacts that have affected and potential customers willmay continue to affect our business, or our clinical studies in general; however, the COVID-19 pandemic may materially disrupt or delay our business operations, further divert the attention and efforts of the medical community to coping with COVID-19, disrupt the marketplace in which we operate, and/or have limited knowledge of, or experience with, such a product. In addition, wematerial adverse effect on our operations.
Additionally, Phase 1 trials are ongoing for drug candidates IMU-935 and IMU-856 in Australia. Such Phase 1 trials are customarily conducted in healthy volunteers who have no related salespotential benefits from participation in such trials. Hence, Phase 1 trials usually are subject to more strict evaluation and marketing experience either domesticallyassessments during pandemic periods. Such Phase 1 trials may for that reason be interrupted or abroad.delayed.
Moreover, the various precautionary measures taken by many governmental authorities throughout the world in order to limit the spread of COVID-19 has had and may continue to have an adverse effect on the global markets and global economy generally, including on the availability and pricing of employees, resources, materials, manufacturing and delivery efforts and other aspects of the global economy. There have been business closures and a substantial global reduction in economic activity as a result of COVID-19. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on the global economy. We have not commercialized any products anywhere. Our commercial success would dependcannot currently predict the duration of the pandemic or its impact on global or regional economic activity. The COVID-19 pandemic could materially disrupt our business and operations, interrupt our sources of supply, hamper our ability to marketraise additional funds or sell our securities, continue to slow down the overall economy or curtail consumer spending.
Risks Related to Immunic’s Business and receive adequate reimbursement. This success would also depend on our ability to obtain and maintain adequate pricing.Financial Condition
Further, we do not have
Immunic has a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of biologic products and medical devices. To achieve commercial success of any product candidates, assuming we were to obtain marketing approval, we would need to establish a sales and marketing organization, and we are unable to currently predict how we would market any such product candidates.
We havelimited operating history with its current business plan, has incurred significant losses since our inception and expect2016, anticipates that it will continue to incur significant and increasing losses infor the foreseeable future and may never become profitable. Even if we ultimately achieve profitability,or maintain profitability. The absence of any commercial sales and Immunic’s limited operating history make it may not be sustained, and we may require additional capital.difficult to assess its future viability.
We are a clinical-stage company, and clinical development of a novel therapy
Immunic is a highly speculative undertaking. We have incurred significant losses in each fiscal year since our inception, includingdevelopment-stage pharmaceutical company with a limited operating history with its current business plan. Immunic’s net losses of $41.5 million for the twelve months ended December 31, 2018 and $52.1 million, $41.0were $44.0 million and $52.0$34.9 million for the years ended December 31, 2017, 20162020 and 2015,2019, respectively. As of December 31, 2018, we2020, Immunic had an accumulated deficit of $337.4$103.9 million Even though we discontinued mostto date and has not generated any revenue from its current product candidates. Moreover, Immunic AG, the company’s operating subsidiary, has only a limited operating history upon which stockholders can evaluate its business and prospects, is not profitable and has incurred losses in each year since its inception in 2016. In addition, Immunic has limited experience and has not yet demonstrated an ability to successfully overcome many of ourthe risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biotechnology industry.
Immunic has devoted substantially all of its financial resources to identify, acquire and develop its product candidates, including providing general and administrative support for its operations. Immunic expects its losses to increase as it conducts clinical trials and continues to develop its lead product candidates. Immunic expects to invest significant funds into the research efforts in September 2018, we expectand development of its current product candidates to continuedetermine the potential to spend a considerableadvance these product candidates to regulatory approval. To date, Immunic has financed its operations primarily through the sale of equity securities. The amount of our resources on strategic opportunities. We continue to incur expenses related to the pursuit of strategic alternatives, including the Transaction, and we expect these expenses will increase as we work towards obtaining stockholder approval and closing of the Transaction, and as we continue to evaluate opportunities to sell assets. We also may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of ourits future net losses will depend, in part, on our decisions onthe rate of its future expenditures and its ability to obtain funding through equity or debt financings, strategic alternatives. Our prior losses and expected future losses have had and will continuecollaborations or grants.
Immunic does not expect to have an adverse effect on our stockholders’ equity and working capital.
We anticipate incurring additional losses and negative cash flow from operations for the foreseeable future. We are not currently generating revenues, and we cannot estimate with precision the extent of our future losses. We do not currently have any products that are available for commercial sale, we may never generate significant revenue from selling productsunless and until it is able to obtain marketing approval for, and successfully commercialize, any current or achieve profitabilityfuture product candidate. However pharmaceutical product development is a highly speculative undertaking and we may never resume the developmentinvolves a substantial degree of the ELAD System or complete the development of any other product candidates. We do not haverisk. In addition, if Immunic obtains regulatory approval to market a product candidate, that has been approved for marketingits future revenue will depend upon the size of any markets in the United States or elsewhere, and we may never receive any such approval. Our two most recent clinical trials, VTI-208 and VTL-308, failed to reach both their primary and secondary endpoints. Our only product in development is our normothermic liver perfusion program, which is too early in development to assess its product value or potentialcandidates may receive regulatory approval, and its ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share for its product sales. If we do develop or acquire othercandidates. Even if Immunic eventually obtains adequate market share for its product candidates, we would expect our researchto the extent they receive regulatory and development expensesmarket approval, the potential markets for its product candidates are may not be large enough for Immunic to increase significantly. If we do acquire a new product candidate and successfully develop and obtain regulatory approval for it, we also expect to incur significant sales and marketing expenses.become profitable.
We have suspended most of our research and development activities to reduce operating expenses while we continue to pursue closing of the Transaction and efforts to sell assets. We expect
Immunic expects to continue to incur significant expenses and increasing operating losses for the foreseeable future, and its expenses will increase substantially if and as we evaluate these strategic alternatives and continue ourImmunic:
•continues the clinical development of its product candidates;
•continues efforts to closediscover, develop and/or acquire new product candidates;
•undertakes the Transaction.manufacturing of its product candidates for clinical development and, potentially, commercialization, or increases volumes manufactured by third parties;
As a result of these factors, we expect to continue to incur significant operating losses•advances its programs into larger, more expensive clinical trials;
•initiates additional preclinical, clinical, or other trials or studies for its product candidates;
•seeks regulatory and negative cash flowsmarketing approvals and reimbursement for the foreseeable future. These losses have had and will continue to have a material adverse effect on our stockholders’ equity, financial position, cash flows and working capital. We are uncertain whenits product candidates;
•experiences any delays or if we will achieve profitability and, if so, whether we will be able to sustain it. Our ability to produce revenue and achieve profitability is dependent on our ability to completeencounters issues with the development and process for regulatory approval of its product candidates such as safety issues, clinical trial accrual delays, longer follow-up for planned studies, additional major studies or supportive studies necessary to support marketing approval;
•establishes a sales, marketing and distribution infrastructure to commercialize any products for which Immunic may obtain necessary regulatory approvals, and to successfully manufacturemarketing approval and market products. We cannot assure youfor itself;
•makes milestone, royalty or other payments under any third-party license agreements;
•seeks to maintain, protect and expand its intellectual property portfolio;
•seeks to retain current skilled personnel and attract additional personnel; and
•adds operational, financial and management, and information systems personnel, including personnel to support our product development and commercialization efforts.
Further, the net losses Immunic incurs may fluctuate significantly from quarter to quarter and year to year, such that we will evera period-to-period comparison of its results of operations may not be profitable even if we successfully enter into strategic transactions or commercialize products.a good indication of its future performance. Failure to become and remain profitable orwould decrease the perception that we may never become profitable would adversely affectvalue of the market price of our common stockcompany and ourcould impair its ability to raise capital, andexpand its business, maintain its development efforts, expand its pipeline of product candidates or continue its operations.
Immunic currently has no source of product sales revenue and may never be profitable.
Although we have suspended most
Immunic has not generated any revenues from commercial sales of ourany of its current product candidates. Immunic’s ability to generate product revenue depends upon its ability to successfully commercialize these product candidates or other product candidates that it may develop, in-license or acquire in the future. Immunic does not anticipate generating revenue from the sale of products for the foreseeable future. Immunic’s ability to generate revenue from its current or future product candidates also depends on a number of additional factors, including its ability to:
•successfully complete research and clinical development activities,of current and future product candidates;
•establish and maintain supply and manufacturing relationships with third parties, and ensure adequate and legally compliant manufacturing of product candidates;
•obtain regulatory approval from relevant regulatory authorities in jurisdictions where Immunic intends to market its product candidates;
•launch and commercialize any product candidates for which Immunic obtains marketing approval, and if we resumelaunched independently, successfully establish a sales force and marketing and distribution infrastructure;
•obtain coverage and adequate product reimbursement from third-party payors, including government payors;
•achieve market acceptance for any approved products;
•establish, maintain and protect its intellectual property rights; and
•attract, hire and retain qualified personnel.
In addition, because of the numerous risks and uncertainties associated with clinical product development, including that Immunic’s product candidates may not advance through development or achieve regulatory approval, Immunic is unable to predict the timing or amount of any potential future product sale revenues. Immunic’s expenses also could increase beyond expectations if Immunic decides to or is required by the FDA or comparable foreign regulatory authorities, to perform studies or trials in addition to those that Immunic currently anticipates. Even if Immunic completes the development and regulatory processes described above, Immunic anticipates incurring significant costs associated with launching and commercializing any product candidates that may be approved.
Immunic will require substantial additional funding, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force Immunic to delay, limit, reduce or terminate its product development, other operations or future commercialization efforts.
Since the inception of Immunic AG, substantially all of its resources have been dedicated to the clinical development of anyits product candidates. Developing pharmaceutical products, including conducting preclinical and non-clinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We have consumed substantial amounts of cash since our inception. For example, in the years ended December 31, 2020 and December 31, 2019, we used net cash of $46.1 million and $28.5 million, respectively, in our operating activities, substantially all of which related to development of our current product candidates. Immunic believes that it will continue to expend substantial resources for the foreseeable future on the completion of clinical development and regulatory preparedness of its product candidates, we would needpreparations for a commercial launch
of any approved product candidates, and development of any other current or future product candidates it may choose to obtain additional financingfurther develop. These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, obtaining marketing approvals, and manufacturing and supply as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any drug development process is highly uncertain, Immunic cannot reasonably estimate the actual amounts necessary to fund our operations and, if we were then unable to obtain such financing, we may be unable tosuccessfully complete the development and commercialization of any potentialapproved current or future product candidates.
We have
Immunic’s operating plan may change as a historyresult of incurring lossesfactors currently unknown to Immunic, and negative cash flows from operationsit may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to Immunic’s stockholders, imposition of debt covenants and have an accumulated deficit of $337.4 million through December 31, 2018. Based on ourrepayment obligations, or other restrictions that may adversely affect its business. In addition, Immunic may seek additional capital due to favorable market conditions or strategic considerations even if Immunic believes it has sufficient funds for its current employees, our known commitments, and our ongoing administrative costs to explore and pursue strategic options, weor future operating plans.
We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the second half of $13.3 million2022. Our estimate as of December 31, 2018 should be sufficient to meet our known liabilities and commitments as of December 31, 2018; however,how long we expect our resource requirementsexisting cash and cash equivalents to change materiallycontinue to the extent we enter into the Transaction or any other strategic alternatives. To advance the development of product candidates, we would need to obtain additional financing and increasefund our expenditures.
Adequate additional funding may not be available to usoperations is based on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate any potential future research and development programs or potential future commercialization efforts. Our forecast of the period of time through which our financial resources will be adequate to support our operating requirements is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this forecast on a number of assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, maycould cause us to consume capital more rapidlycash and cash equivalents significantly faster than we currently anticipate.
Ouranticipate, and we may need to seek additional funds sooner than planned. Immunic’s future fundingcapital requirements will depend on many factors, including:
•the scope, progress, results and costs of researching and developing Immunic’s current product candidates, future product candidates and related preclinical and clinical trials;
•the cost of commercialization activities if Immunic’s current product candidates and future product candidates are approved for sale, including but not limited to:marketing, sales and distribution costs and preparedness of its corporate infrastructure;
•the timingcost of manufacturing current product candidates and structure of any strategic optionsfuture product candidates that are being considered by us, including the TransactionImmunic may obtain approval for and any potential asset sales;successfully commercialize;
our•Immunic’s ability to establish newand maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;
•the number and characteristics of any futureadditional product candidates we pursue (if any);Immunic may develop or acquire;
the timing and progress in the development of our normothermic liver perfusion program;
the scope, progress, results and costs of research and development and future clinical trials, if •any product liability or other lawsuits related to Immunic’s products or otherwise commenced against Immunic;
•the ELAD System or other product candidates;expenses needed to attract and retain skilled personnel;
the cost and timing of any regulatory submissions;
the cost and timing of scaling up and validating the manufacturing process for the ELAD System or any other potential product candidates for commercialization;
the cost and timing of commercialization activities, including reimbursement, marketing, sales and distribution costs, both before and after product approval (if any);
•the costs involvedassociated with being a public company;
the cost, timing and outcome of any future litigation;
•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents,Immunic’s intellectual property rights, including litigation costs and the outcome of any such litigation; and
•the timing, receipt and amount of sales of, or royalties if any, on, the ELAD System and any future product candidates.approved products.
We may finance future cash needs through public or private equity offerings, license agreements, debt financings, collaborations, strategic alliances, marketing or distribution arrangements or a combination thereof.
Additional funds may not be available when we needImmunic needs them, on terms that are acceptable to us,Immunic, or at all. General market conditions or the market price of our common stock may not support capital raising transactions such as an additional public or private offering of our common stock or other securities. In addition, our ability to raise additional capital may be dependent upon our stock being quoted on The Nasdaq Stock Market, or Nasdaq, or upon obtaining stockholder approval. On October 25, 2018, we received a letter from the staff of Nasdaq providing notification that, for the previous 30 consecutive business days, the closing bid price for our common stock was below the minimum $1.00 per share requirement, or the Bid Price Requirement, for continued listing on Nasdaq. The notification had no immediate effect on the listing of our common stock. In accordance with Nasdaq listing rules, we were afforded 180 calendar days, or until April 23, 2019, to regain compliance with the Bid Price Requirement. There can be no assurance that we will be able to satisfy the criteria for continued listing on Nasdaq or that we will be able to obtain
stockholder approval, if it is necessary, to take the steps needed to remedy the Bid Price Requirement. If our common stock is delisted, this would, among other things, substantially impair our ability to close the Transaction and limit our strategic alternatives, and result in fewer development opportunities. If adequate funds are not available weto Immunic on a timely basis, Immunic may be required to close our operations.delay, limit, reduce or terminate:
We•preclinical studies, clinical trials or other development activities for Immunic’s current product candidates or any future product candidates;
•its research and development activities; or
•its establishment of sales and marketing capabilities or other activities that may be necessary to commercialize its future product candidates.
Raising additional capital may cause dilution to Immunic’s existing stockholders, restrict its operations or require Immunic to relinquish rights to its technologies or product candidates.
Immunic may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital atthrough a combination of public and private equity offerings, debt financings, strategic collaborations and alliances and licensing arrangements. To the extent that time. In addition, if we raiseImmunic raises additional capital through the sale of equity or convertible debt securities, the ownership interest of Immunic’s stockholders will be diluted, and the terms of such equity or convertible debt securities may include liquidation or other preferences that adversely affect the rights of Immunic’s stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on Immunic’s ability to incur additional debt, acquire or license intellectual property rights, redeem stock or declare dividends, and other operating restrictions that could adversely impact Immunic’s ability to conduct its business. If Immunic raises additional funds through strategic collaborations strategicand alliances or marketing, distribution orand licensing arrangements with third parties, weImmunic may have to relinquish valuable rights to ourits technologies future revenue streams or product candidates, or to grant licenses on terms unfavorable to Immunic.
Our finance contract (the “Loan Agreement”) with the European Investment Bank (“EIB”) contains various covenants which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.
For so long as any amount is outstanding under the Loan Agreement with EIB, we are subject to covenants that may not be favorable to us. Our inability to obtain additional funding when we need it could seriously harm our business.
If we resume the clinical development of any product candidates, additional capital that we may need to operate or expand our business may not be available.
We may require additional capital to operate or expand our business. The failure of the VTL-308 clinical trial to meet its primary or secondary endpoints may make it very difficult for us to seek and obtain financing from the capital markets on favorable terms, or at all. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be substantially diluted and these newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock. Furthermore, volatility in the credit or equity markets may have an adverse effect onrestrict our ability to incur additional indebtedness, create liens, sell assets, and consolidate or merge. Failure to comply with certain covenants could result in an event of default which, if we were unable to obtain debt or equity financing ora waiver from EIB, could result in an acceleration of repayment under the cost of such financing. If we do notfacility and have funds available to enhance any potential product candidates, maintain the competitiveness of our technology and pursue business opportunities, this could have ana material adverse effectimpact on our business, operatingfinancial condition and results and financial condition.of operations.
Our
Additionally, the restrictive covenants contained in the Loan Agreement could affect our ability to useoperate our net operating lossesbusiness and may limit our ability to offset future taxable income may be subjecttake advantage of potential business opportunities as they arise.
Risks Related to certain limitations.the Clinical Development and Marketing Approval of Immunic’s Product Candidates
As of December 31, 2018, we had net operating loss, or NOL, carryforwards of approximately $208.6 million and $203.0 million (prior to our adjustments for uncertain tax positions), net of estimated limitations caused by certain ownership changes under Section 382
The marketing approval processes of the Internal Revenue Code,FDA and comparable foreign regulatory authorities are lengthy, time-consuming and inherently unpredictable, and if Immunic is ultimately unable to obtain marketing approval for federalits product candidates, its business will be substantially harmed.
None of Immunic’s current product candidates have gained marketing approval for sale in the United States or any other country, and state income tax purposes, respectively. In general, under Section 382, a corporationImmunic cannot guarantee that undergoes an “ownership change”it will ever have marketable products. Immunic’s business is subject to limitationssubstantially dependent on its ability to utilizecomplete the development of, obtain marketing approval for, and successfully commercialize its pre-change NOLproduct candidates in a timely manner. Immunic cannot commercialize its product candidates in the United States without first obtaining approval from the FDA to market each product candidate. Similarly, Immunic cannot commercialize its product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. Immunic’s product candidates could fail to receive marketing approval for many reasons, including the following:
•the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of Immunic’s clinical trials;
•the FDA or comparable foreign regulatory authorities may find the human subject protections for Immunic’s clinical trials inadequate and tax credit carryforwards. We believe our existing NOLplace a clinical hold on (i) an IND application at the time of its submission, precluding commencement of any trials, or (ii) one or more clinical trials at any time during the conduct of such trials;
•Immunic may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and tax credit carryforwardseffective for its proposed indication;
•the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;
•Immunic may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
•the FDA or comparable foreign regulatory authorities may disagree with Immunic’s interpretation of data from preclinical studies or clinical trials;
•the data collected from clinical trials of Immunic’s product candidates may not be sufficient to support the submission of an application to obtain marketing approval in the United States or elsewhere;
•the FDA or comparable foreign regulatory authorities may find inadequate the manufacturing processes or facilities of third-party manufacturers with which Immunic contracts for clinical and commercial supplies of its product candidates; and
•the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner that would delay marketing approval.
Before obtaining marketing approval for the commercial sale of any drug product for a target indication, Immunic must demonstrate in preclinical studies and well-controlled clinical trials and, with respect to approval in the United States, to the satisfaction of the FDA, that the product is safe and effective for its intended use and that the manufacturing facilities, processes and controls are adequate to preserve the drug’s identity, strength, quality and purity. In the United States, it is necessary to submit and obtain approval of a new drug application (“NDA”) from the FDA. The submission of an NDA is subject to limitations arisingthe payment of substantial user fees ($2,875,842 for 2021); under certain limited circumstances, a waiver of such fees may be obtained. An NDA must include extensive preclinical and clinical data and supporting information to establish the product safety and efficacy for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product. After the submission of an NDA, but before approval of the NDA, the manufacturing facilities used to manufacture a product candidate must be inspected by the FDA to ensure compliance with the applicable current good manufacturing practice (“cGMP”) requirements. The FDA, the competent authorities of the member states of the European Economic Area, and comparable foreign regulatory authorities may also inspect Immunic’s clinical trial sites and audit clinical study data to ensure that its studies are properly conducted in accordance with the IND regulations, human subject protection regulations, and current good clinical practice (“cGCP”).
Under the current Prescription Drug User Fee Act (“PDUFA”) guidelines, FDA goal for acting on the submission of an NDA for a new molecular entity is ten months from previous ownership changes,the date of “filing.” The FDA conducts a preliminary review of an NDA within 60 days after submission to determine whether it is sufficiently complete to permit substantive review, before accepting the NDA for filing. This two month preliminary review effectively extends the typical NDA review period to twelve months. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.
Obtaining approval of an NDA is a lengthy, expensive and if we undergouncertain process, and approval may not be obtained. Immunic cannot be certain that any further ownership changes,submissions will be accepted for filing and reviewed by the FDA, or ultimately be approved. If an application is not accepted for review, the FDA may require that Immunic conduct additional clinical studies or preclinical testing, or take other actions before it will reconsider Immunic’s application. If the FDA requires additional studies or data, Immunic would incur increased costs and delays in the marketing approval process, which may require Immunic to expend more resources than Immunic has available. In addition, the FDA may not consider any additional information to be complete or sufficient to support the filing or approval of the NDA.
Regulatory authorities outside of the United States, such as in connection with the Transaction, our ability to utilize NOLEurope and tax credit carryforwards could be further limited. Future changes in our stock ownership, some of which are outside of our control, could also result in additional ownership changes under Section 382. The strategic options that we are pursuing, including the Transaction, will create an ownership change under Section 382 of the Internal Revenue Code, which would limit all or substantially all of our NOL and tax credit carryforwards. Furthermore, our ability to utilize NOLs and tax credit carryforwards of companies that we may acquire in the future, if any, may be subject to limitations.
Furthermore, in 2013, California adopted a single factor, sales, for apportioning income and losses to the state. Although completely offset by our valuation allowance, we had recognized NOL and tax credit carryforwards from 2013 through 2017 based on a multiple factor apportionment based on salaries, property and sales in the state. This position was based on prior court rulings supporting the use of the multiple factor apportionment. This ruling was overturned by the California Supreme Court in December 2015,Japan and in October 2016,emerging markets, also have requirements for approval of drugs for commercial sale with which Immunic must comply prior to marketing in those jurisdictions. Regulatory requirements can vary widely from country to country and could delay or prevent the U.S. Supreme Court declined to hearintroduction of Immunic’s product candidates into the case. California has no regulations or guidance nor have there been any rulings addressing how a company with no sales should apportion losses to California. As most of our operations arerelevant markets. Clinical trials conducted in California, we have filed our tax returns using a multiple factor apportionment. For these reasons and due to the limitations discussed above, we likely willone country may not be able to utilize all or substantially all of such NOL and tax credit carryforwards, even if we attain profitability.
We conduct business and file income tax returns in various tax jurisdictions. Our tax position could be adversely affected by several factors, many of which are outside of our control. For example, in the U.S., recently enacted U.S. tax reform in December 2017 commonly referred to as the Tax Cuts and Jobs Act,accepted or the Tax Act,results may not be found adequate by regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. However, the failure to obtain regulatory approval in one jurisdiction could have a negative impact on our business.Immunic’s ability to obtain approval in a different jurisdiction. Approval processes vary among countries and can involve additional product candidate testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional non-clinical studies or clinical trials, which could be costly and
time-consuming. Foreign regulatory approval may be subject to all of the risks associated with obtaining FDA approval. For all of these reasons, Immunic may not obtain foreign regulatory approvals on a timely basis, if at all.
The process to develop, obtain marketing approval for, and commercialize product candidates both inside and outside of the United States is long, complex and costly, and approval is never guaranteed. The time required to obtain approval by the FDA and comparable regulatoryforeign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of regulatory authorities. In addition, it is possibleapproval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary between jurisdictions. Even if Immunic’s product candidates were to successfully obtain approval from regulatory authorities, any such approval might significantly limit the approved indications for use, including conditioning approval on the requirement of (i) more limited patient populations, (ii) precautions, warnings or contraindications on the product labeling, including “black box” warnings, (iii) expensive and time-consuming post-approval clinical studies, risk evaluation and mitigation strategies ("REMS"), or surveillance, or (iv) limiting the claims that furtherthe product label may make, any of which may impede the successful commercialization of Immunic’s product candidates. Following any approval for commercial sale of Immunic’s product candidates, certain changes to the U.S. tax codeproduct, such as changes in manufacturing processes and the tax rules in the other jurisdictions could occur in the near future. Although we monitor these developments, it is not possibleadditional labeling claims, as well as new safety information, may require new studies and will be subject to assess to what extent changesadditional FDA notification, or review and approval. Also, marketing approval for any of Immunic’s product candidates may be implementedwithdrawn. If Immunic is unable to obtain and maintain marketing approval for its product candidates in one or more jurisdictions, or any approval contains significant limitations, Immunic’s ability to market its product candidates to its full target market will be reduced and its ability to realize the U.S. and other jurisdictions in which we conduct our business, what impact they may have on the way in which we conduct our business, or how they may impact our effective tax rate due to the unpredictability and interdependencyfull market potential of these potential changes. Even though we maintain a full valuation allowance to offset our NOL and tax credit carryforwards, changes in tax laws and related regulations and practices could have a material adverse effect on our business operations, cash flows, effective tax rate, financial position and results of operations and likelihood of consummating a strategic transaction.
Our internal computer systems, cloud-based systems and those systems previously used, or that may in the futureits product candidates will be used, by our clinical investigators, contract research organizations or other contractors or consultants may fail or suffer security breaches, which could result in a material disruption of any of our development programs.
We rely on information technology systems to keep financial records, maintain laboratory information, clinical data and corporate records, communicate with staff and external parties and operate other critical functions. Despite the implementation of security measures, our internal computer systems, cloud-based systems and those systems previously used, or that may in the future be used, by us, our clinical investigators, clinical research organizations, or CROs, and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, cyber-attacks, terrorism, war, and telecommunication and electrical failures. The techniques that could be used to attack these computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, weimpaired. Furthermore, Immunic may not be able to address these risks proactivelyobtain sufficient funding or implement adequate preventative measures. While,generate sufficient revenue and cash flows to our knowledge, we have not experienced any significant system failure, theft of information, accidentcontinue or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruptioncomplete the development of any of its current or future product candidates.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. The FDA and comparable foreign regulatory authorities have substantial discretion when and if to grant approval to Immunic’s product candidates. Even if Immunic believes the data collected from clinical developmenttrials of its current product candidates are promising, such data may not be sufficient to support approval by the FDA or manufacturing activities. For example, the loss ofcomparable foreign regulatoryauthorities. Immunic’s future clinical trial data could result in delays in future regulatory approval efforts and significantly increase costsresults also may not be successful.
It is impossible to recover or reproduce the data. Topredict the extent that any disruption, theft of information,to which the clinical trial process may be affected by existing or security breach wereprospective legislative and regulatory developments. Due to result in a loss ofthese and other factors, Immunic’s current or damage to data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and any future clinical development or other development of product candidates could be delayed.
In the recent past, we have been involved in securities litigation, and defending against such litigation or an adverse resolution of such litigation may adversely affect our business, financial condition, results of operations and cash flows and ability to consummate strategic transactions.
Our industry is characterized by frequent claims and litigation, including claims regarding patent or other intellectual property rights, as well as product liability. Additionally, in the past, companies that experience volatility in the market price of their stock have been subject to securities class action litigation. For example, following our announcement that the ELAD System, our sole product candidate, failed to meet its primary and secondary endpoints in our VTI-208 phase 3 clinical trial, we became the subject oftake a lawsuit alleging securities law violations. Although this litigation was dismissed, this type of litigation can be expensive and disruptive to normal business operations and divert management's attention, and the outcome can be difficult to predict regardless of the facts involved. We are at a heightened risk of, and could be subject to, additional litigation following our announcement in September 2018 that the ELAD System failed to meet its primary and secondary endpoints in our VTL-308 phase 3 clinical trial. An unfavorable outcome with respect to a lawsuit could have a material adverse effect on our business, financial condition, results of operations or cash flows and ability to consummate strategic transactions.
Risks Related to the ELAD System’s or other Product Candidates' Potential Future Clinical Development
If we resume the clinical development of any product candidates, we have limited experience in conducting pivotal clinical trials used to support regulatory approval, and our prior clinical trials of the ELAD System did not demonstrate a statistically significant improvement in survival, the primary endpoint that was needed to support regulatory approval.
Our VTI-208 phase 3 randomized, controlled, open-label trial evaluating the ELAD System in subjects primarily with severe alcoholic hepatitis, or sAH, failed to meet the primary endpoint of overall survival through at least 91 days assessed using the Kaplan Meier statistical method. Our protocol for our subsequent clinical trial of the ELAD system in sAH, VTL-308, incorporated limits on subjects' age, model for end-stage liver disease score, or MELD score, and its three components. While the endpoints and populations for VTL-308 were derived from results of our prior studies, including the results of VTI-208, and based on medical literature, in none of those prior studies had we demonstrated a statistically significant effect on the population based on the endpoints prospectively described in the study plan. Our prior clinical trials of the ELAD System in sAH did not demonstrate statistically significant improvement over standard of care in the primary endpoint of survival through at least study day ninety-one. Similarly, our prior clinical trials of the ELAD System in fulminant hepatic failure, or FHF, did not demonstrate statistically significant improvement in the primary endpoint of 28-day survival. In September 2018, we announced that the VTL-308 clinical trial failed to meet both its primary and secondary endpoints. The lack of statistical significance from these previous trials could be attributed to various factors, including the lack of power to demonstrate significance, the design of the studies and the lack of an ELAD System treatment benefit.
If we resume the clinical development of the ELAD System or any other product candidate, any positive results from previous clinical trials may not be predictive of future results.
Any positive results from our prior clinical trials, including either statistical significance in some endpoints or trends towards statistical significance in other endpoints, should not be relied upon as evidence that our potential future clinical trials will necessarily succeed. For example, our primary endpoint in VTL-308 was based on the results of a subset of subjects in our VTI-208 clinical trial. Additionally, our primary endpoint in VTI-208 was based on the results of a subset of subjects in our VTI-206 clinical trial. Although these subsets showed a trend toward increased survival up to at least study day ninety-one, the subsequent trials still failed to meet their primary and secondary endpoints. The FDA has noted its belief that this preliminary clinical evidence did not indicate that our product may demonstrate a substantial improvement over standard of care. We cannot provide any guarantee that any potential future clinical trials of any product candidates will provide statistically significant data sufficient to support regulatory approval.
Random variation or changes in standard of care could cause any potential future clinical trials to be delayed and/or fail.
Regulatory authorities worldwide have adopted the standard that,significantly longer than expected to gain marketing approval, clinical trials should produce a result that has less than a 5% probability of being due to random variation. There is no assurance that any of our potential future clinical trials will meet that standard. In addition, we have designed all of our past clinical trials to be judged by a survival primary endpoint, which may have been difficult to achieve for many reasons, including unanticipated survival rates of control subjects due to random variations, deficiencies in our exclusion and inclusion criteria, and the standard of care of the subjects, which may vary from site to site and country to country and is continuously evolving. Such difficulties may continue inif at all. This could delay or eliminate any potential future clinical trials.
Any of these factors, which are beyond our control, could materially and adversely affect the results of any potential future trials and prevent us from gaining regulatory approval of any product candidates. In addition, even if the results of any potential future clinical programs are positive, our inability to controlrevenue by delaying or adequately account for these factors between treatment arms could cause the FDA or other regulatory authorities to determine that the results are not adequate, or must be reproduced in a confirmatory study, to support marketing approval.
If we resume clinical development, the ELAD System treatment could result in significant clinical risks to the patient, including death.
The ELAD System therapy was targeted toward very sick patients who were likely to die if left untreated. Patients with liver failure resulting from acute hepatocellular insult quickly develop failure of other organs including lungs, kidney, brain, and blood coagulation systems. Patients who received the ELAD System therapy were at risk of dying due to other serious health problems even if the ELAD System was demonstrated to be effective.
All extracorporeal therapy systems, including the ELAD System, cause a decline in blood platelets, which can lead to coagulation problems and uncontrolled bleeding because platelets are critical to clot formation. Patients with liver failure generally have serious blood clotting problems since the liver produces almost all of the body’s blood clotting proteins. These patients therefore have wide variations in their ability to coagulate their blood. To minimize blood clotting issues during ELAD treatment, some subjects require an infusion of anti-coagulants, which can aggravate bleeding. Because every subject is different, the need for anti-coagulant therapy is variable and must be closely monitored during ELAD System therapy. The risk of uncontrolled bleeding may be treated during the ELAD System therapy by administering platelet transfusions or by administering blood coagulation factors. However, there have been cases of uncontrolled bleeding during and after the ELAD System therapy. Additionally, some patients have abnormal red blood cells, which have weakened cell walls subject to rupture by physical force, a process known as hemolysis. The physical force exerted on the red blood cells by the ultrafiltrate generator in the ELAD System line can, in some cases, be enough to cause overt mechanical hemolysis that resolves after ELAD treatment is stopped, but can result in death if it continues too long. The incidence of hemolysis was less than 0.5% in subjects enrolled in our prior clinical trials, and one patient died in our China trial as a result of hemolysis.
Data from our prior clinical trials suggest that ELAD treatment should not be used in subjects with acute kidney injury (defined as a serum creatinine level of greater than or equal to 1.5 mg/dL). The use of extracorporeal systems such as ELAD may cause harm in patients with pre-existing kidney injury because these subjects are at an increased risk to develop fluid overload due to the renal impairment. Furthermore, ELAD treatment should be stopped if a patient develops any indication for renal replacement therapy, because patients with renal impairment are less likely to be able to tolerate the increased stresses associated with two extracorporeal devices requiring high venous flow rates.
Similarly, data from our prior clinical trials suggest that ELAD treatment should not be used in subjects with severe coagulopathy (problems with blood clotting, defined as an International Normalized Ratio, or INR, of greater than 2.5). The use of extracorporeal systems such as ELAD may cause harm in patients with pre-existing severe coagulopathy because the circulation of blood outside the body can cause a depletion in circulating factors associated with the blood clotting cascade, and reductions in the number of circulating platelets in the blood which are required for the blood to clot properly. As a result, subjects on extracorporeal systems such as ELAD are at an increased risk to develop bleeding issues.
Human liver-derived C3A cells have been shown in animal studies to have the capacity to grow into a tumor mass under certain conditions. While it is possible that some VTL C3A cells could escape from the ELAD cartridges and cause tumors in patients or produce substances that could lead to the development of malignant tumors, it is expected within the natural medical history of this population of patients with chronic liver disease (whether caused by hepatitis B or alcohol) that a certain incidence of cancer will be reported. There was no evidence that the incidence or type of cancer was different between the ELAD and the control groups in our study in China. There have been two reported cancers (rectal cancer and squamous cell carcinoma) in our extended follow-up of ELAD-treated subjects from the VTI-208 study and there have been no such reported cases of cancer in VTL-308. These or other adverse events, even those that are currently unforeseen, could significantly affect any potential future development and commercialization efforts, cause the regulatory authorities to place any potential future clinical trials on hold or to refuse to grant or maintain any potential future marketing approval or result in withdrawal of the ELAD System from the market in the event that development of the ELAD System is resumed and ultimately receives marketing approval.
Due to ethical considerations, we have conducted open-label clinical trials of the ELAD System, where control subjects do not receive a sham treatment, and this could introduce unacceptable bias into any future trial results.
We did not conduct our VTI-208, VTI-210, VTI-212 or VTL-308 clinical trials with a sham control extracorporeal circuit that includes empty cartridges. This is due toterminating the potential harm that the extracorporeal circuit can cause to control subjects without the potential for any benefit, which makes it unethical to subject the controls to a sham. Although regulatory agencies agree that, due to the naturecommercialization of the ELAD System therapy, it is not possible to conduct a blinded study, they have expressed concern that the open-label nature of the study design may introduce significant bias in the treatment of the ELAD System or control subjects, since the study subject, physicians and caregivers know who has and has not received the ELAD System therapy. We had developed a protocol that attempted to minimize this bias to the extent possible, including defining a protocol-specific standard of care, specifying steroid treatment, standardizing the discharge criteria for both the ELAD-treated and control subjects, requiring that follow-up visits are conducted by a blinded reviewer, ensuring home healthcare nurses and other clinical personnel are unaware of treatment assignment, educating subjects not to reveal treatment assignment to their caregivers and monitoring concomitant medications, alcohol recidivism and interaction with the healthcare system to provide evidence that there is no meaningful difference between the groups that might have significantly confounded the trial data. However, there is no guarantee that bias will not enter into any potential future clinical trial, affect the results of such trials or cause regulatory agencies to refuse marketing approval of the ELAD System or any otherImmunic’s current product candidates.
If we resume the clinical development of any product candidates, and if we encounter difficulties enrolling subjects, any potential future clinical
Preclinical trials could be delayed or otherwise adversely affected.
Clinical trials for the ELAD System required us to identify and enroll a large number of subjects that met all of the entry criteria set forth in our protocols, including having the disease under investigation. If we resume the development of any product candidates and conduct any future clinical trials, we may not be able to enroll a sufficient number of subjects who meet our protocol requirements in a timely manner. Subject enrollment is affected by numerous factors, many of which fall outside of our control, including:
the size and nature of the subject population;
timeliness of contracting with clinical trial sites, and obtaining approval of the trial by the applicable institutional review boards, or IRBs, or ethics committees;
lack of a sufficient number of subjects who meet the enrollment criteria for potential future clinical trials;
perceived risks and benefits of the product candidate under study;
availability of competing therapies and clinical trials;
efforts to facilitate timely enrollment in clinical trials;
scheduling conflicts with participating clinicians; and
proximity and availability of clinical trial sites and resources for prospective subjects.
In light of results and disclosures of our prior clinical trials by us or others, it is possible that subjects will be less willing to participate in any potential future trials. Even if we were to identify an appropriate subject population for a clinical trial, there can be no assurance that the subjects will elect to enroll in the study or complete the study. These difficulties could negatively impact any potential future clinical trials.
If we have difficulty enrolling a sufficient number of subjects to conduct any potential future clinical trials or if enrolled subjects fail to complete the study or comply with our protocols, particularly with regard to follow-up appointments, the completion of any potential future clinical trials would be delayed, and our business would be harmed.
If we resume the clinical development of any product candidates, we may face delays in completing any potential future clinical trials, and we may be required to suspend, repeat or terminate any potential future clinical trials if they are not conducted in accordance with applicable regulatory requirements, the results are negative or inconclusive, or the clinical trials are not well-designed or executed as expected.
Any potential future clinical trials must also be conducted in accordance with FDA and comparable foreign regulatoryauthorities’ legal requirements, regulations governing clinicalor guidelines, including Good Laboratory Practice ("GLP"), an international standard meant to harmonize the conduct and quality of non-clinical studies and the archiving and reporting of findings. Preclinical studies, including long-term toxicity studies and carcinogenicity studies in experimental animals, may require further evaluation, which could affect the risk-benefit evaluation of clinical development, or which may even lead the regulatory agencies to delay, prohibit the initiation of or halt clinical trials or delay or deny marketing authorization applications. Failure to adhere to the applicable GLP standards or misconduct during the course of preclinical trials may invalidate the data and require repeating one or more studies or conducting additional testing.
Clinical trials must also be conducted in accordance with legal requirements, regulations or guidelines of the FDA and comparable foreign regulatoryauthorities, including human subject protection requirements and GCP. Clinical trials are subject to further oversight by the FDA, foreignthese governmental agencies ethics committees and IRBs at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of Immunic’s
current product candidates produced under cGMP and other requirements. Immunic’s clinical trials are conducted at multiple sites, including some sites in countries outside the United States and the European Union, which may require large numberssubject Immunic to further delays and expenses as a result of test subjects. Changes inincreased shipment costs, additional regulatory requirements may occur at any time, and we may needthe engagement of foreign and non-European Union contract research organizations ("CROs"), as well as expose Immunic to amendrisks associated with clinical trial protocolsinvestigators who are unknown to reflect such changes. In addition, we may voluntarily amend our protocols, as we didthe FDA or European regulatory authorities, and with different standards of diagnosis, screening and medical care.
To date, Immunic has not completed all clinical trials required for our VTI-210 clinical trial. Amendments may require us to resubmit any potential future clinical trial protocols to ethics committees or IRBs for reexamination, which may impact the costs, timing or successfulapproval of its current product candidates. The commencement and completion of the underlying trial.
Any potential future clinical trials for Immunic’s current product candidates may require amendment or be delayed, not approved, unsuccessfulsuspended or terminated as a result of many factors, including:including but not limited to:
delays•the delay or failures in designing an appropriaterefusal of regulators or IRBs to authorize Immunic to commence a clinical trial protocol with sufficient statistical powerat a prospective trial site;
•changes in regulatory requirements, policies and in reaching agreement on trialguidelines;
•the FDA or comparable foreign regulatory authorities disagreeing as to the design with investigators and regulatory authorities;or implementation of Immunic’s clinical trials;
delays or •failure in reachingto reach agreement on acceptable terms with prospective CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
•delays in patient enrollment and variability in the number and types of patients available for clinical trials;
•the inability to enroll a sufficient number of patients in trials to ensure adequate statistical power to detect statistically significant treatment effects;
•lower than anticipated retention rates of patients and volunteers in clinical trials;
•clinical sites deviating from trial protocols or failure by CROs, investigators anddropping out of a trial;
•adding new clinical trial sites in ensuring the proper and timelysites;
•negative or inconclusive results, which may require Immunic to conduct of any potential futureadditional preclinical or clinical trials;trials or to abandon projects that Immunic expects to be promising;
delays•safety or failure by us in manufacturing sufficient quantities of product pursuanttolerability concerns, which could cause Immunic to required quality standards and by third-party manufacturers in supplying the productsuspend or necessary and suitable components;terminate a trial if it finds that participants are exposed to unacceptable health risks;
delays or failure in transporting products to clinical trial sites with sufficient rapidity to enable treatment to begin early enough to have an opportunity for clinical benefit;
delays or failure in completing data analysis and achieving primary and secondary endpoints;
delays in subject enrollment or site initiation, including in light of, among other things, our prior clinical results;
•regulators or clinical site ethics committeesIRBs requiring that Immunic or IRBs may not approve or may delay,its investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
•Immunic’s third-party research and manufacturing contractors failing to comply with regulatory requirements or concerns about subject safety;meet their contractual obligations to Immunic in a timely manner, or at all;
we may suspend•third-party researchers becoming debarred or terminate any potential future clinical trials if we believe our product is exposing the participating subjects to unacceptable health risks or for other reasons;
subjects may not complete any potential future clinical trials due to safety issues, adverse events, inconvenienceotherwise penalized by FDA or other reasons;regulatory authorities for violations of regulatory requirements, which could call into question data collected by such researcher and potentially affecting Immunic’s ability rely on some or all of the data in support of our marketing applications;
subjects in any potential future clinical trials may die or suffer other adverse events for reasons that may be either related or unrelated to our product;
we may have •difficulty in maintaining contact with subjectspatients after treatment, preventing us from collectingresulting in incomplete data;
•delays in establishing the appropriate dosage levels;
•the quality or stability of Immunic’s current product candidates falling below acceptable standards;
•the inability to produce or obtain sufficient quantities of Immunic’s current product candidates to complete clinical trials; and
•exceeding budgeted costs due to difficulty in accurately predicting the costs associated with clinical trials.
Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, the design of the clinical trial, and competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications Immunic is investigating.
There are significant requirements imposed on Immunic and on clinical investigators who conduct clinical trials that Immunic sponsors. Although Immunic is responsible for selecting qualified clinical investigators, providing them with the information they need to conduct the clinical trial properly, ensuring proper monitoring of the clinical trial, and ensuring that the clinical trial is conducted in accordance with the general investigational plan and protocols contained in the IND, Immunic cannot ensure that clinical investigators will maintain compliance with all regulatory requirements at all times. The pharmaceutical industry has experienced cases where clinical investigators have been found to incorrectly record, omit, or even falsify data. Immunic cannot ensure that the clinical investigators in its trials will not make mistakes or otherwise compromise the integrity or validity of data, any of which would have a significant negative effect on Immunic’s ability to obtain marketing approval, Immunic’s business, and Immunic’s financial condition.
Immunic could encounter delays if a clinical trial is suspended or terminated by Immunic, the IRBs or ethics committees of the institutions in which such trial is being conducted, the independent steering committee, the data safety monitoring board ("DSMB"), for such trial, or the FDA or comparable foreign regulatory authorities. Immunic or such authorities may impose a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or Immunic’s clinical protocols, inspection of the clinical trial operations or trial site by the FDA or comparable foreign regulatory authorities resulting in the imposition of a clinical hold, safety issues or adverse side effects, failure to demonstrate a benefit from using the drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Delay or termination of clinical trials of Immunic’s current product candidates will harm their commercial prospects and impair Immunic’s ability to generate revenues from such product candidates. In addition, any delays in completion of Immunic’s clinical trials will increase its costs, slow its development and approval process and jeopardize its ability to commence product sales and generate revenues.
Moreover, clinical investigators for Immunic’s clinical trials may serve as scientific advisors or consultants to Immunic from time to time and receive compensation in connection with such services. Immunic is required by our study protocol;to report certain financial relationships with clinical investigators to the FDA and,
final analysis where applicable, take steps to minimize the potential for bias resulting from such financial relationships. The FDA may evaluate the reported information and conclude that a financial relationship between Immunic and a clinical investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA may therefore question the integrity of the data fromgenerated at the applicable clinical trial site, and the utility of the clinical trial itself may be jeopardized. The FDA may refuse to accept Immunic’s marketing applications, and other delays or even denial of marketing approval could result.
Preclinical testing or clinical trials of any potential futuredevelopment candidate may also show new and unexpected findings regarding safety and tolerability. Such findings may harm the ability to conduct further development of product candidates, delay such development, require additional expensive tests, harm the ability of Immunic to partner these development candidates, or delay or prevent marketing approval by regulatory agencies. Such findings may also harm the ability to compete in the market with other products or to achieve certain pricing thresholds.
Any of these occurrences could materially adversely affect Immunic’s business, financial condition, results of operations, and prospects. In addition, many of the factors that could cause, or lead to, a delay in the commencement or completion of clinical trials may conclude that suchalso ultimately lead to the denial of marketing approval of Immunic’s current product candidate lacks sufficientcandidates. Significant clinical efficacytrial delays could also allow Immunic’s competitors to bring products to market before Immunic, shorten any periods during which Immunic may have the exclusive right to commercialize any approved current product candidates, and impair its ability to commercialize any approved current product candidates, which may harm Immunic’s business, financial condition, results of operations and prospects.
Use of patient-reported outcomes in Immunic’s clinical trials may delay the development of its product candidates or presents unacceptable safety risks, such as occurred with the VTL-308 clinical trial.increase development costs.
Due to the difficulty of objectively measuring the efficacy of IMU-838, patient-reported outcomes ("PROs"), may have an important role in the development and regulatory approval of Immunic’s IMU-838. PROs involve
patients’ subjective assessments of efficacy, and this subjectivity increases the uncertainty in determining clinical endpoints. Such assessments can be influenced by factors outside of Immunic’s control, and can vary widely from day-to-day for a particular patient, and from patient-to-patient and site-to-site within a clinical trial. Use of PROs may make the outcome of trials more uncertain and may increase Immunic’s costs and time to finish regulatory approval trials.
Clinical failure can occur at any stage of VTI-208clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate Immunic advances through clinical trials may not have favorable results in later clinical trials or receive marketing approval.
Clinical failure can occur at any stage of Immunic’s clinical development. The results of preclinical studies and VTL-308early clinical trials of Immunic’s product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to provide evidence ofshow the desired safety and efficacy sufficienttraits despite having progressed through preclinical studies and initial clinical trials. A number of pharmaceutical companies have suffered significant setbacks in advanced clinical trials due to satisfy the requirementslack of the regulatory authorities, we do not expect the ELAD Systemefficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Clinical trials may produce negative or inconclusive results, and Immunic may decide, or regulators may require Immunic, to be approved unless we are able to performconduct additional clinical or preclinical testing. Data obtained from trials showing such safetyare susceptible to varying interpretations, and efficacy.
Risks Related to Regulatory Matters
If we resume the clinical developmentregulators may not interpret Immunic’s data as favorably as Immunic does, which may delay, limit or prevent marketing approval of anyImmunic’s product candidates, the FDA regulatory approval process is complex, time-consuming and inherently unpredictable.candidates. In addition, the failuredesign of our VTL-308a clinical trial can determine whether its results will support approval of a product, or approval of a product for desired indications, and VTI-208flaws or shortcomings in the design of a clinical trial may not become apparent until the clinical trial is well advanced. Immunic has limited experience in designing clinical trials and may adversely affectbe unable to design and execute a clinical trial to support marketing approval for Immunic’s desired indications. Further, clinical trials of product candidates often reveal that it is not practical or feasible to continue development efforts. If one of Immunic’s product candidates is found to be unsafe or lack efficacy, Immunic will not be able to obtain marketing approval for such product candidate and Immunic’s business would be harmed. For example, if the attituderesults of regulatory authorities toward any potential future developmentImmunic’s clinical trials of the ELAD System.
Potential future clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distributionits product candidates do not achieve pre-specified endpoints, Immunic is subjectunable to extensive regulation by the FDA. In the U.S., the ELAD System has been regulatedprovide primary or secondary endpoint measurements deemed acceptable by the FDA as a combination biologicor comparable foreign regulators or Immunic is unable to demonstrate an acceptable level of safety relative to the efficacy associated with its proposed indications, the prospects for approval of Immunic’s product candidates would be materially and medical device. Before a biologic productadversely affected. A number of companies in the pharmaceutical industry, including those with greater resources and experience than Immunic, have suffered significant setbacks in Phase 2 and Phase 3 clinical trials, even after seeing promising results in earlier clinical trials.
In some instances, there can be marketedsignificant variability in safety and/or efficacy results between different trials of the U.S., we must submit,same product candidate due to numerous factors, including differences in trial protocols and design, the size and type of the patient population, adherence to the dosing regimen and the FDA must approve, a Biologics License Application, rate of dropout among clinical trial participants. Immunic does not know whether any clinical trials it may conduct will demonstrate consistent and/or BLA. In addition, for a combination biologicadequate efficacy and medical device, the device components must be found acceptable as part of the BLA. The regulatory review process for a novel therapy is complex, time-consuming and unpredictable. As a result, development costs, timelines and approvals are not readily predictable.
The time requiredsafety to obtain marketing approval byfor Immunic’s product candidates.
Marketing approval may be substantially delayed or may not be obtained for one or all of Immunic’s product candidates if regulatory authorities require additional or more time-consuming studies to assess the FDA to market a new therapy is unpredictable but typically takes many years and depends upon many factors, including the substantial discretion of regulatory authorities.
Even if a product shows evidence of safety and efficacy in clinical trials, it could failof its product candidates.
Immunic may be unable to receiveinitiate or complete development of its product candidates on schedule, if at all. The completion of the studies for Immunic’s product candidates will require additional funding. In addition, if regulatory authorities require additional or more time-consuming studies to assess the safety or efficacy of Immunic’s product candidates, Immunic may not have or be able to obtain adequate funding to complete the necessary steps for approval for many reasons, including the following:
any or all of its product candidates. Additional delays may result if the FDA, an FDA advisory committee (if one is convened to review Immunic’s NDA) or other regulatory authority indicates that the product candidate should not be approved or there should be restrictions on approval, such as the requirement for a REMS, to ensure safe use of the drug. Delays in marketing approval or rejections of applications for marketing approval in the United States or other markets may disagreeresult from many factors, including:
•the FDA or comparable foreign regulatory authorities disagreeing with the design or implementation of Immunic’s clinical trials;
•regulatory requests for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;
•the FDA or comparable regulatory authorities questioning or disagreeing with interpretations of data and results;
•the emergence of new information regarding Immunic’s current or future product candidates or the field of research;
•unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding safety or the study endpoints. For example, in our ELADefficacy of Immunic’s product candidates during clinical trials, the FDA had expressed concern about the open-label design and multiplicity of confounding variables, including the need for delineating the standard of care that both the treated and control groups received during our studies;trials;
we may be unable•failure to demonstrate to the satisfaction of the FDA that our product is safe and effective for its proposed indications or that the product provides significant clinically relevant benefits or that the benefits outweigh the safety risks;
the results of a clinical trial may not meet the level of statistical significance required by the FDA for approvalapproval;
•inability to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
•lack of adequate funding to commence or may not support approval of a label that could command a price sufficient for us to be profitable;
the FDA may disagree with our interpretation of data from any preclinical studies or clinical trials;
the FDA may not accept clinical data from trials which are conducted outside their jurisdiction;
the opportunity for bias in any potential futurecontinue Immunic’s clinical trials as a result of the open-label designdue to unforeseen costs or other business decisions;
•regulatory authorities may not be adequately handled and may cause any potential future trial to fail;
the product may be subject to an FDA advisory committee review, which is triggered by an FDA request and is solely within the FDA’s discretion, which may result in unexpected delays or additional hurdles to approval;
the FDA may determine thatfind inadequate the manufacturing processes at our facilities or facilities of third partythe third-party manufacturers with which we contractImmunic contracts for clinical and commercial supplies are inadequate;supplies;
even if a future clinical trial is successful in demonstrating a statistically•Immunic may have insufficient funds to pay the significant improvement over standard of care, in light of the fact that certain confounding factors may be vieweduser fees required by the FDA as limitingupon the persuasivenessfiling of the study results, a single successful phase 3 clinical trial may not be sufficient to provide the substantial evidence of effectiveness necessary to support regulatory approval,an NDA; and therefore we may need more than one additional phase 3 clinical trial to secure regulatory approval;
•the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering anythat would delay marketing approval.
The lengthy and unpredictable approval process, as well as the unpredictability of future clinical data insufficient for approval;trial results, may result in Immunic’s failure to obtain marketing approval to market its product candidates, which would significantly harm Immunic’s business, results of operations and prospects.
Immunic’s product candidates may cause undesirable adverse effects or have other properties that could delay or prevent their marketing approval, limit the failurecommercial profile of prioran approved label or result in significant negative consequences following marketing approval, if obtained.
Undesirable side effects caused by Immunic’s product candidates could cause Immunic or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more stringent requirementsrestrictive label or the delay or denial of marketing approval by the FDA or other comparable foreign regulatoryauthorities. If any of Immunic’s current or future product candidates is associated with serious adverse, undesirable or unacceptable side effects, Immunic may need to abandon such candidate’s development or limit development to certain uses or sub-populations in which such side effects are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many drug candidates that initially showed promise in early-stage or clinical testing have later been found to cause side effects that prevented their further development. Results of Immunic’s trials could reveal a high and unacceptable prevalence of these or other side effects. In such an event, Immunic’s trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order Immunic to cease further development of or deny approval of its product candidates for any or all targeted indications. Drug-related side effects could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims.
If Immunic’s product candidates receive marketing approval, and Immunic or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
•regulatory authorities may withdraw approvals of such products;
•Immunic may be required to recall a product or change the way such product is administered to patients;
•additional restrictions may be imposed on the marketing of the particular product or the manufacturing process for the product or any component thereof;
•regulatory authorities may require the addition of labeling statements, such as a precaution, “black box” warning or other warnings or a contraindication;
•Immunic or its collaborators may be required to implement a REMS or create a medication guide outlining the risks of such side effect for distribution to patients;
•Immunic or its collaborators could be sued and held liable for harm caused to patients;
•the product may become less competitive; and
•Immunic’s reputation may suffer.
Any of these events could prevent Immunic from achieving or maintaining market acceptance of any approved product candidates, and could materially adversely affect Immunic’s business, financial condition, results of operations and prospects.
Immunic is heavily dependent on the success of its product candidates, which are in the early stages of clinical development. Immunic cannot give any assurance that it will generate data for any of its product candidates sufficient to receive regulatory approval in its planned indications, which will be required before they can be commercialized.
Immunic has invested substantially all of its efforts and financial resources to identify, acquire and develop its portfolio of product candidates. Its future success is dependent on its ability to successfully further develop, obtain regulatory approval for, and commercialize one or more product candidates. Immunic currently generates no revenue from sales of any products, and Immunic may never be able to develop or commercialize a product candidate.
The first of Immunic’s product candidates, IMU-838, is being imposed byadvanced into a Phase 3 program for RRMS, and pivotal trials are expected to start later in 2021.Immunic is not permitted to market or promote any of its product candidates before it receives regulatory bodiesapproval from the FDA or comparable foreign regulatory authorities, and advisory groups.
The FDA expressed concern with our past phase 3Immunic may never receive such regulatory approval for any of its product candidates. Immunic cannot be certain that any of its product candidates will be successful in clinical trials that to the extent thereor receive regulatory approval. Further, its product candidates may not receive regulatory approval even if they are significant differencessuccessful in how treated and control subjects are treated during the study and after discharge from the hospital, the studyclinical trials. If Immunic does not receive regulatory approvals for its product candidates, Immunic may not be able to provide convincing evidencecontinue its operations.
Immunic may use its financial and operational resources to pursue a particular research program or product candidate and fail to capitalize on programs or product candidates that may be more profitable or for which there is a greater likelihood of success.
Because Immunic has limited financial and operationalresources, it may forego or delay pursuit of opportunities in some programs, product candidates or indications that later prove to have greater commercial potential. Immunic’s resource allocation decisions may cause it to fail to capitalize on viable commercial products or more profitable market opportunities. Immunic’s spending on current and future research and development programs and future product candidates for specific indications may not yield any commercially viable products. Immunic may also enter into additional strategic collaboration agreements to develop and commercialize some of its programs and potential product candidates in indications with potentially large commercial markets. If Immunic does not accurately evaluate the commercial potential or target market for a particular product candidate, it may (i) relinquish valuable rights to that product candidate through strategic collaborations, licensing or other royalty arrangements when it would have been more advantageous to retain sole development and commercialization rights to such product candidate, or (ii) allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a collaborative arrangement.
Immunic may find it difficult to enroll patients in its clinical trials given the limited number of patients who have the diseases for which its product candidates are being studied. Difficulty in enrolling patients could delay or prevent clinical trials of its product candidates.
Identifying and qualifying patients to participate in clinical trials of Immunic’s product candidates is essential to its success. The timing of Immunic’s clinical trials depends in part on the rate at which Immunic can recruit patients to participate in clinical trials of its product candidates, and Immunic may experience delays in its clinical trials if Immunic encounters difficulties in enrollment.
The specific eligibility criteria of Immunic’s planned clinical trials may further limit the available eligible trial participants. Immunic may not be able to identify, recruit, and enroll a sufficient number of patients to initiate or complete its clinical trials in a timely manner because of the perceived risks and benefits of the product candidate under study, the availability and efficacy of competing therapies and clinical trials, and the willingness of physicians to participate in its planned clinical trials. If patients are unwilling to participate in Immunic’s clinical trials for any reason, the timeline for conducting trials and obtaining regulatory approval of its product candidates may be delayed.
If Immunic experiences delays in the completion of, or experiences termination of, any clinical trials of its product candidates, the commercial prospects of its product candidates could be harmed, and its ability to generate product revenue from product candidates could be delayed or impaired. In addition, any delays in initiating or completing clinical trials would likely increase Immunic’s overall costs, impair product candidate development and impair Immunic’s ability to obtain regulatory approval. Any of these occurrences may harm its business, financial condition, and prospects significantly.
Even if Immunic receives marketing approval for its product candidates, such approved products will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, any approved product candidates could be subject to labeling and other restrictions, and Immunic may be subject to penalties and legal sanctions if it fails to comply with regulatory requirements or experience unanticipated problems with its approved products.
If the FDA or a comparable foreign regulatory authority approves any of Immunic’s product candidates, the manufacturing processes, packaging, distribution, adverse event reporting, storage, labeling, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and efficacy. For example, differences in length of hospital stay, rates of hospital re-admission, alcohol recidivism rates, nutritional support,other post-marketing information and the use of concomitant medications could significantly confound the reported study results.
In addition, even if we were to obtain approval followingreports, registration, as well as continued compliance with cGMP regulations and GCP for any potential future clinical trials that Immunic conducts post-approval. Any marketing approvals that Immunic receives for its product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for potentially costly post-approval studies, including Phase 4 clinical trials, and surveillance to monitor safety and efficacy. The FDA may grantalso require a REMS as a condition of approval contingent on the performance of costly post-marketing clinical trials, or may approve a label that does not include the labeling claims necessary or desirable for successful commercialization. Any of the above could materially harm a product's commercial prospects.
If we begin or resume the clinical development of any biologicour product candidates, we do not have,which could include requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and may never obtain,other risk minimization tools
Later discovery of previously unknown problems with an approved product, including adverse events of unanticipated severity or frequency, or with manufacturing operations or processes, or failure to comply with regulatory requirements, or evidence of acts that raise questions about the regulatory approvals we need to market our product.
In responding to a BLA, the FDA may require additional testing or information, may require thatintegrity of data supporting the product labeling be modified,approval, may impose a post-approval study andresult in, among other commitments or reporting requirements or other things:
•restrictions on product commercialization,distribution or may denyuse, or requirements to conduct post-marketing studies or clinical trials;
•restrictions on the application. The FDA has established performance goals for reviewmarketing or manufacturing of BLAs; however,the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;
•fines, warning letters, untitled letters, or holds on clinical trials;
•refusal by the FDA is not required to complete its review within these time periods. approve pending applications or supplements to approved applications filed by Immunic, or suspension or revocation of product approvals;
•product seizure or detention, or refusal to permit the import or export of products; and
•injunctions or the imposition of civil or criminal penalties.
The timingFDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay marketing approval, manufacturing or commercialization of final FDA review andImmunic’s product candidates. Immunic cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, varies greatly, but can take years in some cases and may involve the input of an FDA advisory committee of outside experts. Sales of the producteither in the United States or other jurisdictions. If Immunic is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or not able to maintain regulatory compliance, it may commence only whenlose any marketing approval that may have been obtained and it may not achieve or sustain profitability, which would adversely affect Immunic’s business.
The occurrence of any event described above may limit Immunic’s ability to commercialize any approved product candidates and harm its business, financial condition, and prospects significantly.
If Immunic fails to obtain regulatory approval in jurisdictions outside the BLA is approved. To date, we haveUnited States, it will not applied forbe able to market its products in those jurisdictions.
Immunic intends to market any approved product candidates in international markets, or received thein conjunction with collaborators. Such marketing will require separate regulatory approvals required for the commercial sale of any product.
In light of the clinical results from our VTL-308 clinical trial, we do not believe that the ELAD System can be approved for marketing for sAH in the U.S. or Europe, if ever, without additional clinical trials that would require substantial capitaleach market and time to complete. Therefore, the ELAD System may never be approved for marketing.
If we resume the development of any product candidates, the FDA may or may not grant an accelerated or “Priority Review” to any potential future BLA, if requested by us,compliance with numerous and even if the FDA designates Priority Review for any product candidate, that designation would not assure FDAvarying regulatory requirements. The approval and may not even lead to a faster regulatory review or approval process.
On the date the FDA receives an original BLA submission, a 60 calendar day filing review period starts. Assuming the FDA accepts the submission for filing, a ten-month standard BLA review clock begins, which means the FDA has an aggregate twelve months from its receipt of the original submission to take regulatory action. A product may be eligible for Priority Review for a BLA submission if the FDA determines that the product candidate, if approved, would provide a significant improvement in safety or effectiveness. A six-month Priority Review clock would begin at the conclusion of the 60 calendar day filing review period that starts on the date of FDA receipt of the original BLA submission. Therefore, if Priority Review is granted, the FDA has a total of eight months to take action on an application as opposed to the standard timeline of twelve months. The FDA has broad discretion whether or not to grant Priority Review even if we believe a product is eligible. Moreover, even if a product is designated for Priority Review, such a designation does not assure a faster regulatory review process or confer any advantage with respect to FDA approval. Moreover, a designation of Priority Review or even a standard review from the FDA does not guarantee approval within the eight-month or twelve-month review period, respectively, or at any time thereafter. Accordingly, we cannot assure you that any future BLA will be approved in a timely manner, or at all.
If we resume the development of any product candidates, the regulatory approval processes of foreign regulatory authorities are complex, time-consuming and inherently unpredictable.
Outside the U.S., our ability to market a product is contingent upon receiving marketing authorizations from appropriate regulatory authorities. If any potential future clinical programs were to be successful, we would anticipate submitting applications for marketing authorization in Europe and other foreign countries based on need. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursementprocedures vary widely from country to country and wemay require testing in addition to what is required for a marketing application in the United States. Moreover, the time required to obtain approval in other countries may be unable to meet such requirements. Ifdifferent than in the United States. In addition, in many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority is satisfied that adequate evidence of safety, efficacy, and quality has been presented, a marketing authorization should be granted.does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, the failure to obtain approval in one jurisdiction may negatively impact Immunic’s ability to obtain approval in another jurisdiction. The foreign regulatory approval process involvesmay include all of the risks associated with obtaining FDA approval.approval and additional or different risks. Immunic may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize its products in any market, which would significantly harm Immunic’s business, results of operations and prospects.
Agencies like the FDA and national competition regulators in European countries strictly regulate the promotion of drugs. If Immunic is found to have improperly promoted its current product candidates for uses beyond those that are approved, Immunic may become subject to significant liability.
Regulatory authorities like the FDA and national competition laws in Europe strictly regulate the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA or comparable foreign regulatory authorities as reflected in the product’s approved labeling, known as “off-label” use, nor may it be promoted prior to marketing approval. If Immunic receives marketing approval for its product candidates for Immunic’s proposed indications, physicians may nevertheless prescribe Immunic’s products for their patients in a manner that is inconsistent with the approved label if the physicians personally believe in their professional medical judgment it could be used in such manner. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses.
In addition, the FDA requires that promotional claims not be “false or misleading” as such terms are interpreted by the FDA. For example, the FDA requires substantial evidence, which generally consists of two adequate and well-controlled head-to-head clinical trials, for a company to make a claim that its product is superior to another product in terms of safety or effectiveness. Generally, unless Immunic performs clinical trials meeting that standard comparing its product candidates to competing products and these claims are approved for Immunic’s
product labeling, Immunic will not be able promote its current product candidates as superior to competing products.
In the United States, regulatory authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses. If Immunic is found to have improperly promoted its product, including for an off-label use, it may become subject to significant liability. Numerous drug manufacturers have been the subject of investigations related to off-label promotion resulting in multi-billion dollar settlements, consent decrees, and on-going monitoring under corporate integrity agreements or deferred prosecution agreements. In addition, the FDA could also seek permanent injunctions under which specified promotional conduct is monitored, changed or curtailed.
Immunic’s current and future relationships with healthcare professionals, investigators, consultants, collaborators, actual customers, potential customers and third-party payors in the United States and elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, physician payment transparency, health information privacy and security and other healthcare laws and regulations, which could expose Immunic to sanctions.
Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of any product candidate receives regulatory approval, we willdrug candidates for which Immunic may obtain marketing approval. Immunic’s current and future arrangements with healthcare professionals, investigators, consultants, collaborators, actual customers, potential customers and third-party payors may expose Immunic to broadly applicable fraud and abuse and other healthcare laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act ("FCA"), that may constrain the business or financial arrangements and relationships through which Immunic sells, markets and distributes any drug candidates for which it obtains marketing approval. In addition, Immunic may be subject to ongoingphysician payment transparency laws and patient privacy and security regulation by the federal government and by the U.S. states and foreign jurisdictions in which Immunic conducts its business. The applicable federal, state and foreign healthcare laws that may affect Immunic’s ability to operate include the following:
•The federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under federal and state healthcare programs such as Medicare and Medicaid. Remuneration has been interpreted broadly to include anything of value. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and those activities may be subject to scrutiny or penalty if they do not qualify for an exemption or safe harbor. A conviction for violation of the Anti-Kickback Statute results in mandatory exclusion from participation in federal healthcare programs. This statute has been applied to arrangements between pharmaceutical manufacturers and those in a position to purchase products or refer others including prescribers, patients, purchasers and formulary managers. In addition, the Affordable Care Act amended the Social Security Act to provide that the U.S. government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act penalties for which are described below.
•Federal civil and criminal false claims laws and civil monetary penalty laws, including the FCA, impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $11,665 to $23,331 per false claim or statement.
•The civil monetary penalties statute imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented a claim to a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
•The federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA") imposes criminal and civil penalties for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a healthcare offense and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters.
•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and its implementing regulations impose obligations on covered entities, including healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
•The federal Open Payments program, created under the Physician Payment Sunshine Act, also known as Section 6002 of the Patient Protection and Affordable Care Act (the “Affordable Care Act”), and its implementing regulations, impose annual reporting requirements for certain manufacturers of drugs, devices, biologicals and medical supplies for payments and “transfers of value” provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. The SUPPORT for Patients and Communities Act expanded the scope of reporting such that companies must also report payments and transfers of value provided to other types of healthcare professionals. Failure to submit timely, accurately and completely the required information for all covered payments, transfers of value and ownership or investment interests may face regulatoryresult in civil monetary penalties.
•There are many analogous state and foreign laws, such as state anti-kickback and false claims laws, which may apply to sales or enforcement action.marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
•The Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal statutes governing healthcare fraud. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it.
Efforts to ensure that Immunic’s future business arrangements with third parties comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that Immunic’s business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws. If Immunic’s operations are found to be in violation of any product receives regulatory approval, we willof these laws or any other governmental regulations that may apply to it, Immunic may be subject to significant ongoing regulationcivil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of Immunic’s operations, which could significantly harm its business. If any of the
physicians or other healthcare providers or entities with whom Immunic expects to do business, including current and any future collaborators are found not to be in compliance with applicable laws, those persons or entities may be subject to criminal, civil or administrative sanctions, including exclusion from participation in government healthcare programs, which could also affect Immunic’s business.
We are subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as import and export control laws, customs laws, sanctions laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties and other remedial measures, and incur legal expenses, which could adversely affect our business, financial condition, results of operations, stock price and prospects.
Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act ("FCPA"), and other anti-corruption laws that apply in countries where we do business. The FCPA and these other laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We also may participate in collaborations and relationships with third parties whose actions, if non-compliant, could potentially subject us to liability under the FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the FDAgovernments of the United States and other regulatory authorities in the European Union, including regulation of our manufacturing operationsapplicable import and any third-party manufacturing operationsexport control regulations, economic sanctions on countries and persons, anti-money laundering laws, customs requirements and currency exchange regulations, collectively referred to ensureas trade control laws.
We can provide no assurance that we will be completely effective in ensuring our compliance with all applicable current Good Manufacturing Practices,anti-corruption laws or cGMP, and/other legal requirements, including trade control laws. If we are not in compliance with applicable anti-corruption laws or Quality System Regulation,trade control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and incur legal expenses, which could have an adverse impact on our business, financial condition, results of operations, stock price and prospects. Likewise, any investigation of any potential violations of these anti-corruption laws or QSR, requirementstrade control laws by U.S. or other authorities could also have an adverse impact on our reputation, business, financial condition, results of operations, stock price and prospects.
The impact of recent and future healthcare reform legislation and other changes in the healthcare industry and healthcare spending on Immunic is currently unknown, and may adversely affect its business model.
In the United States and some foreign jurisdictions, legislative and regulatory changes and proposed changes regarding the healthcare system could prevent or delay marketing approval of Immunic’s drug candidates, restrict or regulate post-approval activities and affect its ability to profitably sell any drug candidates for post-approval clinical data, adverse event reportingwhich Immunic obtains marketing approval.
Immunic’s revenue prospects could be affected by changes in healthcare spending and complaint handling,policy in the United States and advertisingother jurisdictions. Immunic operates in a highly regulated industry and promotional activities. Failurenew laws, regulations, judicial decisions, or new interpretations of existing laws, regulations or decisions, related to healthcare availability, the method of delivery or payment for healthcare products and services could negatively impact Immunic’s business, financial condition, results of operations and prospects. There is significant interest in promoting healthcare reform, as evidenced by the enactment in the United States of the Affordable Care Act. Among other things, the Affordable Care Act contains provisions that may reduce the profitability of drug products, including, for example, revising the methodology by which rebates owed by manufacturers for covered outpatient drugs under the Medicaid Drug Rebate Program are calculated, extending Medicaid rebates to individuals enrolled in Medicaid managed care plans, imposing mandatory discounts for certain Medicare Part D beneficiaries who fall into a coverage gap, and subjecting drug manufacturers to payment of an annual fee based on its market share of prior year total sales of branded programs to certain federal healthcare programs.
There have been judicial and congressional challenges to the Affordable Care Act, as well as efforts to repeal or replace certain aspects of the Affordable Care Act. In 2019, the United States Court of Appeals for the Fifth Circuit upheld a lower court decision finding the Affordable Care Act unconstitutional and eliminating the individual mandate. The U.S. Supreme Court declined to expedite this appeal, and thus will not issue a decision until early 2021. If a new law is enacted, or if the Affordable Care Act is overturned by the Supreme Court, many if not all of the provisions of the Affordable Care Act may no longer apply to prescription drugs. While we are unable to predict what changes may ultimately be enacted, to the extent that future changes affect how any future products are paid for and reimbursed by government and private payors, our business could be adversely impacted.
In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of 2% per fiscal year, which started in April 2013, and, due to subsequent legislative amendments, will remain in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, also reduced Medicare payments to several categories of healthcare providers. The Biden administration and Congress may announce initiatives intended to result in lower drug prices. We are not in a position to know at this time whether such initiatives will become law or what impact they would have on our business.
Immunic expects that additional healthcare reform measures and drug pricing regulations that may be adopted in the future may result in more rigorous coverage criteria and in additional downward pressure on the revenue that it receives for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent Immunic from being able to generate revenue or commercialize Immunic’s drugs.
It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing healthcare legislation. Immunic cannot predict the reform initiatives that may be adopted in the future or whether initiatives that have been adopted will be repealed or modified. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:
•the demand for any drug products for which Immunic may obtain marketing approval;
•Immunic’s ability to set a price for its products that Immunic believes is fair;
•Immunic’s ability to obtain coverage and reimbursement approval for a product;
•Immunic’s ability to generate revenues and achieve or maintain profitability; and
•the level of taxes that Immunic is required to pay.
If Immunic fails to comply with regulatoryenvironmental, health and safety laws and regulations, Immunic could become subject to fines or penalties or incur costs that could have a material adverse effect on its business, financial condition or results of operations.
Immunic’s research and development activities and the activities of its third-party manufacturers and suppliers involve the controlled storage, use, and disposal of hazardous materials, including the components of its product candidates and other hazardous compounds. Immunic and its manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling, and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at facilities of Immunic and its manufacturers pending their use and disposal. Immunic cannot eliminate the risk of contamination, which could cause an interruption of its commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. Although Immunic believes that the safety procedures utilized by it and its third-party manufacturers and suppliers for handling and disposing of
these materials generally comply with the standards prescribed by applicable laws and regulations, Immunic cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In the event of contamination of injury, Immunic may be held liable for any resulting damages, which could exceed its resources or result in government-imposed restrictions on Immunic’s use of specified materials or interruptions of its business operations. Furthermore, environmental laws and regulations are complex, change frequently, and have tended to become more stringent over time. Immunic cannot predict the impact of such changes and cannot be certain of its future compliance. Immunic does not currently carry biological or hazardous waste insurance coverage.
Other Risks Related to Immunic’s Business
Due to Immunic’s limited resources and access to capital, it must decide to prioritize development of its current product candidates for certain indications and at certain doses. These decisions may prove to have been wrong and may materially adversely affect Immunic’s business, financial condition, results of operations and prospects.
Because Immunic has limited resources and access to capital to fund its operations, it must decide which dosages and indications to pursue for the clinical development of its current product candidates and the amount of resources to allocate to each. Immunic’s decisions concerning the allocation of research, collaboration, management and financial resources toward dosages or therapeutic areas may not lead to the development of viable commercial products and may divert resources away from better opportunities. If Immunic makes incorrect determinations regarding the market potential of its current product candidates or misreads trends in the pharmaceutical industry, Immunic’s business, financial condition, results of operations and prospects could be materially adversely affected.
Immunic may not be able to win contracts or grants from governments, academic institutions or non-profits.
From time to time, Immunic may apply for contracts or grants from government agencies, non-profit entities and academic institutions. Such contracts or grants can be highly attractive because they provide capital to fund the ongoing development of Immunic’s product candidates without diluting its stockholders. However, there is often significant competition for these contracts or grants. Entities offering contracts or grants may have requirements to apply for or to otherwise be eligible for certain contracts or grants that Immunic’s competitors may subject usbe able to sanctions. Thesesatisfy that Immunic cannot. In addition, such entities may include warning letters,make arbitrary decisions as to whether to offer contracts or make grants, to whom the contracts or grants may or will be awarded and the size of the contracts or grants to each awardee. Even if Immunic is able to satisfy the award requirements, there is no guarantee that Immunic will be a successful awardee. Therefore, Immunic may not be able to win any contracts or grants in a timely manner, if at all.
In addition, even if successfully Immunic enters into contracts with or receives grants from government agencies, non-profit entities or academic institutions, it may lose such contracts or grants due to failure to comply with applicable terms, limitations, or government regulations. As a result, our business, results of operations, financial condition and prospects could be harmed.
If Immunic fails to attract and retain key management and scientific personnel, it may be unable to successfully develop or commercialize its product candidates.
Immunic’s success as a biotechnology company depends on its continued ability to attract, retain and motivate highly qualified management and scientific and clinical personnel. The loss of the services of any of Immunic’s management could delay or prevent obtaining marketing approval or commercialization of its product candidates.
Immunic may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for a limited number of qualified personnel among biotechnology, pharmaceutical and other companies. Immunic’s failure to attract, hire, integrate and retain qualified personnel could impair its ability to achieve its business objectives.
If a successful product liability claim or series of claims is brought against Immunic for uninsured liabilities or in excess of insured liabilities, Immunic could be forced to pay substantial damage awards.
The use of any of Immunic’s product candidates in clinical trials and the sale of any approved products may expose Immunic to product liability claims. Immunic currently maintains product liability insurance. Immunic intends to monitor the amount of coverage it maintains as the size and design of its clinical trials evolve and adjust the amount of coverage it maintains accordingly. However, there is no assurance that such insurance coverage will fully protect Immunic against some or all of the claims to which it might become subject. Immunic might not be able to maintain adequate insurance coverage at a reasonable cost or in sufficient amounts or scope to protect it against potential losses. In the event a claim is brought against Immunic, it might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a claim brought successfully against Immunic. Furthermore, whether or not Immunic is ultimately successful in defending any such claims, Immunic might be required to direct financial and managerial resources to such defense and adverse publicity civil and criminal penalties, injunctions, product seizures or detention, and refusal to approve pending product marketing applications.could result, all of which could harm Immunic’s business.
Our
Immunic’s employees, independent contractors, principal investigators, CROs, consultants, collaborators and vendors may engage in misconduct or other improper activities, including non-compliancenoncompliance with regulatory standards and requirements and insider trading.
We are
Immunic is exposed to the risk that ourits employees independent contractors, principal investigators, CROs, consultants and vendorsother third parties may engage in fraud, misconductfraudulent conduct or other illegal activity or that they do not comply with regulatory standardsactivity. Misconduct by employees and requirements. Misconduct or non-compliance by theseother third parties could include intentional, reckless and/or negligent conduct or unauthorized activities that violate (1)violation of FDA regulations including thoseand laws that require therequiring reporting of true, complete and accurate information to the FDA, (2) qualitymanufacturing standards, including Good Laboratory Practices, or GLP, Good Clinical Practice, or GCP, and cGMP, (3) federal and state healthcare fraud and abuse laws and regulations, (4)or laws that require the reporting of true and accurate financial information andor data (5) securities laws and regulations, (6) the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, or (7) General Data Protection Regulation. If we were to obtain FDA approval of any future product candidate and begin commercializing that product in the United States, our potential exposure under such laws would increase significantly, and our costs associated with compliance with such laws would also be likely to increase.accurately. In particular, research, sales, marketing education and business arrangements in the healthcare industry are also 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. Activities subject to these laws also involve the improper use of information obtained in the course of subject recruitment for clinical trials, which could result in regulatory sanctions and cause serious harm to ourImmunic’s reputation. We have adopted a code of business conduct and ethics, but itIt is not always possible to identify and deter employee and other third-party misconduct, by employees and third parties. We may fail to identify and deter misconduct or non-compliance by employees and third parties, or the precautions we takeImmunic takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting usImmunic from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.laws. If any such actions are instituted against us,Immunic, and we areImmunic is not successful in defending ourselvesitself or asserting ourits rights, those actions could have a significant impact on ourImmunic’s business, including the imposition of changes to or even the halt of any potential future clinical trials or manufacturing orsignificant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of ourImmunic’s operations, any of which could adversely affect ourImmunic’s ability to operate our business and our results of operations.
Risks Related to the Medical Device Components of the ELAD System or Any of Our Products
If we or our third-party manufacturers fail to comply with QSRoperate. Even if Immunic is ultimately successful in the U.S. or Medical Device Directives and Standards in Europe, our business would suffer.
We are required to demonstrate and maintain compliance with applicable regulations for the manufacturing of combination biologic products, including specified parts of the QSR and European Medical Device Directives, or MDD, with
respect to any biological product candidates. Our third-party medical device manufacturers are required to demonstrate and maintain compliance with the QSR and MDD. The QSR and MDD are complex regulatory schemes that cover the methods and documentation of and for the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of the regulated products. Regulatory agencies enforce the QSR and MDD through periodic inspections. Prior to any potential approval ofdefending any such product in the U.S. and Europe, our manufacturing facility would be subject to a preapproval inspection to determine compliance with the applicable regulations, including cGMPs, parts of the QSR, the European drug cGMP regulations, and the MDD. In addition, our third-party medical device component manufacturers would be subject to a preapproval inspection to determine compliance with QSR and MDD requirements. Our failure, or the failure of our third-party manufacturers, to pass a preapproval inspection, or to take satisfactory and prompt corrective action in response to an adverse inspection, could prevent or significantly delay approval of any product.
The ELAD System bedside unit is based on a cardio-pulmonary bypass system that was replaced with an updated system, and regulatory authorities may not view the systems as interchangeable, which could cause regulatory approvals to be significantly delayed should we resume development of ELAD for new indications.
The ELAD System bedside unit was originally based exclusively on the LivaNova (formerly Sorin) Stöckert Perfusion System S3 Double Head Pump Module, a medical device indicated for use during cardio-pulmonary bypass surgery. All or part of our early clinical trials were carried out using an ELAD System bedside unit based on LivaNova’s S3 system. However, LivaNova stopped selling the S3 system and replaced it with an updated S5 system. We carried out testing of an ELAD System bedside unit based on the S5 and we believe that the S3 and S5 systems are equivalent and interchangeable from a clinical and regulatory perspective. We have submitted information to both the U.S. and the European regulatory authorities to support equivalence. Both the S3 and S5 systems were used in our VTI-208, VTI-210 and VTL-308 clinical trials. There can be no assurance that regulatory authorities will continue to view the S3 and S5 systems interchangeably, or that LivaNova would cooperate with us or provide us with the documentation necessary for inclusion in a BLA submission, if any, which would be required to obtain regulatory approval of our ELAD System. If regulatory authorities do not view the S3 and S5 systems as equivalent, or LivaNova fails to provide the information necessary for inclusion in our regulatory filings, future development and approval of the ELAD System, if any, may be significantly delayed or prevented. In addition, effective January 1, 2018, LivaNova no longer supports its S3 systems. Accordingly, if a future trial is undertaken and successful, we would expect to commercialize ELAD with only the LivaNova S5 system.
One of the ELAD System component suppliers was subject to an FDA consent decree, which could have forced us to find another supplier for this component.
One of the components of the ELAD System bedside unit is manufactured by Terumo Cardiovascular Systems, or Terumo. In March 2011, Terumo entered into a consent decree with the FDA which limited its ability to ship products from certain of its manufacturing facilities including the one that manufactures the component we used in our prior clinical trials. We received notice from Terumo in June 2016 that all restrictions listed in the 2011 consent decree were lifted. If we had been unable to source the component we use from Terumo, we would have had to source the component from an alternative supplier. If Terumo or another component supplier has similar issues in the future, there is no guarantee that a qualified alternative supplier can be found that will agree to terms reasonably acceptable to us on a timely basis or at all. This and similar situations with other suppliers could significantly delay the development of future products.
In the development of combination biologic and device products, changes in any of the device components could affect our ability to complete any future clinical trials or to obtain and maintain approval and commercialization efforts.
The device components of the ELAD System must be reviewed as part of any BLA for ELAD. If the manufacturers of those components make modifications, discontinue supplying or are unable to supply sufficient quantities of such components during any potential clinical testing or after any approval, or if we elect to change a component, we would need to perform validation testing and obtain FDA and other regulatory approval prior to using the modified or replacement component. For example, one of our suppliers of a key component in our manufacturing process was having an issue meeting all of their customer orders for the component. If we were unable to obtain sufficient quantities of the component on a timely basis, there could have been a delay in enrollment in our clinical trial or, following an approval, in the marketing of ELAD until additional supplies became available, or we would be required to validate an alternative component to use, which could delay any clinical trials or the marketing of a product, and increase our costs. If the FDA or any other regulatory body fails to approve use of those modified or replacement devices or if we were unable to validate a replacement component, we would not be able to initiate or complete clinical trials or, in the future, we might not be able to market or could have to suspend marketing in certain jurisdictions.
If we determine to resume the clinical development of ELAD, we may be unable to demonstrate that devices cleared for different uses may be safe and effective for use in the ELAD System.
Most device components of the ELAD System have been previously cleared for use by the FDA or other regulatory authorities. However, in many instances, we would be using the components outside the scope of their cleared indications. Other device components have no regulatory approvals. If we resume development of the ELAD System, we may need to conduct additional testing to bridge the differences between the cleared indications for use and its use in the ELAD System in order to obtain any approval, or weactions, Immunic could be required to obtain separate clearance for onedivert financial and managerial resources to such action and adverse publicity could result, all of which could harm Immunic’s business.
Immunic will need to expand its organization and Immunic may experience difficulties in managing this growth, which could disrupt its operations.
As of February 26, 2021, Immunic had 28 employees. As Immunic’s development and commercialization plans and strategies develop, Immunic may need additional managerial, operational, sales, marketing, financial, legal and other resources. Its management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing its growth. As Immunic advances its product candidates through clinical trials, it will need to expand its development, regulatory, manufacturing, marketing and sales capabilities or more of the components used in the ELAD System. The failurecontract with third parties to provide adequate bridging information or to obtain separate clearance of these device components for use in the ELAD System, if required, could delay or prevent an approval of the ELAD System should further development of the ELAD System be pursued.
Risks Related to the Cellular Products and Related Components
If we fail to comply with cGMPs, our business will suffer.
We are required to demonstrate and maintain compliance with cGMPs. The cGMPs describe the methods to be used in, and the facilities or controls to be used for, the manufacture, processing, packing, or holding of a biologic to assure the biologic meets the requirements for safety, and has the quality, purity, and potency characteristicscapabilities. As Immunic’s operations expand, Immunic expects that it purports or is represented to possess. Regulatory agencies enforce these requirements through periodic inspections. Prior to any potential approval of any such product, our manufacturing facilities would be subject to a preapproval inspection to determine compliance with U.S. and European cGMPs and applicable QSR and MDD requirements or other foreign regulatory agencies. Our failure to pass such an inspection, or take satisfactory and prompt corrective action in response to an adverse inspection, could prevent or significantly delay approval of such a product.
In the manufacture of products, we rely on third party suppliers, and in many instances, a single third party supplier, for critical components, and these suppliers could cease to manufacture the components, go out of business or otherwise not perform as anticipated.
While the growth of VTL C3A cells for ELAD is under our control, the manufacture of all of the other parts and components of the ELAD System have been undertaken by third party suppliers. We have previously relied on a single source of supply for many critical components, including components of the ELAD System bedside unit, the ultrafiltrate generator cartridges, the media we use to grow and ship our VTL C3A cells, the cartridges in which our VTL C3A cells are grown, the final cell filter cartridges and the bioreactors that have been developed to grow and store the ELAD cartridges. We have investigated additional sources of supply for some of these components to support any potential future clinical development and, ultimately, commercialization of the ELAD System. If we fail to develop additional sources of supply, and a single source of supply of a critical component of the ELAD System were to become unavailable, our ability to develop or to initiate commercialization of the ELAD System would be severely compromised should we determine to pursue the further development of ELAD for new indications or geographical regions. In addition, we have relied on third party suppliers for the safety of products of human and animal origin that are incorporated in the ELAD System production process, and these suppliers could cease to manufacture the components, inadequately test these components, go out of business or otherwise not perform as anticipated. We do not have long-term agreements with our suppliers, and we will have to purchase components on a purchase order basis. For components that are not readily available from other sources, we would be subject to the risks that our suppliers will raise their prices or impose other terms or conditions that are less favorable or unacceptable to us if we resume development of the ELAD System.
For instance, bovine serum, which is a component of the cell growth media, is used in the manufacture of the ELAD System cell cartridges. It is obtained from an outside supplier. We are wholly reliant on the guarantee of our supplier that the bovine serum used in our manufacturing procedures is free of transmitted animal viruses and other pathogens. Should the source of supply become infected, or the supplier become unable to continue to supply bovine serum of the quality necessary to support human use, or the regulations change such that the bovine serum cannot be used for human use, we would have to find alternative sources of supply and manufacturing methods, for which there is no guarantee of success.
Human albumin and Trypsin-EDTA are also used in the manufacture of ELAD System cartridges and are each provided by a single supplier. In addition, while these products were tested to be free of contamination by the supplier, we cannot guarantee that will always continue to be the case.
If our facility becomes inoperable, we will be unable to continue manufacturing any product candidate and as a result, our business will be harmed until we are able to secure a new facility.
We have manufactured our biologic product and assembled the device component at our facility in San Diego, California. No other manufacturing or assembly facilities are currently available to us, and any additional manufacturing or assembly facilities that we might use would need to be qualified and approved by regulatory authorities prior to our use. Our facility and the equipment would be costly to replace and could require substantial lead-time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquakes, flooding and power outages, which may render it difficult or impossible for us to perform our research, development and manufacturing for some period of time. The inability to perform our manufacturing activities, combinedmanage additional relationships with our limited inventory of reserve raw materials and manufactured supplies, could result in the delay of any potential future clinical trials.
We often rely onsuch third parties, for certain aspects of the manufacture of our clinical productsas well as additional collaborators and supplies. Our business could be harmed if those third parties fail to provide us with sufficient quantities of product or fail to do so at acceptable quality levels or prices or if they encounter other manufacturing issues.suppliers.
We would expect to use third parties for certain parts of our production process for any products under development. This would expose us to a number of risks, including the following:
We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA must approve any manufacturers. This approval would require new testing and good manufacturing practices compliance inspections by the FDA. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of any potential future products.
Any third-party manufacturers might be unable to timely manufacture the components and custom materials and supplies we require, or to produce the quantity and quality required to meet our needs.
Contract manufacturersImmunic may not be able to execute effectively manage the expansion of its operations, which may result in weaknesses in its infrastructure, operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. Immunic’s expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If Immunic’s management is unable to effectively manage its growth, its expenses may increase more than expected, its ability to generate and/or comply withgrow revenue could be reduced and Immunic may not be able to implement its business strategy. Immunic’s future financial performance and its ability to commercialize product candidates and compete effectively will depend, in part, on its ability to effectively manage any future growth.
Immunic’s internal computer systems, or those of its development collaborators, third-party CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of Immunic’s product development programs.
Our internal computer systems and those of our current and any future strategic collaborators, vendors, and other contractors or consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, cybersecurity threats, war and telecommunication and electrical failures. We may experience cyber-attacks on our information technology systems by threat actors of all types (including but not limited to nation states, organized crime, other criminal enterprises, individual actors and/or advanced persistent threat groups). In addition, we may experience intrusions on our physical premises by any of these threat actors. If any such cyber-attack or physical intrusion were to cause interruptions in our operations, such as a material disruption of our development programs or our manufacturing proceduresoperations, whether due to a loss of our trade secrets or other proprietary information, it would have a material and adverse effect on us. For example, the loss of clinical trial data from one or more ongoing or completed or future clinical trials could result in delays in our regulatory approval efforts, significantly increase our costs to recover or reproduce the data and expose us to liability. In addition, any breach of our computer systems or physical premises could result in a loss of data or compromised data integrity across more than one of our programs in different stages of development. Any such breach, loss, or compromise of clinical trial participant personal data may also subject us to civil fines and penalties or claims for damages, either under the General Data Protection Regulation and relevant member state law in the European Union, other foreign laws, and HIPAA, and other logistical support requirements appropriately.
Any contract manufacturers may not perform as agreed, may not devote sufficient resources to us, or may not remainrelevant state and federal privacy laws in the contract manufacturing businessUnited States including the California Consumer Privacy Act. On May 13, 2020, the Federal Bureau of Investigation (“FBI”) and alternative manufacturersCybersecurity and Infrastructure Security Agency announced that can meetthe FBI is investigating the targeting and compromise of U.S. organizations conducting COVID-19-related research by People’s Republic of China-affiliated cyber actors. To the extent that any disruption or security breach were to result in a loss of, or damage to, our requirements maydata or applications, or inappropriate disclosure of confidential or proprietary information, including but not limited to information related to our IMU-838 product candidate, we could incur liability, our competitive and reputational position could be difficult to identifyharmed, and qualify on a timely basis, ifthe further development and commercialization of our investigational medicines could be delayed. On July 31, 2020 we discovered that an email account at all.
Manufacturers arethe Company was subject to ongoing periodic unannounced inspections by the FDAattempted unauthorized access for a period of up to 24 hours and corresponding state agencieswe have hired an investigator to ensure strict compliance with current good manufacturing practices and other government regulations and corresponding foreign standards.ascertain what, if any, Company or patient information was impacted. We do not currently believe any confidential or proprietary information was compromised and have control over third-party manufacturers’ compliance with these regulations and standards, and they are also subjecttaken steps to prevent unauthorized action in the same ongoing periodic unannounced inspection. Any license to manufacture product candidates willfuture such as implementing two factor authentication for our email accounts. While we believe that our insurance policies include liability coverage for security breaches, we could be subject to continued regulatory review. Failure to meet such standardsindemnity claims or other damages that exceed our insurance coverage. As a result, the ramifications of a potential security breach could result in the need to take corrective actions and even withdrawal of product from the market.
We may not own, or may have to share, the intellectual property rights to any improvements made by our third-party manufacturers in the manufacturing process, or in the manufacture of the custom materials used in the manufacture thereof.
Any third-party manufacturers could breach or terminate their agreement with us.
Any contract manufacturers may have unacceptable or inconsistent product quality, success rates and yields.
The actual cost to manufacture and process any future product candidates could materially and adversely affect their commercial viability.
Any manufacturers may experience manufacturing difficulties due to resource constraints and labor disputes, as well as natural or man-made disasters.
Each of these risks could delay or prevent the completion of any potential future clinical trials or the approval of any future product by the FDA, result in higher costs, or adversely impact commercialization. If our contract manufacturers are unable to successfully produce any components or any related supplies for potential future clinical trials or commercialization, potential future clinical trials or potential future commercial efforts would be impaired, which would have ana material adverse effect on our business, financial condition, results of operations and growth prospects.prospects, as well as cause a decline in the trading price of our common stock.
Risks Related to Commercialization of Immunic’s Product Candidates
We forecast
Even if Immunic obtains the requirementsrequired regulatory approvals in the United States and other territories, the commercial success of its product candidates will depend on market awareness and acceptance of its product candidates.
Even if Immunic obtains marketing approval for componentsits current product candidates or any other product candidates that it may develop or acquire in the future, the products may not gain market acceptance among physicians, key
opinion leaders, healthcare payors, patients and materials usedthe medical community. Market acceptance of any approved products depends on a number of factors, including:
•the timing of market introduction;
•the efficacy and safety of the product, as demonstrated in our productsclinical trials;
•the clinical indications for which the product is approved and if our forecasts are incorrect, wethe label approved by regulatory authorities for use with the product, including any precautions, warnings or contraindications that may experience delays in shipments or increased inventory costs.
In the past, we have kept limited materials, components and, if applicable, finished product on hand. To manage our manufacturing operations with our suppliers, we forecast anticipated product orders and material requirements to predict our future inventory needs and enter into purchase ordersbe required on the basislabel;
•acceptance by physicians, key opinion leaders and patients of these requirements. Ourthe product as a safe and effective treatment;
•the cost, safety and efficacy of treatment in relation to alternative treatments;
•the availability of coverage and adequate reimbursement and pricing by third-party payors and government authorities;
•the number and clinical profile of competing products;
•the growth of drug markets in Immunic’s various indications;
•relative convenience and ease of administration;
•marketing and distribution support;
•the prevalence and severity of adverse side effects; and
•the effectiveness of Immunic’s sales and marketing efforts.
Market acceptance is critical to Immunic’s ability to generate revenue. Any approved and commercialized product candidate may be accepted in only limited historical experience maycapacities or not provide us with enough dataat all. If any approved products are not accepted by the market to accurately predict our future needs. Many of our components are medical devices, which have fixed future expiration dates. If we overestimate our component and material requirements, we will have excess inventory, which may have to be disposed of if it exceeds approved expiration dates, which would increase our expenses. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt, delay or prevent delivery of our products. Any of these occurrences would negatively affect our financial performance and the level of satisfaction any potential customers or partners have with our business.
Weextent that Immunic expects, Immunic may not be able to grow cells usedgenerate revenue and its business would suffer.
Immunic currently has limited marketing and sales experience. If Immunic is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell its product candidates, Immunic may be unable to generate any revenue.
Immunic has never commercialized a product candidate, and Immunic currently has no marketing and sales organization. To the extent Immunic’s product candidates are approved for marketing, if Immunic is unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell its product candidates, Immunic may not be able to effectively market and sell its product candidates or generate product revenue.
In addition, Immunic currently does not have marketing, sales or distribution capabilities for its product candidates. In order to commercialize any of Immunic’s products that receive marketing approval, it would have to build marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and Immunic may not be successful in our products reliablydoing so. In the event of successful development of Immunic’s product candidates, if Immunic elects to build a targeted specialty sales force, such an effort would be expensive and cost-effectively.
Operations with human cells, even a stable, cell line such as the VTL C3A cells, which are usedtime consuming. Any failure or delay in the ELAD System, candevelopment of Immunic’s internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. Immunic may choose to collaborate with third parties that have their own sales forces and established distribution systems, in lieu of or to augment any sales force and distribution systems Immunic may create. If Immunic is unable to enter into collaborations with third parties for the commercialization of any approved products on acceptable terms or at all, or if any such collaborator does not devote sufficient resources to the commercialization of Immunic’s product or otherwise fails in commercialization efforts, Immunic may not be able to successfully commercialize its product candidates if it receives marketing approval. If Immunic is not successful in commercializing its product candidates, either on its own or through collaborations with one or more third parties, its future revenue will be materially and adversely impacted.
If Immunic fails to enter into strategic relationships or collaborations, its business, financial condition, commercialization prospects and results of operations may be materially adversely affected.
Immunic’s product development programs and the potential commercialization of its current product candidates will require substantial additional cash to fund expenses. Therefore, in addition to financing the development of Immunic’s product candidates through additional equity financings or through debt financings, Immunic may decide to enter into collaborations with pharmaceutical or biopharmaceutical companies for the development and potential commercialization of its product candidates.
Immunic faces significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. Immunic may also be restricted under existing and future collaboration agreements from entering into agreements on certain terms with other potential collaborators. Immunic may not be able to negotiate collaborations on acceptable terms, or at all. Any of these contingencies may require Immunic to curtail the development of a particular product, reduce or delay its development program or one or more of its other development programs, delay its potential commercialization or reduce the scope of its sales or marketing activities, or increase its expenditures and undertake development or commercialization activities at its own expense. If Immunic elects to increase its expenditures to fund development or commercialization activities on its own, Immunic may need to obtain additional capital, which may not be available to Immunic on acceptable terms or at all. If Immunic does not have sufficient funds, Immunic will not be able to bring its product candidates to market and generate product revenue. If Immunic does enter into a new collaboration agreement, it could be subject to conditionsthe following risks, each of which may materially harm Immunic’s business, commercialization prospects and influencesfinancial condition:
•Immunic may not be able to control the amount or timing of resources that the collaborator devotes to the product development program;
•the collaborator may experience financial difficulties and thus not commit sufficient financial resources to the product development program;
•Immunic may be required to relinquish important rights such as marketing, distribution and intellectual property rights;
•a collaborator could move forward with a competing product developed either independently or in collaboration with third parties, including Immunic’s competitors; or
•business combinations or significant changes in a collaborator’s business strategy may adversely affect Immunic’s willingness to complete its obligations under any arrangement.
Coverage and reimbursement may be limited or unavailable in certain market segments for Immunic’s product candidates, which could make it difficult for Immunic to sell its products profitably.
The pricing, coverage, and reimbursement of any of Immunic’s approved products must be sufficient to support its commercial efforts and other development programs, and the availability and adequacy of coverage and reimbursement by third-party payors, including governmental and private insurers, are essential for most patients to be able to afford expensive treatments. Sales of any of Immunic’s approved product candidates will depend substantially, both domestically in other jurisdictions, on the extent to which the costs of any of its approved products will be paid for or reimbursed by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or government payors and private payors. If coverage and reimbursement are not available, or are available only in limited amounts, Immunic may have to subsidize or provide products for free or Immunic may not be able to successfully commercialize its products.
In addition, there is significant uncertainty related to the insurance coverage and reimbursement for newly approved products. In the United States, the principal decisions about coverage and reimbursement for new drugs are typically made by the Centers for Medicare & Medicaid Services ("CMS"), an agency within the U.S. Department of Health and Human Services, as CMS decides whether and to what extent a new drug will be covered and reimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for Immunic’s novel product candidates and what reimbursement codes its product candidates may receive if approved. There also may be delays in obtaining coverage for newly-approved drugs. Obtaining coverage and reimbursement approval is time-consuming and costly, requiring us to provide payors with scientific, clinical, and cost-
effectiveness data. Further, eligibility for coverage does not necessarily signify that a drug will be reimbursed in all cases or at a rate that covers our costs. Thus, even if we succeed in bringing a product to market, it may not be considered medically necessary or cost-effective, and the amount reimbursed for any products may be insufficient to allow us to sell our products on a competitive basis.
Outside the United States, international operations are generally subject to extensive governmental price controls and other price-restrictive regulations, and Immunic believes the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries has and will continue to put pressure on the pricing and usage of products. In many countries, the prices of products are subject to varying price control mechanisms as part of national health systems. Price controls or other changes in pricing regulation could restrict the amount that Immunic is able to charge for any of its products. Accordingly, the potential revenue and profits from markets outside the United States may be commercially inadequate.
Moreover, increasing efforts by governmental and private payors in the United States and other jurisdictions to limit or reduce healthcare costs may result in restrictions on coverage and the level of reimbursement for new products and, as a result, they may not cover or provide adequate payment for Immunic’s products. Immunic expects to experience pricing pressures in connection with products due to the increasing trend toward managed healthcare, including the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, and prescription drugs in particular, has and is expected to continue to increase in the future. For instance, government and private payors who reimburse patients or healthcare providers are increasingly seeking greater upfront discounts, additional rebates and other concessions to reduce prices for pharmaceutical products. As a result, it may be difficult for any of Immunic’s products to achieve profitability, even if they receive regulatory approval.
Immunic faces substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than Immunic does.
The development and commercialization of new drug products is highly competitive. Immunic faces competition from major pharmaceutical companies, specialty pharmaceutical companies, biotechnology companies, universities and other research institutions worldwide with respect to its product candidates that it may seek to develop or commercialize in the future. Many of Immunic’s competitors have materially greater name recognition and financial, manufacturing, marketing, research and drug development resources than it does. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in its competitors. Large pharmaceutical companies in particular have extensive expertise in preclinical and clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with Immunic’s competitors.
In particular, the field of IBD, including UC, and CD are highly competitive. Immunic’s competitors in the United States and elsewhere include major pharmaceutical, biotechnology and biosimilar manufacturers. Some of these competitors may have more extensive research and development, regulatory compliance, manufacturing, marketing and sales capabilities than Immunic. Many competitors also have significantly greater financial resources. These companies may succeed in developing products that are more effective or more economical than any of Immunic’s product candidates and may also be more successful than Immunic in manufacturing, developing and registering products. In addition, technological advances or different approaches developed by one or more of Immunic’s competitors may render Immunic’s products obsolete, less effective or uneconomical.
If Immunic’s competitors obtain marketing approval from the FDA or comparable foreign regulatory authorities for their product candidates more rapidly than Immunic does, they could establish a strong market position before Immunic is able to enter the market. Third-party payors, including governmental and private insurers, also may encourage the use of generic products. Failure of any approved product candidates to effectively compete against established treatment options or in the future with new products currently in development would harm Immunic’s business, financial condition, results of operations and prospects.
The size of the potential market for our product candidates is difficult to estimate and, if any of our assumptions are inaccurate, the actual markets for our product candidates may be smaller than our estimates.
The potential market opportunities for our product candidates are difficult to estimate and will depend on a number of factors beyond our control. Our estimates of potential market opportunities are predicated on many assumptions, which may include industry knowledge and publications, third-party research reports, and other surveys. Although we believe that our internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain, and their reasonableness has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for our product candidates could be smaller than our estimates.
Negative developments in the field of oral therapies for chronic inflammatory and autoimmune diseases could damage public perception of our product candidates and negatively affect our business.
The commercial success of our product candidates will depend in part on public acceptance of the use of oral therapies for the treatment of chronic inflammatory and autoimmune diseases. Adverse events in clinical trials of our product candidates or in clinical trials of others developing similar products and the resulting publicity, as well as any other negative developments that may occur in the future, including in connection with competitor therapies, could result in a decrease in demand for our product candidates. These events could also result in the suspension, discontinuation, or clinical hold of or modification to our clinical trials. Our product candidates may not be accepted by the general public or the medical community and potential clinical trial subjects may be discouraged from enrolling in our clinical trials. As a result, we may not be able to continue or may be delayed in conducting our development programs.
Price controls may be imposed in foreign markets, which may adversely affect Immunic’s future profitability.
In some countries, particularly member states of the European Union, the pricing of prescription drugs is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, Immunic may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of its product candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of Immunic’s products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, Immunic’s business could be adversely affected.
Risks Related to Third Parties
Immunic relies on third-party suppliers and other third parties for production of its product candidates, and Immunic’s dependence on these third parties may impair the advancement of its research and development programs and the development of its product candidates.
Immunic does not currently own or operate manufacturing facilities for clinical or commercial production of its product candidates. Immunic lacks the resources and the capability to manufacture any of its product candidates on a clinical or commercial scale. Instead, Immunic relies on, and expects to continue to rely on, third parties for the supply of raw materials and manufacture of drug supplies necessary to conduct its preclinical studies and clinical trials. Immunic’s reliance on third parties for manufacturing exposes Immunic to additional risks. Delays in
production by third parties could delay Immunic’s clinical trials or have an adverse impact on any commercial activities. In addition, Immunic’s dependence on third parties for the manufacture of and formulation of its product candidates subjects it to the risk that such products may have manufacturing defects that Immunic has limited ability to prevent or control. Although our VTL C3A cells are stored at three separate locationsImmunic oversees these activities to ensure compliance with its quality standards, budgets and timelines, Immunic has, and will continue to have, less control over the manufacturing of its product candidates than if it was to manufacture its product candidates. Further, the third parties Immunic contracts with could have staffing difficulties, might undergo changes in priorities or may become financially distressed, any of which would adversely affect the manufacturing and production of Immunic’s product candidates. In addition, a third party could be acquired by, or enter into an exclusive arrangement with, one of Immunic’s competitors, which would adversely affect Immunic’s ability to access the formulations it requires for the manufacturing of its product candidates.
The facilities used by Immunic’s current contract manufacturers and any future manufacturers to manufacture Immunic’s product candidates must be inspected by the FDA after Immunic submits its NDA. Immunic does not control the manufacturing process of, and is completely dependent on, its contract manufacturers for compliance with the regulatory requirements, known as cGMPs, for manufacture of both active drug substances and finished drug products. If Immunic’s contract manufacturers cannot successfully manufacture material that conforms to Immunic’s specifications and the strict regulatory requirements of the FDA, the FDA may refuse to approve Immunic’s NDA. If the FDA does not approve Immunic’s NDA because of concerns about the manufacture of its product candidates or if significant manufacturing issues arise in the U.S.future, Immunic may need to find alternative manufacturing facilities, which would significantly impact its ability to develop its product candidates, obtain marketing approval of its NDA or to continue to market any approved product candidates. Although Immunic is ultimately responsible for ensuring compliance with these regulatory requirements, Immunic does not have day-to-day control over a contract manufacturing organization ("CMO"), or other third-party manufacturer’s compliance with applicable laws and regulations, including cGMPs and other laws and regulations, such as those related to environmental health and safety matters. Any failure to achieve and maintain compliance with these laws, regulations and standards could subject Immunic to the risk that Immunic may have to suspend the manufacturing of its product candidates or that obtained approvals could be revoked, which would adversely affect Immunic’s business and reputation. In addition, third-party contractors, such as Immunic’s CMOs, may elect not to continue to work with Immunic due to factors beyond Immunic’s control. They may also refuse to work with Immunic because of their own financial difficulties, business priorities or other reasons, at a time that is costly or otherwise inconvenient for Immunic. If Immunic was unable to find adequate replacement or another acceptable solution in time, Immunic’s clinical trials could be delayed or its commercial activities could be harmed.
Problems with the quality of the work performed by third parties may lead Immunic to seek to terminate its working relationships and use alternative service providers. However, making this change may be costly and may delay clinical trials. In addition, it may be very challenging, and in some cases impossible, to find replacement service providers that can develop and manufacture Immunic’s drug candidates in an acceptable manner and at an acceptable cost and on a timely basis. The sale of products containing any defects or any delays in the supply of necessary services could adversely affect Immunic’s business, financial condition, results of operations, and prospects.
Growth in the costs and expenses of components or raw materials may also adversely affect Immunic’s business, financial condition, results of operations, and prospects. Supply sources could be interrupted from time to time and, if interrupted, supplies may not be resumed (whether in part or in whole) within a reasonable timeframe and at an acceptable cost or at all.
Immunic plans to rely on third parties to conduct clinical trials for its product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, it may cause delays in commencing and completing clinical trials of Immunic’s product candidates or Immunic may be unable to obtain marketing approval for or commercialize its product candidates.
Clinical trials must meet applicable FDA and foreign regulatory requirements. Immunic does not have the ability to independently conduct clinical trials for any of its product candidates. Immunic relies and expects to
continue relying on third parties, such as CROs, medical institutions, clinical investigators and contract laboratories, to conduct all of its clinical trials of its product candidates; however, Immunic remains responsible for ensuring that each of its clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and other foreign regulatory authorities require Immunic to comply with IND and human subject protection regulations and cGCPs for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Immunic’s reliance on third parties does not relieve Immunic of these responsibilities and requirements. Regulatory authorities enforce eGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If Immunic or any of its third-party contractors fail to comply with applicable eGCPs, the clinical data generated in Immunic’s clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require Immunic to perform additional clinical trials before approving its marketing applications. There is no assurance that upon inspection by a given regulatory authority, such regulatory authority will determine that any of Immunic’s clinical trials comply with eGCPs. Immunic’s failure to comply with these regulations may require Immunic to repeat clinical trials, which would delay the marketing approval process.
There are significant requirements imposed on Immunic and on clinical investigators who conduct clinical trials that Immunic sponsors. Although Immunic is responsible for selecting qualified CROs or clinical investigators, providing them with the information they need to conduct the clinical trials properly, ensuring proper monitoring of the clinical trials, and ensuring that the clinical trials are conducted in accordance with the general investigational plan and protocols contained in the IND, Immunic cannot ensure that the CROs or clinical investigators will maintain compliance with all regulatory requirements at all times. The pharmaceutical industry has experienced cases where clinical investigators have been found to incorrectly record data, omit data, or even falsify data. Immunic cannot ensure that the CROs or clinical investigators in Immunic’s trials will not make mistakes or otherwise compromise the integrity or validity of data, any of which would have a significant negative effect on Immunic’s ability to obtain marketing approval, its business, and its financial condition.
Immunic or the third parties it relies on may encounter problems in clinical trials that may cause Immunic or the FDA or foreign regulatory agencies to delay, suspend or terminate Immunic’s clinical trials at any phase. These problems could include the possibility that Immunic may not be able to manufacture sufficient quantities of materials for use in its clinical trials, conduct clinical trials at its preferred sites, enroll a sufficient number of patients for its clinical trials at one or more sites, or begin or successfully complete clinical trials in a timely fashion, if at all. Furthermore, Immunic, the FDA or foreign regulatory agencies may suspend clinical trials of Immunic’s product candidates at any time if Immunic or they believe the subjects participating in the trials are being exposed to unacceptable health risks, whether as a result of adverse events occurring in Immunic’s trials or otherwise, or if Immunic or they find deficiencies in the clinical trial process or conduct of the investigation. The FDA or foreign regulatory agencies could also require additional clinical trials before or after granting marketing approval for any products, which would result in increased costs and significant delays in the development and commercialization of such products and could result in the withdrawal of such products from the market even if marketing approval has already been obtained. Immunic’s failure to adequately demonstrate the safety and efficacy of a product candidate in clinical development could delay or prevent marketing approval of the product candidate. Even if market approval has already been obtained, adverse data from post-approval studies could result in the product being withdrawn from the market. These contingencies would likely have a material adverse effect on Immunic’s business.
Immunic may be unable to realize the potential benefits of any collaboration.
Even if Immunic is successful in entering into a collaboration with respect to the development and/or commercialization of one or more product candidates, there is no guarantee that the collaboration will be successful. Collaborations may pose a number of risks, including:
•collaborators often have significant discretion in determining the efforts and resources that they will apply to the collaboration, and may not commit sufficient resources to the development, marketing or commercialization of the product or products that are subject to the collaboration;
•collaborators may not perform their obligations as expected;
•any such collaboration may significantly limit Immunic’s share of potential future profits from the associated program, and may require it to relinquish potentially valuable rights to its current product candidates, potential product candidates or proprietary technologies or grant licenses on terms that are not favorable to Immunic;
•collaborators may cease to devote resources to the development or commercialization of Immunic’s product candidates if the collaborators view its product candidates as competitive with their own products or product candidates;
•disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the course of development, might cause delays or termination of the development or commercialization of product candidates, and might result in legal proceedings, which would be time-consuming, distracting and expensive;
•collaborators may be impacted by changes in their strategic focus or available funding, or business combinations involving them, which could cause them to divert resources away from the collaboration;
•collaborators may infringe the intellectual property rights of third parties, which may expose Immunic to litigation and potential liability;
•the collaborations may not result in Immunic achieving revenues to justify such transactions; and
•collaborations may be terminated, which may require Immunic to raise additional capital to pursue further development or commercialization of the applicable product candidate.
As a result, a collaboration may not result in the successful development or commercialization of Immunic’s product candidates.
Immunic enters into various contracts in the normal course of its business in which Immunic indemnifies the other party to the contract. In the event Immunic has to perform under these indemnification provisions, it could have a material adverse effect on its business, financial condition and results of operations.
In the normal course of business, Immunic periodically enters into academic, commercial, service, collaboration, licensing, consulting and other agreements that contain indemnification provisions. With respect to Immunic’s academic and other research agreements, Immunic typically indemnifies the institution and related parties from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements for which Immunic has secured licenses, and from claims arising from Immunic’s or its sublicensees’ exercise of rights under the agreements.
Should Immunic’s obligation under an indemnification provision exceed applicable insurance coverage or if Immunic were denied insurance coverage, Immunic’s business, financial condition and results of operations could be adversely affected. Similarly, if Immunic is relying on a collaborator to indemnify Immunic and the collaborator is denied insurance coverage or the indemnification obligation exceeds the applicable insurance coverage, and if the collaborator does not have other assets available to indemnify Immunic, Immunic’s business, financial condition and results of operations could be adversely affected.
If Immunic’s contract manufacturersfail to comply with continuing regulations, resulting enforcement action could adversely affect Immunic.
If any of Immunic’s contract manufacturers fails to comply with regulatory requirements or if previously unknown problems with products, such manufacturers or manufacturing processes are discovered, Immunic or the manufacturer could be subject to administrative or judicially imposed sanctions, including restrictions on the products or the manufacturers or manufacturing processes Immunic uses, warning letters, untitled letters, civil or criminal penalties, fines, injunctions, product seizures or detentions, import bans, voluntary or mandatory product recalls and publicity requirements, suspension or withdrawal of regulatory approvals, total or partial suspension of production, and refusal to approve pending applications for marketing approval of new products.
Risks Related to Immunic’s Intellectual Property
Immunic’s proprietary rights may not adequately protect its technologies and product candidates.
Immunic’s commercial success will depend in part on its ability to obtain additional patents and protect its existing patent position as well as its ability to maintain adequate protection of other intellectual property for its technologies, product candidates, and any future products in the United Kingdom,States and other countries. If Immunic does not adequately protect its intellectual property, competitors may be able to use Immunic’s technologies and erode or UK,negate any competitive advantage Immunic may have, which could harm Immunic’s business and ability to achieve profitability. The laws of some foreign countries, in particular China and India, do not protect Immunic’s proprietary rights to the same extent or in the same manner as U.S. laws, and Immunic may encounter significant problems in protecting and defending its proprietary rights in these countries. Immunic will be able to protect its proprietary rights from unauthorized use by third parties only to the extent that Immunic’s proprietary technologies, product candidates and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.
Immunic applies for patents covering both its technologies and product candidates as it deems appropriate. However, Immunic may fail to apply for patents on important technologies or product candidates in a timely fashion, or at all. Immunic’s existing patents and any future patents it obtains may not be sufficiently broad to prevent others from using its technologies or developing competing products and technologies. Immunic cannot be certain that its patent applications will be approved or that any patents issued will adequately protect Immunic’s intellectual property.
Moreover, the patent positions of pharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles are evolving and remain unresolved. As a result, the validity and enforceability of patents cannot be predicted with certainty. In addition, Immunic does not know whether:
•Immunic or its licensors were the first to make the inventions covered by each of Immunic’s issued patents and pending patent applications;
•Immunic or its licensors were the first to file patent applications for these inventions;
•any of the patents that cover Immunic’s product candidates will be eligible to be listed in the FDA’s compendium of “Approved Drug Products with Therapeutic Equivalence Evaluations,” sometimes referred to as the FDA’s Orange Book;
•others will independently develop similar or alternative technologies or duplicate any of Immunic’s technologies;
•any of Immunic’s or its licensors’ pending patent applications will result in issued patents;
•any of Immunic’s or its licensors’ patents will be valid or enforceable;
•any patents issued to Immunic or its licensors and collaborators will provide Immunic with any competitive advantages, or will be challenged by third parties;
•Immunic will develop additional proprietary technologies that are patentable;
•governmental authorities will exercise any of its statutory rights to Immunic’s intellectual property that was developed with government funding; or
•Immunic’s business may infringe the patents or other proprietary rights of others.
The actual protection afforded by a patent varies based on products or processes, from country to country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country, the validity and enforceability of the patents and Immunic’s financial ability to enforce its patents and other intellectual property. Immunic’s ability to maintain and solidify its proprietary rights to its product candidates and future products will depend on its success in obtaining effective claims and enforcing those claims once granted. Immunic’s issued patents and those that may issue in the future, or those licensed to Immunic, may be challenged, narrowed, invalidated or circumvented, and the
rights granted under any issued patents may not provide Immunic with proprietary protection or competitive advantages against competitors with similar products. Due to the extensive amount of time required for the development, testing and regulatory review of a product candidate, it is possible that, all three locations couldbefore any of Immunic’s product candidates can be destroyed and we could lose allcommercialized, any related patent may expire or remain in force for only a portion of our cell banks. It is also possible that the cells will simply cease to function. While we take precautions to prevent this from happening, we could encounter unforeseen complications. To date, we have only produced the small numbershort period following commercialization, thereby reducing any advantage of the ELAD cartridges requiredpatent.
Immunic may also rely on trade secrets to support our prior clinical trials. If we were to resume development of the ELAD System and needed to increase production to support demand, we could experience significant scale-up issues, which may cause quality and cost problems and our business could be materially harmed.
Cellular therapy is complex, and we may not ever have a complete understanding of the mechanism of action of any cellular therapy.
Cellular therapy is a complex treatment with multiple variables that are not fully understood. For example, our VTL C3A cells, which were used in the ELAD cartridges produce hundreds of metabolites. Likewise, the plasma ultrafiltrate formed from blood, which has been treated by our VTL C3A cells in our ELAD cartridges, is a similarly complex material. The composition and stability of the treated blood can also be affected by the conditionsprotect some of its generation in the ELAD System bedside unit, which could affect treatment outcomes. For instance, while most subjects treated with the ELAD System typically only required a single set of cartridges, some subjects required more than one set during their treatment period, which may have implications for efficacy and costs.technology, especially where Immunic does not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain. While we believed that we had identified the key parameters of the ELAD System VTL C3A cartridges and set them in an appropriate range, it was possible that there were other variables that were importantImmunic uses reasonable efforts to safety and efficacy that were not anticipated.
Likewise, the potential mechanism of action for the ELAD System remains unproven and may never be proven. The ELAD System's mechanism of action appears complex, may involve numerous pathways and we may not succeed in ever elucidating the exact role of any given pathway. Moreover, our research on mechanism of action was primarily based on laboratory studies, and needed correlation with in vivo studies and patient outcomes.
Risks Related to Doing Business Internationally
If we were to do business internationally, it may prove to be difficult and fraught with economic, regulatory and political issues.
If we were to commercialize the ELAD Systemprotect its trade secrets, Immunic’s or any of its collaborators’ employees, consultants, contractors or scientific and other product in countries where the business, economicadvisors may unintentionally or willfully disclose Immunic’s proprietary information to competitors and political climates are very different from those of the U.S., we may not be aware of some of these issues, and it may be difficult for a U.S. company to overcome these issues and ultimately become profitable. For instance, we completed our Chinese pivotal clinical trial in 2007 and submitted our data to the China Food and Drug Administration, or CFDA, showing a statistically significant improvement in transplant-free survival among the ELAD System-treated subjects compared with control subjects. However, this application has been neither approved nor rejected and the timing and nature of any potential decision is highly uncertain. These foreign countries may also favor businesses that are owned by nationals of those countries as opposed to foreign-owned businesses operating locally. As a small company, weImmunic may not have the resourcesadequate remedies in respect of such disclosure. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than U.S. courts to engage in the negotiation and time-consuming work needed to overcome some of these potential issues.
In the event that we were to receive any marketing approval in foreign countries outside of the U.S. and Europe, we could create wholly-owned subsidiariesprotect trade secrets. If Immunic’s competitors independently develop equivalent knowledge, methods or work with a partner in those countries or in a region. These subsidiaries will need to build an effective sales, marketing, distribution, training and support staff and system, find an effective marketing partner or both. Any internal sales, marketing, training and support capabilities of the subsidiaries will need to be developed by these subsidiaries and will need to be built from scratch. The culture and accepted practices related to selling medical products in many foreign countries are unique, and it is possible that we willknow-how, Immunic would not be able to successfully penetrate these markets. We cannot guaranteeassert its rights to trade secrets and Immunic’s business could be harmed.
Immunic is a party to license agreements under which Immunic licenses intellectual property and receives commercialization rights relating to certain of its product candidates. If Immunic fails to comply with obligations in such agreements or otherwise experience disruptions to its business relationships with its licensors, Immunic could lose license rights that our approachare important to its business; any termination of such agreements would adversely affect Immunic’s business.
Immunic is a party to license agreements that give Immunic various commercialization rights, the loss of which (whether due to Immunic’s actions or those of the respective counterparties) may adversely affect Immunic’s business. For instance, in November 2018, Immunic and Daiichi Sankyo entered into a license and option agreement that grants Immunic an exclusive global option to license IMU-856 and related molecules. In January 2020, Immunic exercised this option and acquired the rights to commercialization of IMU-856 in all countries including the U.S., European, Chinese or any other international market would be effective.Europe and Japan.
The medical systems in many foreign countries are very differentloss of (i) the licenses granted to Immunic under its agreements with Daiichi Sankyo and other licensors, or (ii) the rights provided under such agreements, would prevent Immunic from that ofdeveloping, manufacturing or marketing products covered by the U.S.license or subject to supply commitments, and could cause significant problems formaterially harm Immunic’s business, financial condition, results of operations and prospects.
Immunic may not be able to protect its intellectual property rights throughout the ELAD System if foreign commercialization is pursued.world.
If we were to resume developmentFiling, prosecuting and ultimately pursue foreign commercialization of ELAD, the medical systemsdefending patents on product candidates in manyall countries aroundthroughout the world would pose challenges to the commercialization of the ELAD System. For instance, most medical care in China is delivered on a private pay basis,be prohibitively expensive, and it could be difficult to receive payment for the ELAD System therapy delivered or the price of our product, which could be relatively high, may prove to be beyond the capability of the targeted Chinese patient to pay. Further, as we have encountered in our prior clinical trials, the standard and the operation of the delivery of care in China are different, causing problems with the operation of the ELAD System therapy. These issues include the withholding of necessary medicines, the inadequate staffing of Chinese hospitals, the shortage of blood products, the differing practice of delivery of extracorporeal therapies, and the attitude of physicians and nurses. These issues and others are likely to occur in other countries around the world and there is no assurance that we could overcome these challenges or succeed in commercializing the ELAD System or any other product in any foreign country.
If we were to pursue foreign commercialization we would face increased risks of doing business due to the extent of our operations internationally.
If we were to pursue foreign commercialization, these efforts may be through wholly-owned, foreign domiciled subsidiaries. Our efforts to expand internationally pose risks that could adversely affect our business. These risks include, among others, the effects of:
fluctuations in foreign currency exchange rates and controls;
economic weakness, including inflation, or political instability in particular non-U.S. economies and markets;
differing and changing regulatory requirements in non-U.S. countries;
challenges enforcing our contractual andImmunic’s intellectual property rights especially 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 that do not respect and protect intellectual property rights to the same extent as federal and state laws in the United States;
negative consequences from changes in tax laws;
difficulties associated with staffing and managing international operations, including differing labor relations;
potential liability under the Foreign Corrupt Practices Act or comparable foreign laws;
business interruptions resulting from geo-political actions or natural disasters including earthquakes, typhoons, floods and fires;
competitive disadvantages to established foreign businesses with significant current market share and business and customer relationships;
nationalization;
tax and regulatory policies of local governments and the possibility of trade embargoes;
political instability, war, terrorism, or other hostilities; and
laws and policies of the U.S. and foreign governments affecting foreign trade and investment.
Any of these risks could cause significant interruptions in potential future operations, which would adversely affect our ability to commercialize products internationally and our financial condition, results of operations and business.
Revenues, profits and cash flows derived in foreign countries by foreign subsidiaries may be denominated in foreign currency. The value of this currency may be controlled or adjusted periodically by foreign governments, and may be subject to changes in political and economic conditions.
Foreign economic, political and social conditions and government policies could materially and adversely affect our business.
If we were to pursue foreign commercialization, a significant portion of our potential future operations may be conducted in foreign countries and it is possible that a significant percentage of our revenues may be derived from these countries. Accordingly, our results of operations, financial condition and prospects would be subject, to a significant degree, to economic, political, legal and social developments around the world. The economies of many of these countries differ from the economy of the U.S. in many respects, including:
level of government involvement;
economic structure;
allocation of resources;
level of development;
inflation rates;
growth rate; and
control of foreign exchange.
The legal systems inStates. For example, many foreign countries have inherent uncertainties thatcompulsory licensing laws under which a patent owner must grant licenses to third parties. Consequently, Immunic may not be able to prevent third parties from practicing Immunic’s technologies in all countries outside the United States, or from selling or importing products made using Immunic’s technologies in and into the United States or other jurisdictions. Competitors may use Immunic’s technologies in jurisdictions where Immunic has not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where Immunic has patent protection but enforcement rights are weaker than in the United States. These products may compete with Immunic’s product candidates in jurisdictions where Immunic does not have any issued patents and Immunic’s patent claims or other intellectual rights may not be effective or sufficient to prevent such competition.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not favor the enforcement of patents and other intellectual property rights, which could limitmake it difficult for Immunic to stop the legal protections availableinfringement of its patents
generally. Proceedings to us.
We are subject to the laws and regulations ofenforce Immunic’s patent rights in foreign governments, including those applicable to foreign investment and, in particular, laws applicable to wholly foreign-owned enterprises. Any litigation in these countries may be protracted and mayjurisdictions could result in substantial costs and diversiondivert Immunic’s efforts and attention from other aspects of resourcesits business, could put its patents at risk of being invalidated or interpreted narrowly and management attention. For example,its patent applications at risk of not issuing and could provoke third parties to assert claims against Immunic. Immunic may not prevail in 2007, one of our clinical sites in China was sued in connection withany lawsuits that it initiates and the death of a subject of our clinical trial. An expert panel concluded that neither the ELAD System nor the clinical site was at fault and dismissed the lawsuit. Nevertheless, we were later informed that the subject’s family had beendamages or other remedies awarded, approximately $100,000 in a subsequent civil proceeding brought against the clinical site. We ultimately decided to reimburse the clinical site for $100,000, which was partially insured. In addition, these countries may enact new laws or amend current laws that may be detrimental to us, which may have a material adverse effect on our business operations.
We have limited business insurance coverage internationally.
The insurance industry in many parts of the world is still in an early stage of development. Insurance companies in many countries offer only limited business insurance options. As a result, weif any, may not be ablecommercially meaningful. Accordingly, Immunic’s efforts to maintain any liability, hazardenforce its intellectual property rights throughout the world may be inadequate to obtain a significant commercial advantage from the intellectual property that it develops or other insurance covering our services, business, operations, errors, acts or omissions, personnel or propertieslicenses.
If Immunic does not obtain patent term extension in all of the United States under the Hatch-Waxman Act and in foreign countries in which we have operations. To the extent that we areunder similar legislation, it may be unable to recover from othersextend the term of marketing exclusivity for its product candidates and its business may be materially harmed.
Depending on the timing, duration and specifics of any uninsured losses, such losses could result in a lossFDA marketing approval of capital and significant harm to our business. If any action, suit, or proceeding is brought against us and we are unable to pay a judgment rendered against us or defend ourselves against such action, suit, or proceeding, our business, financial condition and operations could be negatively affected.
We must comply with the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws.
The U.S. Foreign Corrupt Practices Act, to which we are subject, prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Other countries, such as the UK and China, have similar laws with which we must comply. Although we attempt to rigidly adhere to the requirementsImmunic’s product candidates, one of the U.S. Foreign Corrupt Practicespatents covering each of such approved product or the use thereof may be eligible for up to five years of patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act and all similar lawsallows extension of a maximum of one patent per FDA-approved product. Patent term extension or special protection certificates also may be available in certain foreign countries upon regulatory approval of Immunic’s product candidates. Nevertheless, Immunic may not be granted patent term extension either in the United States or in any foreign country because of, among other things, failing to which we are subject, there remainsapply prior to applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the risk that an employee or agentterm of oursextension afforded as well as the scope of patent protection during any such extension could be accusedless than Immunic requests.
If Immunic is unable to obtain patent term extension or restoration, or the term of violating oneany such extension is less than Immunic or moreits collaborators request, the period during which Immunic will have the right to exclusively market its product will be shortened and Immunic’s competitors may obtain approval of these laws, particularly in geographic regions where significant overlap exists between local governmentcompeting products following Immunic’s patent expiration, and healthcare industries. Such an accusation, even if unwarranted, could prove disruptive to our developmental and commercialization efforts if such efforts are resumed.
We could be subject to additional income and other tax liabilities.
We are subject to income and other taxes in the U.S. and may be subject to income and other taxes in various other foreign jurisdictions. Significant planning is required in evaluating a worldwide provision for income and other taxes. During the ordinary course of business, there may be transactions for which the ultimate tax determination is uncertain. We may be subject to audit in various jurisdictions and such jurisdictions may assess additional income or other tax against us. Although we may believe our tax positions are reasonable, the final determination of tax audits and any related litigationImmunic’s revenue could be materially different from our historical income tax provisionsreduced.
Immunic may not identify relevant patents or may incorrectly interpret the relevance, scope or expiration of a patent, which may adversely affect Immunic’s ability to develop and accruals. The resultsmarket its product candidates.
Immunic cannot guarantee that any of an auditits patent searches or litigation could have a materialanalyses (including, but not limited to, the identification of relevant patents, the scope of patent claims or the expiration of relevant patents) are complete or thorough, nor can Immunic be certain that Immunic has identified each and adverse effect on our operating results or cash flowsevery patent and pending application in the periodUnited States and other jurisdictions that is relevant to or periodsnecessary for the commercialization of its product candidates in any jurisdiction.
The scope of a patent claim is determined by legal interpretation, the written disclosure in a patent and the patent’s prosecution history. Immunic’s interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact its ability to market its product candidates. Immunic may incorrectly determine that its product candidates are not covered by a third-party patent.
Many patents may cover a marketed product, including but not limited to patents covering the composition, methods of use, formulations, production processes and purification processes of or for the product. The identification of all patents and their expiration dates relevant to the production and sale of a therapeutic product is extraordinarily complex and requires sophisticated legal knowledge in the relevant jurisdiction. It may be impossible to identify all patents in all jurisdictions relevant to a marketed product. Immunic’s determination is made.of the expiration date of any patent in the United States or other jurisdictions that it considers relevant may be incorrect, which may negatively impact its ability to develop and market its product candidates.
Obtaining and maintaining Immunic’s patent protection depends on compliance with various procedural, documentary, fee payment and other requirements imposed by governmental patent agencies, and Immunic’s patent protection could be reduced or eliminated for non-compliance with these requirements.
The United Kingdom’s impending departure fromStates Patent and Trademark Office ("USPTO"), and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the European Union could adversely affect our business.
The United Kingdom heldpatent prosecution process. Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on any issued patent and/or pending patent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of a referendumpatent or patent application. Immunic employs an outside firm and relies on its outside counsel to pay these fees. While an inadvertent lapse may sometimes be cured by payment of a late fee or by other means in June 2016accordance with the applicable rules, there are many situations in which a majority of voters voted to exit the European Union,noncompliance can result in abandonment or Brexit. Negotiations are continuing to determine the future termslapse of the United Kingdom’s relationship with the European Union, including, among other things, the termspatent or patent application, resulting in partial or complete loss of trade between the United Kingdom and the European Union as well as other world trading partners. The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could adversely affect European and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatilitypatent rights in the value ofrelevant jurisdiction. If Immunic fails to maintain the sterlingpatents and euro. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate, including laws that could impact any potential future clinical trials and our ability to obtain approval of our products or sell our products in the United Kingdom. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, results of operations, financial condition and cash flows.
Risks Related to Our Intellectual Property
Our patent rights may prove to be an inadequate barrier to competition.
We hold a patent in the U.S. which claims a method of using C3A cells to treat a patient’s blood, which we believe covers the ELAD System therapy. In addition, we hold another U.S. patent with claimsapplications covering an extracorporeal device configuration, which we believe includes our ELAD System, independent of the cell-type used. Foreign counterparts of these patents have been issued and remain under review in certain jurisdictions. In addition to these two U.S. patents, we hold one additional patent in the U.S. However, the lifespan of any one patent is limited and each of these patents will ultimately expire, and we cannot be sure that pending applications will be granted, or that we will discover new inventions which we can successfully patent. Moreover, any of our granted patents may be held invalid by a court of competent jurisdiction, and any of these patents may also be construed narrowly by a court of competent jurisdiction in such a way that it is held to not directly cover the entire ELAD System or treatment. Furthermore, even if our patents are held to be valid and of broadly enforceable scope, third parties may find legitimate ways to compete with the ELAD System by inventing around our patents to avoid claims of patent infringement. Finally, the process of obtaining new patents is lengthy and expensive, as is the process for enforcing patent rights against an alleged infringer. Any such litigation could take years, cost large sums of money and pose a significant distraction to management. Indeed, certain jurisdictions outside of the U.S. and Europe have a history of inconsistent, relatively lax or ineffective enforcement of patent rights. In such jurisdictions, even a valid patent may have limited value. Our failure to effectively enforce our patents would likely have a harmful impact on our ability to potentially commercialize the ELAD System in these jurisdictions.
We do not hold any patents covering our VTL C3A cells or the production processes we used to grow the VTL C3A cells in the ELAD cartridges.
C3A cells are publicly available and the proprietary methods and production process that we use to grow our VTL C3A cells in the ELAD cartridges are our trade secrets, but they are not currently covered by a patent and no patents are pending. Although we have sought patent protection for certain aspects of our technology, such as our method of using human liver-derived C3A cells to treat a patient’s blood, and we have obtained orphan designation in the U.S. and Europe for the use of C3A cells to treat acute liver failure, we have not sought patent protection for the proprietary methods we use to grow VTL C3A cells. Although we believe that some of these methods may be patentable, we prefer to avoid the disclosure requirements inherent in the patenting process, as such disclosure could provideits product candidates, Immunic’s competitors with insights that allow them to invent around any granted patents. We believe that this concern is particularly appropriate since C3A cells are publicly available, and have been available for research purposes for more than twenty years. Despite this availability, we are not aware of any third parties who have either demonstrated an ability to grow C3A cells in the quantities we do, or have succeeded in treating a human subject with such cells. In addition, patent protection expires 20 years after the application’s priority date which does not apply to trade secret protection. In light of the foregoing, we do not currently contemplate seeking patent protection for our production methods and instead intend to keep our production methods protected as trade secrets, which does not require us to publicly disclose these methods and which is not subject to a formal expiration date. However, trade secrets are vulnerable to inadvertent disclosure and misappropriation. In addition, independent discovery and publication of these methods by third parties, which is feasible given the public availability of C3A cells, would also destroy their trade secret protection. If any of these were to occur, our business may be harmed.
We protect much of our intellectual property as trade secrets. Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information.
Trade secrets offer a relatively limited form of protection as they do not create any barrier for third-parties who independently develop this information and who may even patent the information. In the course of our research and development activities and our business activities, we often rely on confidentiality agreements to protect our proprietary information. Such confidentiality agreements may be used, for example, when we talk to vendors of laboratory or clinical development services or potential strategic partners. In addition, each of our employees is required to sign a confidentiality agreement upon joining us. We take steps to protect our proprietary information, and our confidentiality agreements are carefully drafted to protect our proprietary interests. Nevertheless, there can be no assurance that an employee or an outside party will not make an unauthorized disclosure of our proprietary confidential information. This might happen intentionally or inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, in spite of any legal action we might take against persons making such unauthorized disclosures. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. sometimes are less willing than U.S. courts to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how, which would harm our business.
If our ELAD cartridges or our VTL C3A cells are stolen, misappropriated or reverse engineered, others could produce competing products.
Third parties, including those previously involved in, or that may in the future be involved in, shipping our ELAD System cartridges or in any manufacturing abroad that we may undertake, often have custody or control of our ELAD cartridges. If our ELAD cartridges, or VTL C3A cells from our proprietary VTL C3A cell bank that are stored to grow in these cartridges, were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able to reproduce these cartridges for their own commercial gain. If this were to occur, it would be difficult for us to challenge this type of use, especially in countries with limited intellectual property protection or in countries in which we do not have patents coveringenter the misappropriated ELAD cartridges. In such instance, our business would be harmed.
Ownership of our intellectual property may be claimed by others.
The ELAD System has been under development for over 20 years and certain of our predecessor companies have filed for reorganization and bankruptcy. We were founded in 2003 by acquisition of the assets of a prior company after a bankruptcy. While we believe we have performed extensive diligence on the ownership of the intellectual property rights and have developed our own innovative technology which is independent of prior intellectual property rights, there could be claims by parties associated with the prior entities that could lead to costly and time consuming legal actions. In addition, we have engaged in collaborations with third parties where intellectual property has been developed. In one instance, we were engaged in a dispute over the ownership of intellectual property when a collaborator of ours pursued patent rights over technology which we believe we may have held rights to under the collaboration agreement. Although a patent which claims a different configuration than our ELAD System was ultimately issued in the U.S. to our former collaborator, we do not hold any rights to this patent. Other such disputes could arise in the future or emerge from past activities which could lead others to claim our intellectual property.
We may be involved in future costly intellectual property litigation, which could impact our future business and financial performance.
Our industry has been characterized by frequent intellectual property litigation. Our competitors or other patent holders may assert that our ELAD System and the methods we employ are covered by their patents. For instance, we are aware of other patents issued in the liver support field which we believe do not cover our ELAD System or its use. If our ELAD System or methods are found to infringe any valid patents, we could be prevented from marketing our ELAD System, if our efforts to develop ELAD are resumed. In addition, we do not know whether our competitors or potential competitors have applied for, or will apply for or obtain, patents that will prevent, limit or interfere with our ability to make, use, sell, import or export our ELAD System.
Litigation related to infringement and other intellectual property claims, with or without merit, is unpredictable, can be expensive and time-consuming and could divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, and prohibit us from using technologies essential to our ELAD System, any ofmarket sooner, which would have a material adverse effect on our business, resultsImmunic’s business.
The patent protection for Immunic’s product candidates may expire before Immunic is able to maximize their commercial value, which may subject Immunic to increased competition and reduce or eliminate its opportunity to generate product revenue.
The patents for Immunic’s product candidates have varying expiration dates and, if these patents expire, Immunic may be subject to increased competition and Immunic may not be able to recover its development costs or market any of operationsits approved products profitably. In some of the larger potential markets, such as the United States and financial condition. We do not know whether necessary licenses wouldEurope, patent term extension or restoration may be available to uscompensate for time taken during aspects of the product’s development and regulatory review. However, Immunic cannot be certain that such an extension will be granted, or if granted, what the applicable time period or the scope of patent protection afforded during any extension period will be. In addition, even though some regulatory authorities may provide some other exclusivity for a product under their own laws and regulations, Immunic may not be able to qualify the product or obtain exclusivity. If Immunic is unable to obtain patent term extension, restoration or some other exclusivity, Immunic could be subject to increased competition and its opportunity to establish or maintain product revenue could be substantially reduced or eliminated. Furthermore, Immunic may not have sufficient time to recover its development costs prior to the expiration of its U.S. and foreign patents.
Immunic may become involved in lawsuits to protect its patents or other intellectual property rights, which could be expensive, time-consuming and ultimately unsuccessful.
Competitors may infringe Immunic’s patents or other intellectual property rights. To counter infringement or unauthorized use, Immunic may be required to file infringement claims, directly or through its licensors, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of Immunic’s licensor is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on satisfactorythe grounds that Immunic’s patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of the patents Immunic licenses at risk of being invalidated or interpreted narrowly and could put Immunic’s licensors’ patent applications at risk of not issuing.
Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to patents of Immunic’s licensors and patent applications or those of Immunic’s current or future collaborators. An unfavorable outcome could require Immunic to cease using the technology or to attempt to license rights to it from the prevailing party. Immunic’s business could be harmed if a prevailing party does not offer Immunic a license on terms that are acceptable to Immunic. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of Immunic’s management and other employees. Immunic may not be able to prevent, alone or with its collaborators, misappropriation of its proprietary rights, particularly in countries whose laws do not grant the same protections to intellectual property as fully as the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Immunic’s confidential and proprietary information could be compromised by
disclosure. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of Immunic’s common stock.
Third-party claims of intellectual property infringement or misappropriation may adversely affect Immunic’s business and could prevent Immunic from developing or commercializing its product candidates.
Immunic’s commercial success depends in part on avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, ex-parte review, inter party review and post-grant review proceedings before the USPTO and foreign patent offices. Numerous U.S. and foreign patents and patent applications exist in the fields in which Immunic is developing and may develop its product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that Immunic’s product candidates may be subject to third-party claims of patent infringement. Third-party claims that Immunic infringes on their products or technology could present a number of issues, including:
•infringement and other intellectual property claims, whether we couldwith or without merit, can be expensive and time-consuming to litigate and can divert management’s attention from Immunic’s core business;
•the risk of substantial court-imposed damages for past infringement;
•a court prohibiting Immunic from selling or licensing its product unless the patent holder licenses the patent to Immunic, which it would not be required to do;
•even if a license is available from the patent holder, Immunic may have to pay substantial royalties or grant cross licenses to Immunic’s patents; and
•Immunic may need to redesign our ELAD System orits processes to avoid infringement.further infringement, which may not be possible or could require expenditure of substantial funds and time.
Competing products
Third parties may assert that Immunic is employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of Immunic’s product candidates, that Immunic failed to identify. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until issued as patents. Except for the preceding exceptions, patent applications in the United States and elsewhere are generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering Immunic’s product candidates may have been filed by others without the knowledge of Immunic or its licensors. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover Immunic’s product candidates or the use or manufacture of its product candidates. Immunic may also appearface misappropriation claims if a third party believes that Immunic inappropriately obtained and used its trade secrets. If the third-party prevails on such claims, Immunic may be prevented from further using such trade secrets, limiting its ability to develop its product candidates, and may be required to pay damages.
If a court of competent jurisdiction held that any third-party patents cover aspects of Immunic’s materials, formulations, methods of manufacture or methods for treatment, the holders of any such patents would be able to block Immunic’s ability to develop and commercialize the applicable product candidate until such patent expired or unless Immunic obtains a license. A license may not be available on acceptable terms, if at all. Even if Immunic was able to obtain a license, the rights could be nonexclusive, which could result in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit, weImmunic’s competitors having access to its licensed intellectual property.
Ultimately, Immunic could be prevented from marketing our ELAD Systemcommercializing a product, or be forced to cease some aspect of its business operations, if, as a result of actual or threatened patent infringement claims, Immunic is unable to enter into licenses on acceptable terms or at all. In addition, during the course of any patent or other intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the
perceived value of Immunic’s product candidates, programs, or intellectual property could be diminished. Accordingly, the market price of Immunic’s common stock may decline.
Parties making claims against Immunic may obtain injunctive or other equitable relief, which could effectively block Immunic’s ability to further develop and commercialize one or more of its product candidates. Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming, regardless of the outcome. Thus, even if Immunic was to ultimately prevail, or to settle at an early stage, such litigation could burden Immunic with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of Immunic’s management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement against Immunic, Immunic may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign its infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial expenditure of time and money. In addition, the uncertainties associated with litigation could have a material adverse effect on Immunic’s ability to raise the funds necessary to continue its clinical trials, continue its research programs, license necessary technology from third parties, or enter into collaborative arrangements that would help Immunic bring its product candidates to market.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Immunic’s ability to protect its product candidates.
As is the case with other pharmaceutical companies, Immunic’s success is heavily dependent on intellectual property, particularly on obtaining and enforcing patents and patent rights. Obtaining and enforcing patents and patent rights in the biotechnology industry involves both technological and legal complexity, and therefore, is costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Further, several recent U.S. Supreme Court rulings have either narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to Immunic’s ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents and patent rights, once obtained.
For Immunic’s U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act ("the AIA"), was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and reviewed after issuance, and may also affect patent litigation. The USPTO is currently developing regulations and procedures to govern administration of the AIA and many of the substantive changes to patent law associated with the AIA. It is not clear what other, if any, impact the AIA will have on the operation of Immunic’s business. Moreover, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of patent rights, all of which could have a material adverse effect on Immunic’s business and financial condition.
An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-inventor-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but Immunic or Immunic’s licensor could therefore be awarded a patent covering an invention of Immunic’s even if Immunic or its licensor had made the invention before the third party. This will require Immunic to be cognizant going forward of the time from invention to filing of a patent application. Furthermore, Immunic’s ability to obtain and maintain valid and enforceable patent rights depends on whether the differences between the licensor’s or Immunic’s technology and the prior art allow Immunic’s technology to be patentable over the prior art. Since patent applications in the United States and most other countries are confidential for a period of time after filing, Immunic cannot be certain that a licensor or it was the first to either (i) file any patent application related to Immunic’s product candidates or (ii) invent any of the inventions claimed in Immunic’s patents or patent applications.
Among other changes, the AIA limits where a patentee may file a patent infringement suit and provides opportunities for third parties to challenge any issued patent in the USPTO. This applies to all U.S. patents, even those issued before March 16, 2013. Because the evidentiary standard to invalidate a patent claim in USPTO proceedings is lower than for a procedure in U.S. federal court, a third party may attempt to use the USPTO procedures to invalidate patent rights that would not have been invalidated in federal court.
Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken Immunic’s ability to obtain new patents or to enforce its existing patents and patents that Immunic might obtain in the future.
Because of the expense and uncertainty of litigation, Immunic may not be in a position to enforce its intellectual property rights against third parties.
Because of the expense and uncertainty of litigation, Immunic may conclude that even if effortsa third party is infringing the patents of Immunic’s licensors or Immunic or other intellectual property rights, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of Immunic or its stockholders. In such cases, Immunic may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.
Intellectual property rights do not protect against all potential threats to Immunic’s competitive advantage.
The degree of future protection afforded by Immunic’s intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect Immunic’s business, or permit Immunic to maintain its competitive advantage. The following examples are illustrative:
•Others may be able to make products that are similar to Immunic’s product candidates but that are not covered by the claims of the patents that Immunic licenses from others or may license or own in the future.
•Others may independently develop similar or alternative technologies or otherwise circumvent any of Immunic’s technologies without infringing its intellectual property rights.
•Any of Immunic’s collaborators might not have been the first to conceive and reduce to practice the inventions covered by the patents or patent applications that Immunic licenses or will, in the future, own or license.
•Any of Immunic’s collaborators might not have been the first to file patent applications covering certain of the patents or patent applications that Immunic licenses or will, in the future, license.
•Issued patents that have been licensed to Immunic may not provide Immunic with any competitive advantage, or may be held invalid or unenforceable, as a result of legal challenges by Immunic’s competitors.
•Immunic’s competitors might conduct research and development activities in countries where Immunic does not have license rights, or in countries where research and development safe harbor laws exist, and then use the information learned from such activities to develop ELAD are resumed.competitive products for sale in Immunic’s major commercial markets.
In addition, we may hereafter become involved in litigation•Ownership of patents or patent applications licensed to protect our trademark rights associated with our company name or the names used with our ELAD System. Names used with our ELAD System and proceduresImmunic may be claimedchallenged by third parties.
•The patents of third parties or pending or future applications of third parties, if issued, may have an adverse effect on Immunic’s business.
Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and protect other proprietary information.
Trade secrets and/or confidential know-how can be difficult to infringe names heldmaintain as confidential. To protect this type of information against disclosure or appropriation by otherscompetitors, Immunic requires its employees, consultants, contractors and advisors to enter into confidentiality agreements with Immunic. However, current or former employees, consultants, contractors and advisers may unintentionally or willfully disclose Immunic’s confidential
information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party obtained illegally and is using trade secrets and/or confidential know-how is expensive, time-consuming and unpredictable. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction.
Failure to obtain or maintain trade secrets and/or trade protection of confidential know-how could adversely affect Immunic’s competitive position. Moreover, Immunic’s competitors may independently develop substantially equivalent proprietary information and may even apply for patent protection in respect of the same. If successful in obtaining such patent protection, Immunic’s competitors could limit Immunic’s use of its trade secrets and/or confidential know-how.
Immunic may need to license certain intellectual property from third parties, and such licenses may not be ineligible for proprietary protection. If we haveavailable or may not be available on commercially reasonable terms.
A third party may hold intellectual property, including patent rights that are important or necessary to change the namedevelopment or commercialization of our company or our ELAD System, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales, if any.
WeImmunic’s product candidates. It may be subjectnecessary for Immunic to damages resultinguse the patented or proprietary technology of third parties to commercialize its product candidates, in which case Immunic would be required to obtain a license from claims that wesuch third parties. Such a license may not be available on commercially reasonable terms or our employees have wrongfully used or disclosed alleged trade secrets owned by third parties.at all, which could materially harm Immunic’s business.
Many of our employees were previously employed at universities or other life science companies, including our competitors or potential competitors. Although no claims against us are currently pending, we
Immunic may be subject to claims that theseits employees, consultants or weindependent contractors have wrongfully used or disclosed confidential information of third parties.
Immunic has received confidential and proprietary information from third parties. In addition, Immunic employs individuals who were previously employed at other biotechnology or pharmaceutical companies. Immunic may be subject to claims that Immunic or its employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed trade secretsconfidential information of third parties or the former employers of Immunic’s employees, consultants or independent contractors.
Further, Immunic may be subject to ownership disputes in the future arising from, among other things, consultants or third-parties who are involved in developing Immunic’s product candidates. Immunic may also be subject to claims that former employees, consultants, independent contractors, collaborators or other confidentialthird parties have an ownership interest in Immunic’s patents or proprietary information of their former employers.other intellectual property. Litigation may be necessary to defend against these claims.and other claims challenging Immunic’s right to and use of confidential and proprietary information. If we failImmunic fails in defending any such claims, in addition to paying monetary damages, weImmunic may lose its rights to certain intellectual property. Such an outcome could have a material adverse effect on Immunic’s business.
Even if Immunic is successful in defending against these claims, litigation could result in substantial cost and be a distraction to Immunic’s management and employees.
Immunic may be subject to claims challenging the inventorship or ownership of its patents and other intellectual property.
Immunic may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in its patents and other intellectual property. Immunic may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing Immunic’s product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If Immunic fails in defending any such claims, in addition to paying monetary damages, Immunic may lose valuable intellectual property rights, such as exclusive ownership of, or personnel. A loss of key personnelright to use, valuable intellectual property. Such an outcome could hamper our ability to resume the development and commercialization of the ELAD System in the future.have a material adverse effect on Immunic’s business. Even if we areImmunic is successful in defending against thesesuch claims, litigation could result in substantial costs and be a distraction to management.management and other employees.
Risks RelatedImmunic’s reliance on third parties requires Immunic to Our Capital Requirementsshare its trade secrets, which increases the possibility that a competitor will discover them or that Immunic’s trade secrets will be misappropriated or disclosed.
Because Immunic relies on third parties to assist with research and Finances
We have limited resourcesdevelopment and to fund our operationsmanufacture its product candidates, Immunic must, at times, share trade secrets with them. Immunic seeks to protect its proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with its advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use, disclose or publish Immunic’s confidential information, including its trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets will become known to Immunic’s competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that Immunic’s proprietary position is based, in part, on its know-how and trade secrets, a competitor’s discovery of Immunic’s trade secrets or other unauthorized use or disclosure would impair Immunic’s competitive position and may need to raise additional capital in conjunction with and as a result of our pursuit of strategic alternatives.
We have a historymaterial adverse effect on its business.
In the future Immunic may also conduct joint research and development programs that may require it to share trade secrets under the terms of incurring lossesits research and negative cash flows from operationsdevelopment or similar agreements. Despite Immunic’s efforts to protect its trade secrets, Immunic’s competitors may discover its trade secrets, either through breach of Immunic’s agreements with third parties, independent development or publication of information by any of Immunic’s third-party collaborators. A competitor’s discovery of Immunic’s trade secrets would impair Immunic’s competitive position and have an accumulated deficit of $337.4 million through December 31, 2018. Basedadverse impact on our current employees, our known commitments,its business.
If Immunic’s trademarks and our ongoing administrative costs to explore and pursue strategic options, we believe that our existing cash and cash equivalents of $13.3 million as of December 31, 2018 should be sufficient to meet our known liabilities and commitments as of December 31, 2018. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. The timing and amount of our actual expenditures will be based on many factors, including, buttrade names are not limited to, whether and when the Transaction closes, future research and development efforts if any, other strategic options that we may pursue, and any unforeseen cash needs which may deplete current cash and cash equivalents sooner than planned.
As a result of our liquidity needs, vendors and other key contract counterparties may be reluctant to enter into contracts with us if they believe weadequately protected, then Immunic may not be able to satisfy our obligations. In addition, there is no assurance that we willbuild name recognition in its markets of interest and its business may be able to obtain additional funding whenadversely affected.
If Immunic’s trademarks and if needed on acceptable terms or at all. If wetrade names are not able to secure adequate additional funding, we would be required to make further reductions in certain spending to extend current funds, we may have to liquidate some or all of our assets, delay, reduce the scope of, or eliminate some or all of any development programs or even close our operations. We may also have to delay development of any potential products or license to third parties the rights to our products or technology that we would otherwise seek to develop. Our inability to enter into such contracts or raise additional funding would adversely affect our business, liquidity, financial condition, results of operations and cash flows.
As a result of our decision to cease development of the ELAD System in the United States and Europe, our history of operating losses and the other factors discussed above, we believe there is substantial doubt about our ability to continue as a going concern for one year from the date of issuance of our consolidated financial statements for the year ended December 31, 2018.
To conserve capital, we may undertake additional workforce and cost reduction activities in the future. These activities may cause us to be unable to fully support and manage our operations.
In September 2015, and again in September 2018, we instituted across the board expense reductions to conserve capital, and we may, in the future, need to undertake additional workforce reductions or restructuring activities. As a result of the reduction in our workforce, we face an increased risk of employment litigation. We also need to effectively manage our operations and facilities. Following our recent workforce reduction in September 2018, it is possible that our infrastructure may be inadequate to support our future efforts and business strategy or to maintain operational, financial and management controls and reporting systems and procedures. If we cannot successfully manage our operations, we may be unsuccessful in executing our business strategy, including potential strategic options, including the Transaction.
Our future capital needs are uncertain, and we may need to raise additional funds in the future.
We may need to raise substantial additional capital to:
pursue strategic options for the company;
complete any potential future clinical trials and related regulatory applications;
fund our operations;
commence and expand the commercialization of any products we may acquire; and
further our research and development.
Our future funding requirements will depend on many factors, including:
the cost, timing and structure of any potential strategic options that we pursue;
the cost of any future research and development activities;
the cost and timing of any further clinical development activities;
the cost of filing and prosecuting patent applications;
the cost of defending litigation or any claims that we infringe third-party patents or violate other intellectual property rights;
the cost and timing of regulatory clearances or approvals, if any;
the cost and timing of establishing sales, marketing and distribution capabilities;
the cost and timing of establishing additional technical support capabilities;
market acceptance of any products;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products and technologies, although we currently have no significant commitments or agreements relating to any of these types of transactions other than the Transaction.
Weadequately protected, then Immunic may not be able to obtain additional fundsbuild name recognition in its markets of interest and its business may be adversely affected. Immunic’s unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on acceptable terms,other marks. Immunic may not be able to protect its rights to these trademarks and trade names, which Immunic needs to build name recognition among potential collaborators or at all. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available,customers in its markets of interest. At times, competitors may involve covenants restricting our operationsadopt trade names or ourtrademarks similar to Immunic’s, thereby impeding Immunic’s ability to incur additional debt. Any debtbuild brand identity and possibly leading to market confusion. In addition, there could be potential trade name or additional equity financingtrademark infringement claims brought by owners of other registered trademarks or trademarks that we raiseincorporate variations of Immunic’s unregistered trademarks or trade names. Over the long term, if Immunic is unable to successfully register its trademarks and trade names and establish name recognition based on its trademarks and trade names, then Immunic may contain terms that are not favorablebe able to us or our stockholders. If we raise additional funds through collaborationcompete effectively and licensing arrangements with third parties, which we have no prior experience in, itits business may be necessaryadversely affected. Immunic’s efforts to relinquishenforce or protect its proprietary rights related to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, delay, reduce the scope of or eliminate some or all of any potential future development programs or close our operations.
If we do not have, or are not able to obtain, sufficient funds, we may have to delay development of any potential products or license to third parties the rights to develop our products or technologies that we would otherwise seek to develop. We also may have to reduce marketing, customer supporttrademarks, trade secrets, domain names, copyrights or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.
Raising additional funds through debt or equity financing is likely tointellectual property may be challenging, could be highly dilutiveineffective and may cause the market price of our common stock to decline.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of those securities could result in substantial dilution for our current stockholderscosts and the terms may include liquidationdiversion of resources and could adversely impact Immunic’s financial condition or other preferences that adversely affect the rightsresults of our current stockholders. Furthermore, the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline further and existing stockholders may not agree with our financing plans or the terms of such financings. The failure of the VTI-208 and VTL-308 clinical trials to meet their primary or secondary endpoints, in addition to general market conditions, may make it very difficult for us to seek and obtain further financing from the capital markets on favorable terms, or at all. There is no assurance that we will be able to obtain additional funding on acceptable terms or at all.operations.
In order to raise required funds we may choose to enter into one or more collaborations. Such collaborations could require us to give up substantial rights to the ELAD System in the U.S. and/or outside the U.S.
We may choose to enter into one or more collaborations in order to resume the development of the ELAD System. These collaborations could require us to relinquish substantial rights, potentially including the grant of an exclusive license to make, use and sell the ELAD System, to another company.
Risks Related to Being a Public Company
Our common stock may be delisted from The Nasdaq Global Market if we are unable to maintain compliance with Nasdaq’s continued listing standards.
The Nasdaq Global Market imposes certain continued listing standards including minimum bidImmunic incurs significant costs and public float requirements. On October 25, 2018, we receiveddemands upon management as a letter from Nasdaq providing notification that, for the previous 30 consecutive business days, the closing bid price for our common stock was below the minimum $1.00 per share requirement, or the Bid Price Requirement, for continued listing on The Nasdaq Global Market. The notification had no immediate effect on the listingresult of our common stock. In accordance with Nasdaq listing rules, we were afforded 180 calendar days, or until April 23, 2019, to regain compliancecomplying with the Bid Price Requirement. If we are unable to regain compliance, Nasdaq may determine to delist our common stock. If our common stock is delisted, thislaws and regulations affecting public companies.
Immunic incurs significant legal, accounting and other expenses that it would among other things, substantially impair our ability to raise additional funds to sustain our operations and could result in the loss of institutional investor interest, limit our strategic alternativesnot incur as a private company, including the Transaction, and result in fewer development opportunities.
The requirements of being acosts associated with public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.
As a public company, we are subject to the reporting requirements. Immunic also incurs costs associated with corporate governance requirements, of the Securities Exchange Act of 1934, or the Exchange Act,including requirements under the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), as well as new rules implemented by the Dodd-Frank Act, the listing requirements ofSEC and The Nasdaq Stock Market LLC and other applicable securities rules and regulations. Compliance with these("Nasdaq"). These rules and regulations increases ourincrease the company’s legal and financial compliance costs makesand make some activities more time-
consuming and costly. Not all members of Immunic’s management have previously managed and operated a public company. These executive officers and other personnel will need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations may also make it difficult time-consumingand expensive for the company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for Immunic to attract and retain qualified individuals to serve on its board of directors or costlyas executive officers of the company, which may adversely affect investor confidence in Immunic and increases demand on our systems and resources, and even more so after we arecould cause Immunic’s business or stock price to suffer.
Effective December 31, 2019, Immunic is no longer an “emerging growth company,” as defined inand the Jumpstart Our Business Startups Act, or the JOBS Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respectreduced disclosure requirements applicable to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight are required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. To assist us in complying with these requirements, we may need to hire more employees in the future or engage outside consultants,“emerging growth companies” no longer apply, which will increase ourImmunic’s costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatorypublic company and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from development activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ fromincrease the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.demands on management.
For as long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and financial statements in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote to approve executive compensation and stockholder approval of any golden parachute payments not previously approved. We will take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We will remain an “emerging growth company” until as late asEffective December 31, 2019, (thethe fiscal year-end following the fifth anniversary of the completion of ourits initial public offering).
offering, Immunic is no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act. As a public company it is more expensive for us to maintain and obtain director and officer liability insurance, and we may be required to accept reduced coverage orresult, Immunic will incur substantially higher costs to obtain coverage. These factors may also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
Under Section 107(b) of 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 irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
As a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. If we do not maintain a proper and effective system of internal control over financial reporting, or if these internal controls are determined not to be designed or operating effectively, it may adversely affect investor confidencesignificant additional expenses in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404complying with certain provisions of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the 2018 fiscal year. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
We have and will continue to evaluate and test our system of internal control over financial reporting. If, during the evaluation and testing process, we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective, which could result in a loss of investor confidence in the accuracy and completeness of our financial reports. This could cause the price of our common stock to decline, and we may be subject to investigation or sanctionsrules implemented by the SEC.
We are required to disclose changes made in our internal control and procedures on a quarterly basis. However, our Moreover, if Immunic or its independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an emerging growth company pursuant to the exemptions containedidentifies deficiencies in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied that our internal controls over financial reporting are designed and operating effectively to prevent or detect a material misstatement to the financial statements.
If we do not remediate any material weaknesses in our internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected.
In prior years, we had not maintained an effective control environment to ensure that the design and execution of our controls consistently resulted in effective review of our financial statements and supervision by appropriate individuals. As a result of these factors, certain misstatements in our annual financial statements for periods prior to becoming a public company were identified and brought to the attention of management by our independent registered public accounting firm for correction. We and our independent registered public accounting firm concluded that these control deficiencies constituted a material weakness in our internal control over financial reporting. A material weakness is a control deficiency, or a combination of control deficiencies, inImmunic’s internal control over financial reporting that indicates there is a reasonable possibility that aare deemed to be material misstatementweaknesses, the market price of our annualImmunic’s stock could decline, and Immunic could be subject to sanctions or interim condensed consolidatedinvestigations by the SEC or other regulatory authorities, which would require additional financial statements will not be prevented or detected on a timely basis.
Efforts to remediate the control deficiencies that led to the material weakness discussed above were completed. However, the measures we have taken to date, or any measures weand management resources. Furthermore, investor perceptions of Immunic may takesuffer if, in the future, may not be sufficient to avoid potential future material weaknesses. In addition, an independent registered public accounting firm has not performed an evaluationweaknesses are found, and this could cause a decline in the market price of ourImmunic’s stock. Any failure of Immunic’s internal control over financial reporting could have a material adverse effect on the company’s stated operating results and harm its reputation. If Immunic is unable to implement these changes effectively or efficiently, it could harm Immunic’s operations, financial reporting or financial results and could result in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had ouran adverse opinion on internal control from its independent registered public accounting firm performed an evaluationfirm.
In addition, Immunic is no longer eligible for reduced disclosure requirements and exemptions requirements applicable to emerging growth companies regarding executive compensation and exemptions from the requirements of our internal control over financial reportingholding advisory say-on-pay votes on executive compensation and as such, Immunic will hold a say-on-pay vote and a say-on-frequency vote at its 2021 annual meeting of stockholders. Immunic expects that the increased disclosure requirements will require additional attention from management and will result in accordanceincreased costs to the company, which could include higher legal fees, accounting fees and fees associated with the provisions of the Sarbanes-Oxley Act, additional significant deficiencies or material weaknesses may have been identified. If we are unable to successfully remediate any significant deficiency or material weakness in our internal control over financial reporting, or identify any additional significant deficiencies or material weaknesses that may exist, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result.investor relations activities, among others.
Risks Related to ourImmunic’s Common Stock
If
The market price of Immunic’s common stock is volatile.
The market price of Immunic’s common stock can be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of Immunic’s common stock to fluctuate include:
•reports on or the perception of clinical progress, or the lack thereof;
•the ability of Immunic to obtain regulatory approvals for its product candidates, and delays or failures to obtain such approvals;
•failure of any of Immunic’s approved product candidates to achieve commercial success;
•failure to maintain its existing third-party license and supply agreements;
•failure by Immunic or its licensors to prosecute, maintain, or enforce its intellectual property rights;
•changes in laws or regulations applicable to its product candidates;
•any inability to obtain adequate supply of its product candidates or the inability to do so at acceptable prices;
•adverse regulatory authority decisions;
•introduction of new products, services, or technologies by its competitors;
•failure to meet or exceed financial and development projections that Immunic may provide to the public;
•failure to meet or exceed the financial and development projections of the investment community;
•the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
•announcements of significant acquisitions, strategic collaborations, joint ventures, or capital commitments by Immunic or its competitors;
•disputes or other developments relating to proprietary rights, including patents, litigation matters, and its ability to obtain patent protection for its technologies;
•additions or departures of key personnel;
•significant lawsuits, including patent or stockholder litigation;
•if securities or industry analysts do not publish research or publish unfavorable researchreports about ourits business, ouror if they issue adverse or misleading opinions regarding its business and stock;
•changes in the market valuations of similar companies;
•general market or macroeconomic conditions;
•sales of common stock price and by the company or its stockholders in the future;
•trading volume could decline.of its common stock;
The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We are not currently aware•announcements by commercial partners or competitors of any securities or research analysts that are covering our business. We do not have any control of the analystsnew commercial products, clinical progress or the contentlack thereof, significant contracts, commercial relationships or capital commitments;
•adverse publicity relating to the markets in which Immunic operates, including with respect to other products and opinions includedproduct candidates in their reportssuch markets;
•the introduction of technological innovations or whether any such analysts will continuenew therapies that compete with product candidates of Immunic;
•changes in the structure of healthcare payment systems; and
•period-to-period fluctuations in Immunic’s financial results.
Moreover, stock markets in general have experienced substantial volatility that has often been unrelated to or whether new analysts will, cover us for any given periodthe operating performance of time. Theindividual companies. These broad market fluctuations may also adversely affect the trading price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If a research analyst ceases coverageImmunic’s common stock.
In the past, following periods of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
The market price of our common stock has been, and may continue to be volatile and fluctuate significantly, which could result in substantial losses for investors.
The market price of our common stock has been and is likely to continue to be highly volatile. Since our initial public offering in April 2014 at a price of $12.00 per share, the sale price of stock as reported on the The Nasdaq Global Market has ranged from $0.15 to $35.20, through February 28, 2019. Our announcement in 2015 that the VTI-208 clinical trial failed to meet its primary or secondary endpoints resulted in a significant declinevolatility in the market price of our common stock. Then againa company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in September 2018, our announcement that the VTL-308 clinical trial failed to meet its primary or secondary endpoints resulted insubstantial costs and diversion of management attention and resources, which could significantly harm Immunic’s profitability and reputation.
Additionally, a significant declinedecrease in the marketstock price of our common stock. FollowingImmunic may cause the announcement on the morning of September 12, 2018 that our VTL-308 clinical trial failed to meet its primary or secondary endpoints, the price of ourcompany’s common stock dropped $5.85 per share, or 93%, from $6.30 per share asto no longer satisfy the continued listing standards of The Nasdaq Global Select Market. If the close of businesscompany is not able to maintain the requirements for listing on September 11, 2018 to $0.45 per share as of the close of businessThe Nasdaq Global Select Market, it could be delisted, which could have a materially adverse effect on September 12, 2018. The closing price of our common stock was $0.24 on February 28, 2019. In addition, as with any public company, some investors hold a short position in our common stock. Such investors have published and distributed information about our company including on past and recent clinical trials. Activities by these investors may increase the volatility of the market price of our common stock, and may affect ourits ability to raise additional funds and to complete any potential future clinical trials or transactions.
Our stock price could be subject to wide fluctuations due to many factors, including:
any potential strategic options that we pursue, including the Transaction;
clinical data and government approvals relating to products in development;
changes in governmental regulations or in the status of our regulatory approvals or applications;
disputes or other developments with respect to our intellectual property rights or the intellectual property rights of others;
product liability claims or other litigation, including intellectual property or securities litigation;
sales of large blocks of our common stock, including sales by our executive officers and directors;
changes in earnings estimates or recommendations by securities analysts;
our ability to meet investors' expectations regarding our future operating performance;
media exposure of our products or products of our competitors;
volume and timing of sales of products;
the introduction of new products or product enhancements by us or our competitors;
our ability to develop, obtain regulatory clearance or approval for and market new and enhanced products on a timely basis;
quarterly variations in our or our competitors’ results of operations;
developments in our industry; and
general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
In addition, an active and liquid market may not develop or persist, and you may not be able to sell your shares quickly or at a price that is higher than what you paid for them. These and other factors may makeas well as the price and liquidity of our stock volatile and subject to unexpected fluctuations.
Sale of a substantial number of shares of our common stock by existing stockholders or by us may cause the price of our common stock to decline.
Sales of a substantial number of shares of our common stock into the public market or the perception that these sales might occur could depress the market price of our common stock and could impair our ability to raise adequate capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of ourits common stock.
In May 2018, we filed a shelf registration statement on Form S-3, or the 2018 Shelf Registration Statement, which became effective in June 2018. The 2018 Shelf Registration Statement permits: (i) the offering, issuance and sale by us of up to a maximum aggregate offering price of $200.0 million of common stock, preferred stock, warrants, debt securities, and/or units in one or more offerings and in any combination; (ii) sales of up to 2.5 million shares of common stock by certain selling stockholders; and (iii) the offering, issuance and sale by us of up to a maximum aggregate offering price of $60.0 million of our common stock that may be issued and sold under an “at-the-market” sales agreement, or ATM, with Cantor Fitzgerald & Co. At December 31, 2018, $200.0 million remains available for issuance and sale under the 2018 Shelf Registration Statement, $60.0 million of which may be offered, issued and sold under the ATM. However, we expect the amounts available under the shelf registration statement to be significantly limited to the extent our public float remains below $75.0 million, and our ability to use the ATM will likewise be limited or completely unavailable based on the requirements of the ATM. Additionally, funding is expected to be more difficult to secure due to our VTL-308 clinical trial not meeting its primary or secondary endpoints.
In addition, we have filed registration statements on Form S-8 registering a total of 9,634,695 shares of common stock subject to options or reserved for future issuance under our 2012 Stock Option Plan, 2014 Equity Incentive Plan and 2017 Inducement Equity Incentive Plan. Shares registered under these registration statements are available for sale in the public market subject to vesting arrangements, the exercise of such options and, in the case of our affiliates, the restrictions of Rule 144. As of December 31, 2018, options to purchase 6,183,266 shares of our common stock were exercisable.
To the extent we raise additional capital by selling and issuing common stock, convertible securities or other equity securities, it may result in material dilution to our existing stockholders and new investors could gain rights superior to our existing stockholders. Sales by us or by our current stockholders also could cause the price of our common stock to fall and make it more difficult for you to sell shares of our common stock.
Anti-takeover provisions in our amendedImmunic’s organizational documents and restatedDelaware law might discourage or delay acquisition attempts for the company that stockholders might consider favorable.
Immunic’s Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), and Amended and Restated Bylaws (the "Bylaws"), contain provisions that may delay or prevent an acquisition or change in control of the company. Immunic’s certificate of incorporation and our amended and restated bylaws as well as Delaware law, could discourage a takeover.include provisions that:
Our amended and restated certificate of incorporation, bylaws, and Delaware law, contain provisions that might enable our management to resist a takeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions:
•authorize ourImmunic’s board of directors to issue without further action by ourthe stockholders, up to 20,000,000 shares of undesignated preferred stock;
•require that any action to be taken by ourImmunic’s stockholders be effected at a duly called annual or special meeting and not by written consent;
specify that special meetings of our stockholders can be called only by a supermajority (75%) vote of our directors then in office;
specify that our board of directors may amend or repeal our bylaws only pursuant to a supermajority (75%) vote of our directors then in office;
specify that our stockholders may amend or repeal our bylaws only pursuant to a supermajority (75% and majority of the minority, if applicable) vote of the outstanding shares of our capital stock;
require in general the approval of a supermajority (75% and majority of the minority, if applicable) vote of our outstanding shares of capital stock to amend or repeal certain provisions of our amended and restated certificate of incorporation;
require the approval of a supermajority (75% and majority of the minority, if applicable) vote of our outstanding shares of capital stock to approve the sale or liquidation of the company;
•establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of ourImmunic’s stockholders, including proposed nominations of persons for election to ourImmunic’s board of directors;
provide that directors may be removed only for cause by a supermajority (75%) vote of our outstanding shares of capital stock;
•provide that vacancies on ourImmunic’s board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
provide that in general the number of directors on our board may only be fixed from time to time by a supermajority (75%) vote of our directors then in office; and
•establish that ourImmunic’s board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms;terms.
These
Further, as a Delaware corporation, Immunic is subject to provisions might discourage, delay or preventof Delaware law, which may impair a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the pricetakeover attempt that investors might be willing to pay in the future for shares of our common stock.
Our amended and restated certificate of incorporation also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporation Law and will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock and unless board or stockholder approval is obtained prior to the acquisitions.Immunic’s stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders.Immunic, including actions that its stockholders may deem advantageous, or negatively affect the trading price of its common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect or remove directors of yourtheir choosing and to cause usImmunic to take other corporate actions youthey desire.
We
Immunic may experience adverse consequences because of required indemnification of officers and directors.
Provisions of Immunic’s Certificate of Incorporation and Bylaws provide that it will indemnify any director and officer as to liabilities incurred in their capacity as a director or officer and on those terms and conditions set forth therein to the fullest extent of Delaware law. Further, Immunic may purchase and maintain insurance on behalf of any such persons whether or not Immunic would have the power to indemnify such person against the liability insured against. The foregoing could result in substantial expenditures by Immunic and prevent any recovery from its officers, directors, agents and employees for losses incurred by the company as a result of their actions.
Immunic does not paidanticipate that it will pay any cash dividends in the pastforeseeable future.
The current expectation is that Immunic will retain any future earnings to fund the development and growth of
its business. As a result, any capital appreciation of the common stock of the company will be stockholders’ sole source of any gain for the foreseeable future.
The ownership of Immunic’s common stock is highly concentrated, which may prevent stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause Immunic’s stock price to decline.
Executive officers and directors of Immunic and their affiliates and entities that are related to such officers and directors beneficially own or control approximately 31% of the outstanding shares of common stock of the company. Accordingly, these executive officers, directors and their affiliates, acting as a group, have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of Immunic’s assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of Immunic, even if such a change of control would benefit the other stockholders of the company. The significant concentration of stock ownership may adversely affect the trading price of Immunic’s common stock due to investors’ perception that conflicts of interest may exist or arise, and may adversely affect the liquidity of Immunic’s common stock.
General Risk Factors
If Immunic fails to maintain proper and effective internal controls, its ability to produce accurate financial
statements on a timely basis could be impaired.
Immunic is subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and Nasdaq rules and regulations. The Sarbanes-Oxley Act requires, among other things, that Immunic maintain effective disclosure controls and procedures and internal control over financial reporting. Effective internal control over
financial reporting is necessary for Immunic to provide reliable financial reports and, together with adequate disclosure controls and procedures, is designed to prevent fraud. Immunic must perform system and process evaluation and testing of its internal control over financial reporting to allow management to report on the effectiveness of its internal controls over financial reporting in its Annual Report on Form 10-K for each year, as required by Section 404 of the Sarbanes-Oxley Act ("Section 404"). This requires significant management efforts and requires Immunic to incur substantial professional fees and internal costs to expand its accounting and finance functions. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause the company to fail to meet its reporting obligations. In addition, any testing by Immunic, as and when required, conducted in connection with Section 404, or any subsequent testing by the company’s independent registered public accounting firm, as and when required, may reveal deficiencies in the company’s internal control over financial reporting that are deemed to be significant deficiencies or material weaknesses or that may require prospective or retroactive changes to its financial statements or identify other areas for further attention or improvement. Furthermore, Immunic cannot be certain that its efforts will be sufficient to remediate or prevent future material weaknesses or significant deficiencies from occurring.
If Immunic is not able to comply with the requirements of Section 404, or if it is unable to maintain proper and effective internal controls, it may not be able to produce timely and accurate financial statements. If that were to happen, the market price of Immunic’s common stock could decline and it could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities.
Immunic’s business and stock price could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of its securities.
Stockholders may, from time to time, engage in proxy solicitations or advance stockholder proposals, or otherwise attempt to effect changes and assert influence on Immunic’s board of directors and management. Activist campaigns that contest or conflict with Immunic’s strategic direction or seek changes in the composition of its board of directors could have an adverse effect on Immunic’s operating results and financial condition. A proxy contest would require Immunic to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by Immunic’s board of directors and management, diverting their attention from the pursuit of Immunic’s business strategy. Any perceived uncertainties as to Immunic’s future direction and control, its ability to execute on its strategy, or changes to the composition of its board of directors or management team arising from a proxy contest could lead to the perception of a change in the direction of its business or instability which may result in the loss of potential business opportunities, make it more difficult to pursue strategic initiatives, or limit its ability to attract and retain qualified personnel and business partners, any of which could adversely affect its business and operating results. If individuals are ultimately elected to Immunic’s board of directors with a specific agenda, Immunic’s ability to effectively implement its business strategy and create additional value for its stockholders may adversely effected. Immunic may choose to initiate, or may become subject to, litigation as a result of the proxy contest or matters arising from the proxy contest, which would serve as a further distraction to its board of directors and management and would require it to incur significant additional costs. In addition, actions such as those described above could cause significant negative or other fluctuations in Immunic’s stock price based upon temporary or speculative market perceptions or other factors that do not expectnecessarily reflect the underlying fundamentals and prospects of Immunic’s business.
An active trading market for Immunic’s common stock may not be sustained and its stockholders may not be able to pay dividends in the future, and any return on investmentresell their shares of common stock for a profit, if at all.
An active trading market for Immunic’s shares of common stock may not be sustained. If an active market for Immunic’s common stock is not sustained, it may be limiteddifficult for stockholders to sell their shares at an attractive price or at all.
Future sales of shares by existing stockholders could causeImmunic’s stock price to decline.
If existing stockholders of Immunic sell, or indicate an intention to sell, substantial amounts of the value of our stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on ourcompany’s common stock in the foreseeable future. public market after legal restrictions on resale lapse, the trading price of the common stock of the company could decline.
If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about Immunic, its business or its market, its stock price and trading volume could decline.
The payment of dividends on ourtrading market for Immunic’s common stock will dependbe influenced by the research and reports that equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of Immunic’s common stock, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, Immunic will not have any control over the analysts or the content and opinions included in their reports. The price of Immunic’s common stock could decline if one or more equity research analysts downgrade its stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of Immunic or fails to publish reports on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, ourit regularly, demand for its common stock may be less valuable because a positive return on your investment will only occur if ourcould decrease, which in turn could cause its stock price appreciates.or trading volume to decline.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We leased 44,000As of December 31, 2020, we lease approximately 5,700 square feet in San DiegoGermany in fourHalle and Gräfelfing, in two different facilities, at December 31, 2018. and approximately 3,300 of office space in the U.S. in New York City.
The New York City lease, which we entered into in November 2019, expires in April 2023 and provides the principal location for our U.S. operations. The Halle, Germany lease is month to month and the Gräfelfing, Germany lease, which was effective July 1, 2020, expires in June 2025.
We have consolidatedmay look to expand the space available to us in our operations in a single 19,000 square foot leased facility, the lease on which runs to June 2022. The three other leases for approximately 25,000 square feet expired in January 2019. Our remaining facility is adequate to meet our existing needs.German facilities.
Item 3. Legal Proceedings.
We are not currently a party to any litigation, nor are we aware of any pending or threatened litigation against us that we believe would materially affect our business, operating results, financial condition or cash flows. Our industry is characterized by frequent claims and litigation including securities litigation, claims regarding patent and other intellectual property rights and claims for product liability. As a result, in the future, we may be involved in various legal proceedings from time to time.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed inon the The Nasdaq Global Select Market under the symbol "VTL""IMUX".
Holders
As of February 15, 2019,12, 2021, there were approximately 5134 holders of record of our common stock, which excludes stockholders whose shares were held in nominee or street name by brokers. The actual number of common stockholders is greater than the number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
None.
Item 6. Selected Financial Data.
The following table summarizes our selected consolidated financial data for the periods and as of the dates indicated. We have derived the consolidated statement of operations data for the years ended December 31, 2018, 2017 and 2016 and the consolidated balance sheet data as of December 31, 2018 and 2017 from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data for the years ended December 31, 2015 and 2014 and the balance sheet data as of December 31, 2016, 2015 and 2014 are derived from our audited financial statements not included in this Annual Report on Form 10-K. This data should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our audited consolidated financial statements and their related notes, which are included elsewhere in this Annual Report.Not applicable.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Consolidated Statement of Operations Data: | (in thousands, except share and per share amounts) |
Operating expenses: | | | | | | | | | |
Research and development | $ | 24,825 |
| | $ | 39,341 |
| | $ | 30,046 |
| | $ | 39,118 |
| | $ | 39,479 |
|
General and administrative | 13,585 |
| | 13,314 |
| | 11,220 |
| | 12,139 |
| | 10,863 |
|
Severance costs | 2,395 |
|
| — |
|
| — |
|
| 863 |
|
| — |
|
Impairment loss | 1,219 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Total operating expenses | 42,024 |
| | 52,655 |
| | 41,266 |
| | 52,120 |
| | 50,342 |
|
Loss from operations | (42,024 | ) | | (52,655 | ) | | (41,266 | ) | | (52,120 | ) | | (50,342 | ) |
Net loss | (41,475 | ) | | (52,078 | ) | | (40,969 | ) | | (52,023 | ) | | (47,667 | ) |
Net loss attributable to common stockholders | $ | (41,475 | ) | | $ | (52,078 | ) | | $ | (40,969 | ) | | $ | (52,023 | ) | | $ | (56,821 | ) |
Net loss per share attributable to common stockholders, basic and diluted | $ | (0.98 | ) | | $ | (1.31 | ) | | $ | (1.31 | ) | | $ | (2.07 | ) | | $ | (3.54 | ) |
Weighted-average common shares outstanding, basic and diluted (1) | 42,369,245 |
| | 39,859,009 |
| | 31,387,579 |
| | 25,152,948 |
| | 16,054,452 |
|
__________
| |
(1) | Please refer to Note 2, "Summary of Significant Accounting Policies," in the notes to the consolidated financial statements, for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the number of shares used in the computation of the per share amounts.
|
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Consolidated Balance Sheet Data: | (in thousands) |
Cash and cash equivalents | $ | 13,324 |
| | $ | 56,901 |
| | $ | 59,991 |
| | $ | 83,416 |
| | $ | 102,238 |
|
Working capital | 11,722 |
| | 47,840 |
| | 55,983 |
| | 78,433 |
| | 94,538 |
|
Total assets | 14,978 |
| | 60,384 |
| | 64,026 |
| | 89,081 |
| | 108,082 |
|
Preferred stock | — |
| | — |
| | — |
| | — |
| | — |
|
Additional paid-in-capital | 349,771 |
| | 345,915 |
| | 302,185 |
| | 285,098 |
| | 248,305 |
|
Accumulated deficit | (337,428 | ) | | (295,953 | ) | | (243,825 | ) | | (202,856 | ) | | (150,833 | ) |
Total stockholders’ equity | 12,427 |
| | 50,044 |
| | 58,446 |
| | 82,325 |
| | 97,563 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this Annual Report. As used in this report, unless the context suggests otherwise, "we," "us," our" “we,” “us,” our” or "the Company"“the Company” refer to Vital Therapies,Immunic, Inc. and its subsidiaries.
Overview
We are a biotherapeuticclinical-stage biopharmaceutical company that has been developing a cell-based therapypipeline of selective oral immunology therapies aimed at treating chronic inflammatory and autoimmune diseases, including relapsing-remitting multiple sclerosis ("RRMS"), ulcerative colitis ("UC"), Crohn’s disease ("CD") and psoriasis. We are headquartered in New York with our main operations in Gräfelfing, Germany. We currently have 28 employees.
We are currently pursuing three development programs, all orally available small molecule inhibitors in the clinical development phase. These include the IMU-838 program, which is focused on the development of oral formulations of small molecule inhibitors of the enzyme dihydroorotate dehydrogenase (“DHODH”); the IMU-935 program, which is focused on an inverse agonist of RORγt, an immune cell-specific isoform of retinoic acid receptor-related orphan nuclear receptor gamma (“RORγ”), and the IMU-856 program, which involves the development of a drug targeting the treatmentrestoration of acute forms of liver failure. Our initialintestinal barrier function. These product candidate, the ELAD® System, or ELAD, is a human-cell-based, bio-artificial liver, which wascandidates are being developed to improve ratesaddress diseases such as RRMS, UC, CD, and psoriasis. In addition to these large markets, these products are also being developed to address certain rare diseases with high unmet medical needs, such as primary sclerosing cholangitis (“PSC”), and Guillain-Barré syndrome (“GBS”). We are also investigating IMU-838 as a potential treatment option for coronavirus disease 2019 (“COVID-19”).
We have incurred net losses since inception of survival among patients$103.9 million through December 31, 2020. We anticipate that we will continue to incur losses for at least the next several years. Due to the uncertainties involved with acute formstherapeutic product development and the clinical trial process, we cannot predict the timing or level of liver failure. Since inception,future expenses with certainty, when product approval might occur, if ever, or when profitability may be achieved or sustained.
Recent Events
1. $50M At-the-Market Offering
In December 2020, we have devoted essentiallyfiled a Prospectus Supplement for the offering, issuance and sale of up to a maximum aggregate offering price of $50.0 million of common stock that may be issued and sold under an additional at-the-market sales agreement with SVB Leerink LLC (“SVB Leerink”) as agent (the "December 2020 ATM"). We intend to use the net proceeds from the offering to continue to fund the ongoing clinical development of our product candidates and for other general corporate purposes, including funding existing and potential new clinical programs and product candidates. The December 2020 ATM will terminate upon the earlier of (i) the issuance and sale of all of our effortsthe shares through SVB Leerink on the terms and subject to product development, clinical testingthe conditions set forth in the December 2020 ATM or (ii) termination of the December 2020 ATM as otherwise permitted thereby. The December 2020 ATM may be terminated at any time by either party upon ten days’ prior notice, or by SVB Leerink at any time in certain circumstances, including the occurrence of a material adverse effect on us.As of December 31, 2020, $50.0 million in capacity remains under the December 2020 ATM. The prior at-the-market sales agreement between the Company and pilot manufacturingSVB Leerink, dated as of July 17, 2019, which provides for the offer and have not recognized revenuessale of common stock from our planned principal operations.time to time having an aggregate offering price of up to $40.0 million (the “July 2019 ATM”), remains in effect.
2. Shelf Registration Statement
In September 2018,November 2020, we reported top-line data fromfiled a phase 3 clinical trialshelf registration statement on Form S-3 (the “2020 Shelf Registration Statement”), which became effective in November 2020. The 2020 Shelf Registration Statement permits the offering, issuance and sale of ELAD, VTL-308,up to $250.0 million of common stock, preferred stock, warrants, debt securities, and/or units in 151 subjectsone or more offerings and in any combination of the foregoing.
3. Loan Agreement with severe alcoholic hepatitis. Although there wasThe European Investment Bank
On October 19, 2020, we and Immunic AG entered into a numerical improvementFinance Contract with the European Investment Bank (“EIB”), pursuant to which EIB agreed to provide Immunic AG with a term loan in survivalan aggregate amount of up to €24.5 million to
support the development of our lead asset, IMU-838, in moderate COVID-19, to be made available to be drawn in three tranches, with the second and third tranches subject to the completion of certain pre-defined milestones. We have the right to defer payment of principal and interest on the first and second tranches until five years after the respective borrowing dates, at which point such tranches must be repaid in full. The third tranche is repayable in annual installments commencing one year after its respective borrowing date and must be repaid in full no later than five years after such date. Any outstanding borrowings under the Loan Agreement will accrue interest as provided in the ELAD-treated group between three monthsLoan Agreement.
From January 1, 2021 until December 31, 2030, we and one year following randomization, the study failedImmunic AG are also obligated to meet the primary endpointpay EIB a very low single digit percentage of a significant improvement in overall survival through at least ninety-one days. The secondary endpoint of the proportion of survivors at study day ninety-one also showed no statistically significant difference between the groups.
Considering these results, we do not believe the ELAD System can be approvedour revenue, as set forth in the United States orLoan Agreement, subject to certain conditions and limitations tied to the European Union without additional clinical trials,total amount drawn under the Loan Agreement and subject to a cap of €8.6 million if ever,only the first tranche is drawn and subject to a cap of €30 million if the full loan amount is drawn. The Loan Agreement also includes certain prepayment penalties that such clinical trials would require substantial capitalmay be triggered by certain prepayments prior to the maturity date. We will guarantee Immunic AG’s obligations to EIB pursuant to a Guarantee Agreement to be executed by us, Immunic AG and time to complete. Consequently, weEIB. As of December 31, 2020, no funds have ceased any further development ofbeen drawn down under the ELAD System for the United States and Europe, substantially reduced our workforce, discontinued most of our supply and service agreements, and shifted our strategic focus to identifying and exploring strategic alternatives including a merger, or an acquisition or sale of assets.Loan Agreement.
In January 2019,4. Equity Financings
August 2020 Offering
On August 4, 2020, we entered into an exchangeunderwriting agreement (the “Underwriting Agreement”) with Immunic AG, or Immunic, and allSVB Leerink, as representative of the current shareholdersseveral underwriters, relating to our public offering of Immunic, or the Exchange Agreement, pursuant to which all of the Immunic shareholders will exchange all of their Immunic shares for5,000,000 shares of our common stock, withat a public offering price of $18.00 per share. Under the result of Immunic becoming a wholly-owned subsidiaryterms of the Company,Underwriting Agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 750,000 shares of common stock (the “Option Shares”) at the public offering price, less underwriting discounts and commissions, which is referredwas exercised in full on August 6, 2020. On August 7, 2020, we closed the offering.
The net proceeds to asus from this offering, after giving effect to the Transaction. exercise in full by the underwriters of their option to purchase the Option Shares, was approximately $96.5 million, after deducting underwriting discounts and commissions and offering expenses payable by us.
June 2020 Offering
On June 10, 2020, we entered into a placement agency agreement with ROTH Capital Partners, LLC ("RCP") and Ladenburg Thalmann & Co. Inc. relating to our public offering of 2,175,000 shares of our common stock. Pursuant to this agreement, we agreed to pay the placement agents a cash fee of 6.5% of the gross proceeds from the offering raised from investors and to reimburse the placement agents for certain costs incurred in connection therewith.
In addition, all Immunic shareholderson June 10, 2020, we and certain institutional investors entered into securities purchase agreements relating to the issuance and sale of Immunic’s executive officersan aggregate of 2,175,000 shares of our common stock. The purchase price per share in this offering was $11.40 for aggregate gross proceeds of approximately $25.0 million.
The net proceeds to us from this offering, after deducting our offering expenses, were approximately $23.0 million.
April 2020 Registered Direct Offering
On April 23, 2020, we entered into an engagement letter with RCP relating to our registered direct offering of common stock to select institutional investors. Pursuant to this agreement, we agreed to pay RCP a cash fee of 6.5% of the gross proceeds from the offering raised from investors and directors,to reimburse RCP for certain costs incurred in connection therewith.
In addition, on April 23, 2020, we and the investors entered into a securities purchase agreement with Immunic,relating to the issuance and sale of an aggregate of 1,764,706 shares of our common stock. The purchase price per share was $8.50 for aggregate gross proceeds to us of approximately $15.0 million.
The net proceeds to us from this offering, after deducting our offering expenses, were approximately $13.9 million.
ATM Issuances
For the year ended December 31, 2020, we raised gross proceeds of $11.3 million pursuant to which they agreed, subject to the terms and conditionsJuly 2019 ATM through the sale of such agreement, to invest prior to733,728 shares of common stock at a weighted average price of $15.42 per share. The net proceeds from the consummationJuly
2019 ATM were $11.0 million after deducting underwriter commissions of the Transaction an aggregate amount$339,356. As of approximately €26.7 million, or approximately $30.5 million based on the exchange rate at December 31, 2018 in Immunic. Following the closing of the Transaction, the company will focus on advancing Immunic’s pipeline of treatments for chronic inflammatory and autoimmune diseases. The issuance of the company common stock2020, there was $23.3 million available under the Exchange AgreementJuly 2019 ATM and certain related transactions must be approved by$50.0 million available under the company’s stockholders. There can be no assurance that such transactions will be approved byDecember 2020 ATM.
Other
Immunic Joins the stockholders or that the Transaction will be consummated.NASDAQ Biotech Index
Further, our business, operating results, financial condition and prospects are subject to significant risks and uncertainties. Even if we complete the Transaction, we will have no commercial products or products in later stage development and it may be difficult to secure additional funding in light of the risks and circumstances outlined above. In
We were selected for addition to the TransactionNASDAQ Biotechnology Index (Nasdaq: NBI), effective prior to market open on December 21, 2020. The NASDAQ Biotechnology Index is designed to track the performance of a set of securities listed on The Nasdaq Stock MarketⓇ that are classified as either biotechnology or pharmaceutical according to the Industry Classification Benchmark. The NASDAQ Biotechnology Index is re-ranked annually. All securities in the index must be listed on the NASDAQ Global Market or the NASDAQ Global Select Market and as noted above,meet minimum market value and share volume requirements, among other criteria.
Immunic Joins the Nasdaq Global Select Market
Effective October 7, 2020, we are exploring selling assets, including those relatingtransferred the listing of our common stock from the Nasdaq Capital Market to ELAD, and options to reduce the amountNasdaq Global Select Market. The Global Select Market is the most selective of space we lease, in order to increase our cash balance and reduce expenses. IfNasdaq’s three market tiers.
Immunic Joins the proposed transaction with Immunic is not completed and we are unable to seek an appropriate alternate use for our remaining assets, we may decide to pursue a dissolution and liquidationRussell 3000 Index
At the conclusion of the company. In such event,2020 Russell indexes annual reconstitution effective June 29, 2020, we joined the amount of cash availableRussell 3000Ⓡ Index.Membership in the U.S. all-cap Russell 3000 Index, which remains in place for distribution to stockholders will depend heavily onone year, means automatic inclusion in the timing of such liquidationlarge-cap Russell 1000 Index or small-cap Russell 2000 Index as well as the amountappropriate growth and value style indexes. FTSE Russell determines membership for its Russell indexes primarily by objective, market-capitalization rankings and style attributes.
Changes to Executive Team
Separation Agreement with Sanjay S. Patel
On April 17, 2020, our former Chief Financial Officer, Sanjay S. Patel, resigned and entered into a Confidential Severance Agreement and Full and General Release with the Company (the “Separation Agreement”). Pursuant to the terms of cash that will need to be reserved for commitments and contingent liabilities. There can be no assurance any transaction will result from our evaluation of strategic alternatives.the Separation Agreement, Mr. Patel’s employment terminated on April 17, 2020.
We have a history of incurring losses and negative cash flows from operations and have an accumulated deficit of $337.4 million through December 31, 2018. In considerationExecutive Chairman Agreement with Duane Nash
On April 15, 2020, the compensation committee of our decisionBoard independently reviewed and approved entering into an employment agreement with our current Chairman of the Board, Duane Nash, MD, JD, MBA (the “Executive Chairman Agreement”) and pursuant to ceasesuch approval, on April 17, 2020, we and Mr. Nash entered into the further development of ELAD in the United StatesExecutive Chairman Agreement. The Executive Chairman Agreement establishes an “at will” employment relationship pursuant to which Mr. Nash serves as Executive Chairman and Europe,contemplated a term that ends on October 15, 2020. On October 15, 2020, we have made reductions in operating expenses as we pursue strategic alternatives for the Company. As a result, we believe that our existing cash and cash equivalents of $13.3 million as of December 31, 2018 would be sufficient to meet our known liabilities and commitments at such date; however, we expect our resource requirements to change materiallyMr. Nash entered into an addendum to the extentExecutive Chairman Agreement, pursuant to which the term of the agreement was extended to April 15, 2021. In connection therewith, we enter intoagreed to make a one-time award of 120,000 stock options to Mr. Nash, which began to vest monthly starting on November 15, 2020.All other terms of the employment agreement remain the same.
Promotion of Glenn Whaley
On April 17, 2020, Glenn Whaley, the Company’s Principal Accounting Officer and complete any strategic transactions, such as and including the Exchange Agreement with Immunic. We have based our estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. The timing and amount of our actual expenditures will be based on many factors, including, but not limitedController, was promoted to the strategic options that we pursue, any unforeseen cash needs which may deplete current cashposition of Vice President Finance, Principal Financial and cash equivalents sooner than planned, or any future researchAccounting Officer. Mr. Whaley has assumed day-to-day financial management responsibilities, and development efforts we decidereports directly to pursue.
Daniel Vitt, Ph.D., Chief Executive Officer and President of the Company.
Daiichi Sankyo Option Exercise
Financial Operations Overview
Research and Development Expenses
Research and development expenses have principallyOn January 5, 2020, Immunic AG, under the terms of the Daiichi Sankyo Agreement, exercised its option to obtain the exclusive worldwide right to commercialization of IMU-856. Among other things, the option exercise grants Immunic AG the rights to Daiichi Sankyo’s patent application related to IMU-856. In connection with the development ofoption exercise, we paid a one-time upfront licensing fee to Daiichi Sankyo. Under the ELAD System and are expensed as incurred. Our research andDaiichi Sankyo Agreement, Daiichi Sankyo is also eligible to receive future development, expenses consisted primarily of:
expenses incurred under agreements with clinical sites, clinical research organizations, or CROs, and statistical, regulatory and other consultants that assist us with our clinical trials;
employee-related expenses, which include salaries, benefits, travel and stock-based compensation;
the cost of acquiring and manufacturing clinical trial materials;
facilities, depreciation, and other allocated expenses, which include direct and allocated expenses for rent, information systems, maintenance of facilities and equipment, and depreciation of fixed assets; and
other costs associated with research, the preparation for a potential biologics license application, or BLA, submission and other regulatory activities.
We do not track our employee and facility-related research and development costs by clinical trial,sales milestone payments, as we have used our employee and infrastructure resources across multiple clinical trials, and we believe the allocation of such costs would be arbitrary and would not provide a meaningful assessment.
The costs of clinical trials vary significantly over the life of a projectwell as a result of a variety of factors including, but not limited to, the following:
per subject trial costs;
the number of sites included in the trials;
the countries in which the trials are conducted;
the number of subjects that participate in the trials;
continuing quality assurance activities and standards consistent with the U.S. Food and Drug Administration, or FDA, and other regulatory requirements;
potential additional safety monitoring or other studies requested by regulatory agencies;
the number of events that occur in our event-driven clinical trials; and
the frequency and duration of subject follow-up visits.
A change in any of these variables can result in a significant change in the costs and timing associated with clinical development. For example, if we were to conduct an additional clinical trial, we would be required to expend significant additional financial resources and time on the completion of the clinical development of the ELAD System. However, based on our current plan, and in light of our VTL-308 clinical trial results, we expect significantly reduced research and development costs over at least the next several quarters.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, information technology, marketing and legal functions. Other general and administrative expenses include but are not limited to related facility costs, stock-based compensation, professional fees for legal, consulting, accounting and tax services and insurance costs. Based on our current plans and the recent reduction in our workforce, we expect significantly reduced general and administrative costs at least over the next several quarters.
Severance Costs
As a result of the failure of the Company’s clinical trial, the Company completed a staff reduction plan in order to reduce operating expenses and to conserve cash. The plan reduced our workforce by approximately 85%. The staff reduction was completed in September 2018. We also expect to incur costsroyalties related to the termination of the executive officers, pursuant to severance and change of control agreements previously entered into with such officers.IMU-856.
Impairment Loss
We evaluate long-lived assets, such as property and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. If a long-lived asset is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset or asset group. The resulting impairment charge is included as a loss from operations in the condensed consolidated statements of operations. We recorded such an impairment loss in conjunction with the termination of our VTL-308 clinical trial in the third quarter of 2018.
Other Income
Interest Income
Our cash and cash equivalents are and have been invested primarily in money market funds, which in our opinion, provide liquidity and protection from loss of principal. We expect to continue to make similar investments while the funds await use in operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the U.S.United States ("US"), or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an on-going basis, management makes its best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are typically recognized in the period when new information regarding estimates becomes available to management. Actual results could differ from those estimates.
Our significant accounting policies are described in more detail in Note 2, "Summary of Significant Accounting Policies," in the notes to the consolidated financial statements. However,See below for what we believe thatare our Critical Accounting Policies.
Foreign Currency Translation and Presentation
The Company’s reporting currency is US dollars. During the following accounting policiestwelve months ended December 31, 2020 and 2019, Immunic AG’s operations were located in Germany with the euro being its functional currency. Immunic Australia Pty Ltd.’s functional currency is the Australian dollar. All amounts in the financial statements where the functional currency is not the US dollar are translated into US dollar equivalents at exchange rates as follows:
• assets and liabilities at reporting period-end rates;
• income statement accounts at average exchange rates for the most critical for fully understandingreporting period; and evaluating our financial condition
• components of equity at historical rates.
Gains and results of operations.
Clinical Trial Accruals
As partlosses from translation of the process of preparing our financial statements weinto US dollars are required to estimate our accrued expenses. Our clinical trial accrual process seeks to account for expensesrecorded in stockholders’ equity net of the anticipated income tax effects as a component of accumulated other comprehensive income (loss). Realized and unrealized gains and losses resulting from our obligations under agreements with clinical sites, clinical research organizations, vendors,foreign currency transactions denominated in currencies other than the functional currency are reflected as general and consultantsadministrative expenses in connection with conducting our clinical trials. We account for these expenses accordingthe Consolidated Statements of Operations. Foreign currency transaction gains and losses related to long-term intercompany loans that are payable in the progressforeseeable future are recorded in Other Income. The Consolidated Statements of each trial as measuredCash Flows were prepared by subject enrollment,using the average exchange rate in effect during the reporting period which reasonably approximates the timing of various aspectsthe cash flows.
Goodwill
Business combinations are accounted for under the acquisition method. The total purchase price of an acquisition is allocated to the underlying identifiable net assets, based on their respective estimated fair values as of the trialacquisition date. Determining the fair value of assets acquired and if available, information from our service providers. Duringliabilities assumed requires management’s judgment and often involves the courseuse of a clinical trial, we adjust our ratesignificant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, probabilities of clinical expense recognition if actual results differ from our estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understandingsuccess, discount rates, and asset lives, among other items. Assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the statuspurchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter, or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition.
The Company assesses qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, the Company were to determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company would perform a quantitative test that compares the fair value to its carrying value to determine the amount of any impairment. Impairment testing for goodwill is done at the reporting unit level. The Company has determined that it operates in a single operating segment and timinghas a single reporting unit. The Company has determined there was no goodwill impairment as of services performed relative to the actual statusDecember 31, 2020.
Research and timingDevelopment Expenses
Research and development expenses consist of services performed may vary, and can resultexpenses incurred in us reporting amounts that may later be determined to be higher or lower than our estimates for a particular period and adjustments to our research and development activities, which include clinical trials, contract research services, certain milestone payments, salaries and related employee benefits, allocated facility costs and other outsourced services. Research and development expenses are charged to operations as incurred.
The Company enters into agreements with CROs to provide clinical trial services for individual studies and projects by executing individual work orders governed by a Master Service Arrangement (“MSA”). The MSAs and associated work orders provide for regular recurrent payments and payments upon the completion of certain milestones. The Company regularly assesses the timing of payments against actual costs incurred to ensure a proper accrual of related expenses in the appropriate accounting period.
Collaboration Arrangements
Certain collaboration and license agreements may be necessaryinclude payments to or from the Company of one or more of the following: non-refundable or partially refundable upfront or license fees; development, regulatory and commercial milestone payments; payment for manufacturing supply services; partial or complete reimbursement of research and development costs; and royalties on net sales of licensed products. The Company assesses whether such contracts are within the scope of Financial Accounting Standards Board (FASB) Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” and ASU No. 2018-18, “Collaborative Arrangements”, ("ASU 2018-18"). ASU 2018-18, clarifies that certain elements of collaborative arrangements could qualify as transactions with customers in the scope of ASC 606.
In October 2018, the Company entered into an option and license agreement (the "Daiichi Sankyo Agreement") with Daiichi Sankyo Co., Ltd. ("Daiichi Sankyo") which granted the Company the right to license a group of compounds, designated by the Company as IMU-856, as a potential new oral treatment option for diseases such as inflammatory bowel disease, irritable bowel syndrome with diarrhea, immune checkpoint inhibitor induced colitis and other barrier function associated diseases. During the option period, the Company performed agreed upon research and development activities for which it was reimbursed by Daiichi Sankyo up to a maximum agreed-upon limit. Such reimbursement is recorded as other income.
On January 5, 2020, the Company exercised its option to obtain the exclusive worldwide right to commercialization of IMU-856. Among other things, the option exercise grants Immunic AG the rights to Daiichi Sankyo’s patent application related to IMU-856. In connection with the option exercise, the Company paid a one-time upfront licensing fee to Daiichi Sankyo. Under the Daiichi Sankyo Agreement, Daiichi Sankyo is also eligible to receive future periods.development, regulatory and sales milestone payments, as well as royalties related to IMU-856.
Stock-Based Compensation
We measureThe Company measures the cost of employee and recognize compensation expensenon-employee services received in exchange for all stock-based compensation for employees and directorsequity awards based on the estimatedgrant-date fair value of the award recognized generally as an expense (i) on a straight-line basis over the requisite service period for those awards whose vesting is based upon a service condition, and (ii) on an accelerated method for awards whose vesting is based upon a performance condition, but only to the extent it is probable that the performance condition will be met. Stock-based compensation is estimated (i) at the date of grant and to consultants based on the ongoing estimatedaward’s fair value. Currently, our stock-based awards have only consisted of stock options and restricted stock; however, future grants under ourvalue for equity compensation plan may also consist of shares of restricted stock units, stock appreciation rights, performanceclassified awards and performance units. We estimate(ii) final measurement date for liability classified awards. Forfeitures are recorded in the period in which they occur.
The Company estimates the fair value of stock options using the Black-Scholes-Merton or BSM, option pricingoption-pricing model, which requires the use of estimates.
We recognize stock-based compensation cost for employeesestimates and directors for ratably vesting stock options on a straight-line basis over the requisite service period of the award. For performance-based stock options to employees and directors, we record stock-based compensation expense only when the performance-based milestone is deemed probable of achievement. We utilize both quantitative and qualitative criteria to judge whether milestones are probable of achievement.
The fair value of options granted to consultants is estimated using the BSM option pricing model and is re-measured at each reporting date with changes in fair value prior to vesting recognized as expense in the consolidated statements of operations across the applicable vesting period. Beginning in 2019, we will measure and recognize compensation expense for consultants based on the estimated fair value at the grant date. For performance-based stock options to consultants, we record
stock-based compensation expense only when the performance-based milestones are achieved unless there is a performance commitment.
The BSM option pricing model requires the input of highly-subjectivesubjective assumptions, including the risk-free interest rate, the fair value of the underlying common stock, the expected dividend yield of ourthe Company’s common stock, the expected volatility of the price of ourthe Company’s common stock, and the expected term of the option. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, ourthe Company’s stock-based compensation expense could be materially different in the future.
Income Taxes
We account forThe Company is subject to corporate income taxes undertax laws and regulations in the U.S., Germany and Australia. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment in their application.
The Company utilizes the asset and liability method of accounting for income taxes which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed audited
consolidated financial statements. Under this method, deferredDeferred income tax assets and liabilities are determined based on the basis of the differences between the financial statementsstatement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a changechanges in tax rates on deferred tax assets and liabilities is recognized in incomeoperations in the period that includes the enactment date.
We recognize net Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not some portion or the entire deferred tax assetsasset will not be realized. As of December 31, 2020, and December 31, 2019, the Company maintained a full valuation allowance against the balance of deferred tax assets.
It is the Company’s policy to provide for uncertain tax positions and the extent we believe these assets arerelated interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be realized. In making suchsustained upon examination by tax authorities. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a determination, management considers all available positivecomponent of income tax expense.
Components of Results of Operations
Revenue
To date, we have not generated any revenue from product sales and negative evidence, including future reversalsdo not expect to generate any revenue from the sale of existing taxable temporary differences, projected future taxable income, tax-planning strategies,products in the foreseeable future. If our development efforts for our product candidates are successful and results of recent operations. If management determines thatresult in regulatory approval, we would be able to realize our deferred tax assetsmay generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in excessobtaining regulatory approval for any of their netour product candidates.
Research and Development Expenses
Research and development expenses consist of costs associated with our research activities, including our product discovery efforts and the development of our product candidates. Our research and development expenses include:
•external research and development expenses and milestone payments incurred under arrangements with third parties, such as CROs, contract manufacturing organizations, collaborations with partners, consultants, and our scientific advisors; and
•internal personnel expenses.
We expense research and development costs as incurred. Non-refundable advance payments for goods and services that will be used in future research and development activities are capitalized as prepaid expenses and expensed when the service has been performed or when the goods have been received.
Since our inception in March 2016, we have spent a total of approximately $82.4 million in research and development expenses through December 31, 2020.
These costs primarily include external development expenses and internal personnel expenses for the three development programs, IMU-838, IMU-935 and IMU-856. We have spent the majority of our research and development resources on IMU-838, our lead development program for clinical trials in RRMS, UC, COVID-19 and PSC. IMU-935 is currently being tested in a Phase 1 clinical trial in healthy volunteers, which was initiated in September 2019. IMU-856 is currently being tested in a Phase 1 clinical trial in healthy volunteers, which was initiated in August 2020.
In August 2019, Immunic AG received a grant of up to approximately $730,000 from the German Federal Ministry of Education and Research, in support of the InnoMuNiCH (Innovations through Munich-Nippon Cooperation in Healthcare) project. The grant funds will be used to fund a three-year research project relating to autoimmune diseases by us and our three project partners. Since the inception of the grant, we have received $101,000 which was recorded amount, management wouldin other income in the accompanying consolidated statement of operations.
We expect our research and development expenses to increase for the foreseeable future as we continue to conduct ongoing regulatory and development activities, initiate new preclinical and clinical trials and build our pipeline. The process of commercialization, conducting clinical trials and preclinical studies necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving regulatory approval for any of our product candidates.
Successful development of product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. We anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an adjustmentongoing basis in response to the deferreddevelopment and regulatory success of each product candidate, and ongoing assessments as to each product candidate’s commercial potential.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel expenses, professional fees for legal, accounting, tax asset valuation allowance,and business consulting services, insurance premiums and stock-based compensation.
Other Income (Expense), Net
Interest Income
Interest income consists of interest earned on our money market funds and bank accounts which would reduceare a portion of our cash and cash equivalents balance. Our interest income has not been significant due to low interest rates earned on invested balances.
Other Income (Expense), Net
Other income consists primarily of reimbursement of research and development expenses in connection with our option and licensing agreement with Daiichi Sankyo Co., Ltd., the provision for income taxes. As of December 31, 2018 and 2017, we maintained a full valuation allowance against our entire balance of deferred tax assets.
We record uncertain tax positionsgain on the basissettlement of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlementnote receivable in connection with the relatedsale of ELAD Assets (See Note 4), a research and development tax authority. We recognize interest and penaltiesincentive related to unrecognized tax benefits, if any, within income tax expense,clinical trials performed in Australia and any accrued interestforeign currency transaction gains and penaltieslosses related to long-term intercompany loans that are included withinpayable in the related tax liability line.foreseeable future.
Results of Operations
Comparison of Fiscal Years Ended December 31, 20182020 and 20172019
The following table summarizes our operating expenses for the years ended December 31, 20182020 and 20172019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | Change |
| 2020 | | 2019 | | $ | | % |
Operating expenses: | | | | | | | |
Research and development | 38,637 | | | 22,512 | | | 16,125 | | | 72 | % |
General and administrative | 10,334 | | | 14,520 | | | (4,186) | | | (29) | % |
Total operating expenses | 48,971 | | | 37,032 | | | 11,939 | | | 32 | % |
Loss from operations | (48,971) | | | (37,032) | | | (11,939) | | | 32 | % |
Total other income | 4,954 | | | 2,099 | | | 2,855 | | | 136 | % |
Net loss | (44,017) | | | (34,933) | | | (9,084) | | | 26 | % |
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| 2018 | | 2017 | | $ | | % |
Operating expenses: | | | | | | | |
Research and development | $ | 24,825 |
| | $ | 39,341 |
| | $ | (14,516 | ) | | (37 | )% |
General and administrative | 13,585 |
| | 13,314 |
| | 271 |
| | 2 | % |
Severance Costs | 2,395 |
| | — |
| | 2,395 |
| | 100 | % |
Impairment Loss | 1,219 |
| | — |
| | 1,219 |
| | 100 | % |
Total operating expenses | $ | 42,024 |
| | $ | 52,655 |
| | $ | (10,631 | ) | | (20 | )% |
The $14.5 million decrease in researchResearch and development expenseexpenses increased by $16.1 million during the yeartwelve months ended December 31, 20182020, as compared to the yeartwelve months ended December 31, 2017 principally2019. The increase reflects (i) a $7.2$9.6 million increase in external development costs for IMU-838 related to the Phase 2 clinical trial in patients with COVID-19 since the trial was started in 2020, (ii) a $5.0 million increase in license fees, drug supply and Phase 1 costs related to IMU-856 since these trials have ramped up in 2020, (iii) a $2.1 million increase in drug supply, Phase 1 and preclinical costs related to IMU-935 since these trials have ramped up in 2020, (iv) a $1.5 million increase in personnel expenses, (v) a $0.7 million increase in drug supply costs related to IMU-838, and (vi) a $0.7 million increase for a bioequivalence study related to IMU-838. The increases were partially offset by (i) a $2.0 million decrease related to the Phase 2 clinical trial of IMU-838 in patients with RRMS as the clinical trial came to an end in 2020, and (ii) a $1.5 million decrease in costs related to the VTL-308a Phase 2 clinical trial due to completion of enrollment in the first quarter of 2018. There were 97 subjects enrolled in the VTL-308 clinical trial inpatients with Crohn’s disease.
General and administrative expenses decreased by $4.2 million during the twelve months ended December 31, 2017, while there were 19 subjects enrolled in2020, as compared to the twelve months ended December 31, 20182019. The decrease is primarily due to the completion of enrollment. In addition, upon the release of results from the VTL-308 clinical trial in September 2018, we ceased substantially all development efforts related to the ELAD System. As a result, research and development(i) $5.1 million lower stock compensation expense also reflects a $1.7 million reduction in salaries and wages, $1.4 million reduction in estimated incentive compensation costs and a $1.3 million net reversal of stock-based compensation in the 2018 period, all reflecting that our VTL-308 clinical trial did not successfully reach its primary or secondary survival endpoints and a related reduction in staff. Manufacturing supplies, travel and entertainment, outside marketing efforts and consulting also all decreased primarily as a result of non-recurring costs recorded in 2019 related to the completionTransaction, (ii) $0.9 million of the VTL-308 clinical trial by $918,000, $697,000, $498,000decreased legal, accounting and $225,000, respectively. Depreciation expense also decreased by $279,000consultancy costs, and (iii) a $0.7 million decrease in 2018 as compared to 2017, in parttravel costs due to worldwide travel
restrictions in connection with the impairment loss recorded in 2018.
COVID-19 pandemic. The $0.3decrease was partially offset by (i) a $2.2 million increase in generalpersonnel expenses, and administrative expense(ii) $0.3 million of increased costs across numerous categories.
Total other income increased by $2.9 million during the yeartwelve months ended December 31, 20182020, as compared to the yeartwelve months ended December 31, 2017 reflects an2019. The increase of $786,000 in outside services,is primarily dueattributable to strategic marketing efforts in anticipation of the potential commercialization of ELAD,(i) a $2.5 million foreign exchange gain on a $68.0 million intercompany loan between Immunic, Inc. and increases in patentImmunic AG, and other legal and securities-related costs of $882,000 including costs for the filing of(ii) a shelf registration statement on Form S-3 in the second quarter of 2018 and the subsequent write-off of deferred offering costs as a result of our inability to complete a follow-on offering considering the VTL-308 clinical trial results. These increased costs were largely offset by a $1.5 million decrease in compensation-related costs driven by a $862,000 reduction in stock-based compensation for the reversal of previously recognized expense related to performance-based stock options and a $502,000 reduction in estimated incentive compensation costs both reflecting that our VTL-308 clinical trial did not successfully reach its primary or secondary survival endpoints.
As previously reported, we ceased substantially all of our development efforts related to the ELAD System in September 2018. This resulted in a substantial change in the expected use of our long-lived assets and a significant decrease in the benefits expected to be realized from these assets. Accordingly, we recognized an impairment charge of $1.2 million on our property and equipment reflecting the difference in the carrying value of such property and equipment and its estimated fair value, and severance costs of $2.4 million for the related reduction in staff, in the consolidated statement of operations for the year ended December 31, 2018.
In conjunction with our review of strategic alternatives and our decision to cease the further development of ELAD, we have significantly reduced our projected monthly cash usage entering into 2019. In addition, we are exploring options to reduce the amount of space we lease to further reduce expenses. The reduction in staff in September 2018 and the cancellation of stock options in January 2019 has also reduced and should reduce reported stock-based compensation in 2019. However, we expect our expenditures will change materially to the extent we enter into any strategic transactions, such as the Transaction with Immunic. For example, the Transaction would be expected to trigger the accelerated vesting of restricted stock unit awards and payments to our officers under severance and control agreements increasing costs. The timing and amount of our actual expenditures will be based on many factors, including, but not limited to, future research and development efforts including such costs incurred by Immunic assuming completion of the Transaction, and any other strategic options that we pursue.
Comparison of Fiscal Years Ended December 31, 2017 and 2016
The following table summarizes our operating expenses for the years ended December 31, 2017 and 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| 2017 | | 2016 | | $ | | % |
Operating expenses: | | | | | | | |
Research and development | $ | 39,341 |
| | $ | 30,046 |
| | $ | 9,295 |
| | 31 | % |
General and administrative | 13,314 |
| | 11,220 |
| | 2,094 |
| | 19 | % |
Total operating expenses | $ | 52,655 |
| | $ | 41,266 |
| | $ | 11,389 |
| | 28 | % |
The $9.3$0.9 million increase in research and development expense during the year ended December 31, 2017 as compared to the year ended December 31, 2016 principally reflects an $8.0 million increase in costs related to the VTL-308 and priortax incentives for clinical trials primarily in higher costs for subjects, sites, manufacturing, enrollment support activities and consulting. As enrollment started in the second quarter of 2016, 35 subjects were enrolled in the VTI-308 clinical trial in the year ended December 31, 2016, while 97 subjects were enrolled during the year ended December 31, 2017. Costs also increased by $1.2
million for activities to support a potential biologics license application, or BLA, submission in the future.
The $2.1 million increase in general and administrative expense during the year ended December 31, 2017Australia as compared to the year ended December 31, 2016 was largely the result of a $1.9 million increase in compensation-related costs. In December 2017, our chief executive officer transitioned from being an employee to a consultant. As a result of increased spending on clinical trials in Australia. This increase was partially offset by (i) the related transition$0.4 million difference between the face value and consulting agreements, we recorded $525,000fair value of the promissory note collected in severance costs and $674,000full in stock-based compensation related to stock option modifications. In total, stock-based compensation increasedSeptember 2019 in connection with the sale of ELAD Assets, offset by $1.2the $0.1 million write-off of the investment in 2017 as compared to 2016 principally due to the stock option modifications and an increaseVTL China included in the numberELAD Assets sale, and (ii) a $0.2 million decrease of options outstanding.recognized income attributable to reimbursements of research and development expenses in connection with the Daiichi Sankyo Agreement.
Liquidity and Capital Resources
Overview
We have a historyno products approved for commercial sale and have not generated any revenue from product sales. We have never been profitable and have incurred operating losses in each year since our inception in 2016. Our net losses were approximately $44.0 million and $34.9 million for the year ended December 31, 2020 and 2019, respectively. As of incurring losses and negative cash flows from operations and haveDecember 31, 2020, we had an accumulated deficit of $337.4 millionapproximately $103.9 million. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
We expect to incur significant expenses and increasing operating losses for the foreseeable future as we initiate and continue the pre-clinical and clinical development of our product candidates and add personnel necessary to operate as a company with an advanced clinical pipeline of product candidates. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.
From inception through December 31, 2018. In consideration of our decision to cease the further development of ELAD in the United States and Europe,2020, we have made reductions in operating expenses asraised net cash of approximately $216.8 million from private and public offerings of preferred and common stock. As of December 31, 2020, we pursue strategic alternatives for the Company. As a result, we believe that our existinghad cash and cash equivalents of $13.3 million as of December 31, 2018 would be sufficient to meet our known liabilities and commitments at such date; however,approximately $127.5 million. With these funds, we expect to be able to fund our resource requirements to change materially tooperations beyond twelve months from the extent we enter into and complete any strategic transactions. The timing and amountdate of our actual expenditures will be based on many factors, including, but not limited to, the strategic options that we pursue, any unforeseen cash needs which may deplete current cash and cash equivalents sooner than planned, or any future research and development efforts we decide to pursue.issuance of the accompanying consolidated financial statements.
We currently have an effective shelf registration statement on Form S-3 on file with the Securities and Exchange Commission, or SEC which expires in June 2021. The shelf registration statement currently permits the offering, issuance and sale by us of up to an aggregate offering price of $200.0 million of common stock, preferred stock, warrants, debt securities or units in one or more offerings and in any combination, of which $60.0$40.0 million may be offered, issued and sold under an "at-the-market"at-the-market sales agreement with Cantor Fitzgerald & Co. However, amountsSVB Leerink. We may use the net proceeds from the offering to continue to fund the ongoing clinical development of our product candidates and for other general corporate purposes, including funding existing and potential new clinical programs and product candidates. In the year ended December 31, 2020, we raised gross proceeds of $11.3 million pursuant to the July 2019 ATM through the sale of 733,728 shares of common stock at a weighted average price of $15.42 per share. The net proceeds from the July 2019 ATM were $11.0 million after deducting underwriter commissions of $339,356. As of December 31, 2020, there was $23.3 million available under the July 2019 ATM.
In November 2020, we filed a shelf registration statement are significantly limitedon Form S-3. The 2020 Shelf Registration Statement permits the offering, issuance and sale of up to $250.0 million of common stock, preferred stock, warrants, debt securities, and/or units in one or more offerings and in any combination of the foregoing.
In December 2020, we filed a Prospectus Supplement for the offering, issuance and sale of up to a maximum aggregate offering price of $50.0 million of common stock that may be issued and sold under an additional at-the-market sales agreement with SVB Leerink as agent. We intend to use the net proceeds from the offering to continue to fund the ongoing clinical development of our public float was below $75.0 millionproduct candidates and for other general corporate purposes, including funding existing and potential new clinical programs and product candidates. The December 2020 ATM will terminate upon the earlier of (i) the issuance and sale of all of the shares through SVB Leerink on the terms and subject to the conditions set forth in the December 2020 ATM or (ii) termination of the December 2020 ATM as measuredotherwise permitted thereby. The December 2020 ATM may be terminated at any time by either party upon ten days’ prior notice, or by SVB Leerink at any time in certain circumstances, including the occurrence of a material adverse effect on us.As of December 31, 2018. Additional funding is not likely at this time due2020, $50.0 million in capacity remains under the December 2020 ATM.
Debt Financing
On October 19, 2020, Immunic, Inc. and Immunic AG entered into the Loan Agreement with EIB, pursuant to our past clinical trials not meeting their primary or secondary survival endpoints.
Should the Transactionwhich EIB agreed to provide Immunic AG with Immunic be completed, as a condition to closing, the Immunic shareholders and certain executive officers and directors are expected to investterm loan in an aggregate amount of approximately €26.7up to €24.5 million or approximately $30.5 million based on the exchange rate at December 31, 2018, in Immunic prior to the consummation of the Transaction. Following the closing of the Transaction, such funds would be available to support the development of Immunic’s current pipelineour lead asset, IMU-838, in moderate COVID-19, to be made available to be drawn in three tranches, with the second and third tranches subject to the completion of treatments for chronic inflammatorycertain pre-defined milestones. We have the right to defer payment of principal and autoimmune diseases; however, there caninterest on the first and second tranches until five years after the respective borrowing dates, at which point such tranches must be repaid in full. The third tranche is repayable in annual installments commencing one year after its respective borrowing date and must be repaid in full no assurancelater than five years after such date. Any outstanding borrowings under the Loan Agreement will accrue interest as provided in the Loan Agreement.
From January 1, 2021 until December 31, 2030, we and Immunic AG are also obligated to pay EIB a very low single digit percentage of our revenue, as set forth in the Loan Agreement, subject to certain conditions and limitations tied to the total amount drawn under the Loan Agreement and subject to a cap of €8.6 million if only the first tranche is drawn and subject to a cap of €30 million if the full loan amount is drawn. The Loan Agreement also includes certain prepayment penalties that such transactionsmay be triggered by certain prepayments prior to the maturity date.
Immunic, Inc. will receiveguarantee Immunic AG’s obligations to EIB pursuant to a Guarantee Agreement to be executed by Immunic, Inc., Immunic AG and EIB. As of December 31, 2020, no funds have been drawn down under the necessary approvals fromLoan Agreement.
Public Equity Offerings
August 2020 Offering
On August 4, 2020, we entered into an Underwriting Agreement with SVB Leerink, as representative of the several underwriters, relating to our stockholders or that the Transaction will be consummated.
In addition, in October 2018, we received a letter from the staffpublic offering of Nasdaq providing notification that, for the previous 30 consecutive business days, the closing bid price for5,000,000 shares of our common stock, at a public offering price of $18.00 per share. Under the terms of the Underwriting Agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 750,000 shares of common stock at the public offering price, less underwriting discounts and commissions, which option was belowexercised in full on August 6, 2020. On August 7, 2020, we closed the minimum $1.00 per share requirement, oroffering.
The net proceeds to us from this offering, after giving effect to the Bid Price Requirement, for continued listing onexercise in full by the Nasdaq Global Market. The notification had no immediate effect onunderwriters of their option to purchase the listingOption Shares, was approximately $96.5 million, after deducting underwriting discounts and commissions and offering expenses payable by us.
June 2020 Offering
On June 10, 2020, we entered into a placement agency agreement with RCP and Ladenburg Thalmann & Co. Inc. relating to our public offering of 2,175,000 shares of our common stock. Pursuant to this agreement, we agreed to pay the placement agents a cash fee of 6.5% of the gross proceeds from the offering raised from investors and to reimburse the placement agents for certain costs incurred in connection therewith.
In accordance with Nasdaq listing rules,addition, on June 10, 2020, we are afforded 180 calendar days, or untiland certain institutional investors entered into securities purchase agreements relating to the issuance and sale of an aggregate of 2,175,000 shares of our common stock. The purchase price per share in this offering was $11.40 for aggregate gross proceeds of approximately $25.0 million. The net proceeds to us from this offering, after deducting our offering expenses, were approximately $23.0 million.
April 2020 Registered Direct Offering
On April 23, 2019,2020, we entered into an engagement letter with RCP relating to regain compliance withour registered direct offering of common stock to select institutional investors. Pursuant to this agreement, we agreed to pay RCP a cash fee of 6.5% of the Bid Price Requirement. Ifgross proceeds from the offering raised from investors and to reimburse RCP for certain costs incurred in connection therewith.
In addition, on April 23, 2020, we and certain institutional investors entered into a securities purchase agreement relating to the issuance and sale of an aggregate of 1,764,706 shares of our common stock is delisted,stock. The purchase price per share was $8.50 for aggregate gross proceeds to us of approximately $15.0 million.
The net proceeds to us from this would, among other things, substantially impairoffering, after deducting our ability to raise additional funds to sustain our operations and our ability to successfully enter into strategic transactions, and could result in the loss of investor interest.
We believe that due to the factors described above, there is substantial doubt about our ability to continue as a going concern for one year from the date of the issuance of our consolidated financial statements for the twelve months ended December 31, 2018.
Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with an intent to maximize liquidity and preserve capital. As of December 31, 2018, such fundsoffering expenses, were held in cash and money market funds.approximately $13.9 million.
Cash Flows
The following table shows a summary of our cash flows for each of the years ended December 31 2018, 2017, and 2016 (in thousands):
| | | 2018 | | 2017 | | 2016 | | 2020 | | 2019 |
Cash (used in) provided by: | | | | | | Cash (used in) provided by: | | | |
Operating activities | $ | (43,165 | ) | | $ | (40,397 | ) | | $ | (35,774 | ) | Operating activities | $ | (46,124) | | | $ | (28,545) | |
Investing activities | (415 | ) | | (678 | ) | | (21 | ) | Investing activities | (146) | | | 10,536 | |
Financing activities | 4 |
| | 37,984 |
| | 12,374 |
| Financing activities | 144,431 | | | 34,895 | |
Net cash used in operating activities
During the year ended December 31, 2018,2020, operating activities used $43.2$46.1 million of cash. The use of cash primarily related to our net loss of $41.5$44.0 million adjusted for non-cash charges of $3.7$2.7 million related to stock-based compensation $1.2 million in impairment losses, and $727,000 related to depreciation and amortization; andwas partially offset by a $7.6$2.5 million unrealized foreign currency gain as well as a $2.4 million net change in our operating assets and liabilities. Changes in our operating assets and liabilities during the year ended December 31, 20182019 consisted primarily of a decreasean increase of $7.7$2.8 million in accrued expenses and accounts payable slightly offset by a decrease of $165,000 in prepaid expenses and other current assets. The decreaseassets partially offset by $0.4 million increase in other current liabilities, accrued expenses and accounts payable was primarily attributable to the decrease in amounts due for our VTL-308 clinical trial, and for accrued compensation due to the reduction in staff and no incentive compensation being accrued for 2018.
During the year ended December 31, 2017, operating activities used $40.4 million of cash.payable. The use of cash primarily related to our net loss of $52.1 million adjusted for non-cash charges of $5.5 million related to stock-based compensation and $998,000 related to depreciation and amortization, partially offset by a $4.9 million change in our operating assets and liabilities. Changes in our operating assets and liabilities during the year ended December 31, 2017 consisted primarily of an increase of $4.8 million in accrued expenses and accounts payable and a decrease of $165,000 in prepaid expenses and other current assets.assets is primarily due to higher prepaid clinical costs, increased receivable for the Australian research and development credit and other miscellaneous items. The increase in accrued expenses and accounts payable wasliabilities is primarily attributabledue to thean increase in amounts due for our VTL-308 clinical trial.
Duringcosts as a result of more Phase 2 clinical studies than in the prior year, ended December 31, 2016, operating activities used $35.8 millionthe timing of cash. The use of cash primarily related to our net loss of $41.0 million adjusted for non-cash charges of $4.7 million related to stock-based compensation and $1.8 million related to depreciation and amortization,year-end 2020 bonus payments partially offset by a $1.4 million change in our operating assets and liabilities. Changes in our operating assets and liabilities during the year ended December 31, 2016 consisted primarily of a decrease of $1.0 million in accrued expenses and accounts payable and an increase of $232,000 in prepaid expenses and other current assets. The decrease in accrued expenses and accounts payable was primarily attributablelower deferred income related to the reduction in amounts due to clinical sites for our VTI-208, VTI-210 and VTI-212 clinical trials, partially offset by increases in amounts due for our VTL-308 clinical trial.Daiichi Sankyo at year-end 2020.
Net cash used in investing activities
During the year ended December 31, 2018,2020, net investing activities used $415,000$0.1 million of cash, primarily due to capital expenditurespurchase of $597,000 for purchases of equipment for manufacturing and research and development offset by proceeds of $182,000 received for the sale of research and development equipment due to the VTL-308 clinical trial.
During the year ended December 31, 2017, net investing activities used $678,000 of cash, primarily due to capital expenditures of $685,000 for facility improvements and purchases of equipment for manufacturing and research and development.
During the year ended December 31, 2016, net investing activities used $21,000 of cash, including capital expenditures of $556,000 principally for purchases of equipment for manufacturing and clinical operations, partially offset by $533,000 from a decrease in restricted cash requirements relating to our clinical trials and lease commitments.equipment.
Net cash provided by financing activities
During the year ended December 31, 2018,2020, financing activities provided $4,000$144.4 million of cash related toof consisting of net cash proceeds from the exercise and sale of common stock options.
Duringunder the year ended December 31, 2017, financing activities provided $38.0 million of cash related to net cash proceeds after underwriters' commissionsJuly 2019 ATM and cash payments for offering costs from a follow-on offering completed in March 2017the April 2020, June 2020, and ATM offerings completed in 2017.
During the year ended December 31, 2016, financing activities provided $12.4 million of cash, which included net proceeds of $12.4 million after underwriters' commissions and offering costs from ATM offerings and a private placement completed in the year ended December 31, 2016.August 2020 equity offerings.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Our future capital requirements are difficult to forecast and will depend on many factors, including, but not limited to:
•the timing and structure of any strategic options and transactions, if any;
•the cost, timing and outcome of any future litigation costs;
•personnel-related expenses, including salaries, benefits, stock-based compensation expense and other compensation expenses related to retention and termination of personnel;
•the scope, progress, results and costs of research and development and any future clinical trials;
•the cost and timing of future regulatory submissions;
•the cost and timing of developing and validating the manufacturing processes for any potential product candidates;
•the cost and timing of any commercialization activities, including reimbursement, marketing, sales and distribution costs;
•our ability to establish new collaborations, licensing or other arrangements and the financial terms of such agreements;
•the number and characteristics of any future product candidates we pursue, (if any);if any;
•the costs involved with being a public company;
•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and
•the timing, receipt and amount from the sales of, or royalties on any future product candidates, if any.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of stock offerings, debt financings, strategic alliances, collaborations and licensing arrangements. We do not expect to achieve revenue from product sales prior to the use of the net proceeds from our public and private offerings to date. We do not have any committed external source of funds.funds other than the Loan Agreement with the EIB. Additional funds may not be available on acceptable terms, if at all. To the extent that we raise additional capital through the sale of equity securities, or complete the Transaction with Immunic, the ownership interest of our stockholders will be diluted and it may be on terms that are not favorable to us or our stockholders. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt or other terms that are not favorable to us or our stockholders. If we raise additional funds through collaborations and licensing arrangements with third parties, we would expect to relinquish substantial rights to our technologies or our future products, or grant licenses on terms that may not be favorable to us. If we were to complete a merger, we may relinquish all control over the organization and could experience detrimental tax effects. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets. Any of these factors could harm our operating results.
Off-Balance Sheet Arrangements
Through December 31, 2018,2020, we have not entered into and did not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose.
ContractualOther Commitments and Obligations
SomeIn May 2016, the Company entered into a purchase agreement (the “Agreement”) with 4SC whereby the Company acquired certain assets, including the rights to patents and patent applications, trademarks and know-how. This transaction was accounted for as an asset acquisition under Accounting Standards Update 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of our most significant clinical trial expenditures have beena Business. The Agreement included payments (Tranches III and IV) that were contingent upon the occurrence of certain events and required the Company to investigative sites andpay royalties equal to CROs. These agreements are cancellable by either party at any time upon written notice and do not have any cancellation penalties, but do obligate us to reimburse4.4% of the providersaggregated net sales for any time or costs incurred through the date of termination and to close out clinical sites. These items are not includeda certain period as defined in the table below. We lease officeAgreement (Tranche III) upon commercialization of the acquired assets. Effective April 12, 2019, the parties agreed to settle Tranche IV by issuing 120,070 shares of the Company’s common stock, immediately following the Transaction, to 4SC while keeping the obligation to pay Tranche III in effect. Approximately $1.5 million of expense was recorded as a result of the issuance of these shares on April 12, 2019. No royalties are payable as of December 31, 2020 or December 31, 2019 as sales have not commenced.
See Note 6 regarding the Company’s obligations under the option agreement with Daiichi Sankyo, which includes the potential payment of future development, regulatory and manufacturing space in San Diego, California. sales milestone payments, as well as royalties related to IMU-856.
The following table summarizes our contractual obligations atas of December 31, 20182020 and the effect such obligations are expected to have on our cash flowflows in future periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| (In thousands) |
Operating lease obligations | $ | 1,080 | | | $ | 348 | | | $ | 670 | | | $ | 62 | | | $ | — | |
Purchase obligations | 1,234 | | | 1,234 | | | — | | | — | | | — | |
Total contractual obligations | $ | 2,314 | | | $ | 1,582 | | | $ | 670 | | | $ | 62 | | | $ | — | |
The purchase obligations above represent non-cancelable contractual obligations under certain agreements related to our development programs IMU-838, IMU-935 and IMU-856.
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| (In thousands) |
Operating lease obligations | $ | 1,511 |
| | $ | 469 |
| | $ | 821 |
| | $ | 221 |
| | $ | — |
|
As of December 31, 2018, we had no material purchase commitments. During the years ended December 31, 2018, 2017 and 2016, we purchased $659,000, $1.1 million and $943,000, respectively, of cell culture media from a supplier. During the years ended December 31, 2018, 2017 and 2016, we purchased $143,000, $228,000 and $139,000, respectively, of cartridges used in our clinical trial and our manufacturing process from another supplier. In the course of normal business operations, we may also enter into agreements with contract service providers and others. We can elect to discontinue the work under these contracts and purchase orders with notice.
Recent Accounting Pronouncements
In February 2016, the FinancialRecently Adopted Accounting Standards Board, or
In January 2017, the FASB issued Accounting Standards Update, or ASU No. 2016-02, "Leases,2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." or ASU 2016-02. ASU 2016-02 will require that lease arrangements longer than 12 months result inThis guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity recognizing an asset and liability equal to recognize a goodwill impairment charge for the present value ofamount by which the lease paymentsgoodwill carrying amount exceeds the reporting unit’s fair value. The Company adopted this ASU, as required, in the statement of financial position. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods therein. This standard requiresquarter ended March 31, 2020 on a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We will adopt ASU 2016-02 in 2019.prospective basis. The adoption of this guidance is expected to result in a significant increase in the total assets and liabilities reported on our consolidated balance sheets.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash," or ASU 2016-18. ASU 2016-18 provides guidance on the classification of restricted cash in the statements of cash flows. This ASU requires that our statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. We adopted this standard in the first quarter of 2018, and the adoption did not have a significant impact on ourthe Company's consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,” or ASU 2017-09. The amendments in this update provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. We adopted this standard in the first quarter of 2018, and the adoption did not have a significant impact on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, "Improvements to Non-Employee Share-Based Payment Accounting," or ASU 2018-07. ASU 2018-07, which simplifies the accounting for non-employee share-based payment transactions, specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, and early adoption is permitted. We currently expect to adopt ASU 2018-07 in the first quarter of 2019. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, "“Fair Value Measurement - Disclosure Framework,Framework” (" or ASU 2018-13.") ASU 2018-13 modifies the disclosure requirements for fair value measurements. The amendments relate to disclosures regarding unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty, and are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments shouldmust be applied retrospectively to all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted.
JOBS Act
In April 2012,Company adopted this ASU, as required, in the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay thequarter ended March 31, 2020. The adoption of certain accounting standards until those standards would otherwise apply to private companies. Wethis ASU did not have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we adopt new or revised accounting standardssignificant impact on the relevant dates on which adoptionCompany's consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements” ("ASU 2018-18"). ASU 2018-18, clarifies that elements of such standards iscollaborative arrangements could qualify as transactions with customers in the scope of ASC 606. The Company adopted this ASU, as required, for other companies.in the quarter ended March 31, 2020. The Company does not have any agreements that meet the definition of a collaboration arrangement at this time.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Sensitivity
We had cash and cash equivalents of $13.3$127.5 million atas of December 31, 2018,2020, which waswere held for working capital purposes. We do not enter into investments for trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates due to their short-term nature. However, $2.9 million of these funds are held in German bank accounts that were earning negative interest of 0.5% as of December 31, 2020. There was also $79.1 million held in German banks that are U.S. dollar denominated bank accounts and $44.0 million in U.S. bank accounts that are earning nominal interest. Declines or increases in interest rates, however, will reduce or increase future investment income, respectively, to the extent we have funds available for investment.
Foreign Currency Exchange Risk
Our primary research and development operations are conducted in our facilities in Germany. We have entered and may continue to enter into international agreements, primarily related to our clinical studies. Accordingly, we have an exposure to foreign currency exchange rates.rates and fluctuations between the U.S. dollar and foreign currencies, primarily the euro and the Australian dollar, which could adversely affect our financial results, including income and losses as well as assets and liabilities. To date, we have not entered into, and do not have any current plans to enter into, any foreign currency hedging transactions or derivative financial transactions. We expect our transactions outside of the U.S. in the near-term will primarily entail payments for clinical trials, and for vendors and consultants supporting those trials within Europe. Our exposure to foreign currency risk will fluctuate in future periods as our research and clinical trial activitydevelopment activities in Europe changes.and Australia change. We do not currently maintain anya significant amount of our assets outside of the U.S.
The functional currencies of our foreign subsidiaries are the applicable local currencies. Accordingly, the effects of exchange rate fluctuations on the net assets of these operations are accounted for as translation gains or losses in accumulated other comprehensive income (loss) within stockholders’ equity. Our foreignGerman subsidiaries are currently inactivea significant portion of our business and, accordingly, a change of 10% in such foreignthe currency exchange rates, would notprimarily the euro, could have a material impact on their financial position or results of operations.
Although operating in local currencies may limit the impact of currency rate fluctuations on the results of operations of our German subsidiaries, rate fluctuations may impact the consolidated financial position as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our consolidated balance sheets. As of December 31, 2020, our German subsidiaries had net current assets (defined as current assets less current liabilities), subject to foreign currency translation risk, of $82.0 million. The potential decrease in net current assets as of December 31, 2020, from a hypothetical 10% adverse change in quoted foreign currency exchange rates, due primarily to the euro, would be approximately $8.2 million. In addition, a 10% change in the foreign currency exchange rates for the year ended December 31, 2020, would have impacted our net loss by approximately $3.5 million due primarily to the euro.
Effects of Inflation
We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements required pursuant to this item are included in Part IV, Item 15 of this Annual Report, and are presented beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management, with the participation of its Chief Executive Officer and ChiefPrincipal Financial and Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018.2020. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and ChiefPrincipal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2018,2020, our Chief Executive Officer and ChiefPrincipal Financial and Accounting Officer have concluded that, as of December 31, 2018,2020, our disclosure controls and procedures were effective at the reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our Chief Executive Officer and ChiefPrincipal Financial and Accounting Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance (a) transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, (b) our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (c) regarding the prevention or timely detection of the unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2018,2020, our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on this evaluation, our management concluded that, as of December 31, 2018,2020, our internal control over financial reporting was effective.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 20182020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers and Directors
The following table sets forthInformation required by this item will be contained in our definitive proxy statement (the “Definitive Proxy Statement”), to be filed with the names, ages and positionsSEC in connection with our 2021 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the end of our executive officers and directors as of February 28, 2019:
|
| | | | |
Name | | Age | | Position |
Executive Officers: | | | | |
Duane D. Nash, M.D., J.D. | | 48 | | Director, Chief Executive Officer and President |
Robert A. Ashley, M.A. | | 61 | | Executive Vice President and Chief Scientific Officer |
Michael V. Swanson, M.B.A. | | 64 | | Executive Vice President and Chief Financial Officer |
John M. Dunn, J.D. | | 67 | | General Counsel and Secretary |
Non-Employee Directors: | | | | |
Faheem Hasnain (1)(2)(3)
| | 60 | �� | Chairman |
Cheryl L. Cohen(1)(2)(3)
| | 53 | | Director |
Lowell E. Sears, M.B.A.(1)(2)(3)
| | 68 | | Director |
|
| |
(1) | Member of the Audit Committee. |
|
| |
(2) | Member of the Compensation Committee. |
|
| |
(3) | Member of Nominating and Governance Committee. |
Executive Officers
Duane D. Nash, M.D., J.D. has served as a director and our chief executive officer since January 2019 and as our President since March 2016. Dr. Nash joined Vital Therapies, Inc. in 2012, where he has held various leadership roles, including Medical Director, Executive Vice President, Chief Business Officer and President. Prior to joining Vital Therapies, Dr. Nash held various positions at Wedbush PacGrow Life Sciences, an investment bank, where he was employed from March 2009 to March 2012, serving most recently as Senior Vice President in Equity Research. Before that, he was a research analyst at Pacific Growth Equities, an investment bank, from April 2008 through March 2009, which was subsequently acquired by Wedbush Securities, Inc. Dr. Nash also practiced as an attorney from November 2002 to February 2008, most recently at the law firm of Davis Polk, where he focused on intellectual property litigation and corporate matters. Dr. Nash served on the board of directors of Aerpio Pharmaceuticals, Inc. (Nasdaq: ARPO), from 2012 to 2017, and Akebia Therapeutics (Nasdaq: AKBA) from 2013 to 2018. Dr. Nash earned a B.A. in biology from Williams College, an M.D. from Dartmouth Medical School, a J.D. from the University of California, Berkeley, and a M.B.A. from the University of Oxford. Dr. Nash completed his internship in general surgery at the University of California at San Francisco.
Robert A. Ashley, M.A. has served as our Executive Vice President and Chief Scientific Officer since November 2018, having previously served as our Executive Vice President and Chief Technical Officer since September 2013. Between May 2008 and September 2013 he served as our Vice President and Chief Operating Officer. Mr. Ashley’s career in the pharmaceutical industry extends more than 30 years. He was formerly Chairman, President and Chief Executive Officer of AmpliMed Corporation, a privately-held cancer drug development company, from January 2004 to March 2007, and Senior Vice President of Commercial Development at CollaGenex Pharmaceuticals, Inc., a publicly-held pharmaceutical company, from September 1994 tofiscal year ended December 2003. Prior to that he held positions of increasing responsibility at Bristol-Myers Squibb from January 1989 to September 1994, and with Amersham International from 1979 to 1989. He earned a Master’s Degree in Biochemistry from Oxford University. Mr. Ashley is the inventor of several issued and pending patents, as well as the author of several scientific papers. He serves on the Board of Directors of Rowpar Pharmaceuticals, a privately-held manufacturer of proprietary dental pharmaceuticals.
Michael V. Swanson, M.B.A. joined us in August 2013 as our Chief Financial Officer and has also served as our Executive Vice President since March 2016. Mr. Swanson has over 25 years of experience in senior financial positions in both public and private life sciences companies. Mr. Swanson was Chief Financial Officer of Amira Pharmaceuticals, Inc., a pharmaceutical company focused on the discovery and early development of drugs to treat inflammatory and fibrotic diseases, from May 2008 until the company was acquired in September 2011, and of Panmira Pharmaceuticals, LLC, a spin out from Amira from September to December 2011. From January 2012 to October 2015, Mr. Swanson provided financial consulting services to development stage companies. From July 2000 to April 2008, Mr. Swanson served in senior finance positions including Senior Vice President, Finance and Chief Financial Officer at Prometheus Laboratories Inc., a specialty pharmaceutical company marketing and selling pharmaceutical products and diagnostic testing services for gastrointestinal diseases and disorders. Previously, Mr. Swanson was Senior Vice President and Chief Financial Officer of Advanced Tissue Sciences, Inc., a publicly-traded biomedical company, where he served in senior financial positions for over ten years. Mr. Swanson also served as Director of Finance of the Fisher Scientific Group, Inc., a health and scientific technology company, and its parent, The Henley Group, Inc., a widely diversified holding company. Mr. Swanson began his career working approximately nine years with the public accounting firm of Deloitte Haskins & Sells, now Deloitte LLP. Mr. Swanson earned a B.S. in business administration from the California Polytechnic State University at San Luis Obispo and an M.B.A. from the University of Southern California. He is also a Certified Public Accountant (inactive).
John M. Dunn, J.D. has served as our General Counsel since November 2014 and as our Secretary since February 2015. Mr. Dunn has over 25 years of national law firm and in-house general counsel experience. Mr. Dunn was Senior Vice President Legal and Compliance, General Counsel and Secretary of IDEC Pharmaceuticals from 2002 until its merger with Biogen in late 2003. From 2004 to 2012, Mr. Dunn served as an Executive Vice President at Biogen Idec where he was in charge of Biogen Idec’s internal corporate venture fund and Innovation Incubator. More recently, Mr. Dunn was providing legal and corporate development advisory services to emerging life science companies. Previously, Mr. Dunn was a partner for 16 years in the Corporate, Securities and Technology Group at the Pillsbury Winthrop law firm where his practice focused on the healthcare industry. Mr. Dunn earned a B.S. in finance and his J.D. from the University of Wyoming. He serves as an advisor to TVM Capital, a life science venture capital firm, and is a member of the board of directors of Acer Therapeutics, Inc., a publicly-traded specialty orphan pharmaceutical company.
Board of Directors
Duane D. Nash. Please see biographical information above in the section entitled "Executive Officers."
Faheem Hasnain has served on our board of directors since August 2016. Mr. Hasnain is currently Executive Chairman since August 2018 and served as Chairman and Chief Executive Officer from October 2015 through July 2018 at Gossamer Bio, Inc. Gossamer Bio is a publicly-traded company focused on the discovery and development of novel and differentiated therapeutic products to address unmet need amongst various targeted patient populations. Previously, Mr. Hasnain served as the Chief Executive Officer, President, and a director at Receptos, Inc. from November 2010 to August 2015. Prior to joining Receptos, Inc., Mr. Hasnain was the President and Chief Executive Officer and a director of Facet Biotech Corporation, a biology-driven antibody company with a focus in multiple sclerosis and oncology. He held that position from December 2008 until the company’s acquisition by Abbott Laboratories in April 2010. Previously, Mr. Hasnain was President, Chief Executive Officer and a director of PDL BioPharma, Inc. from October 2008 until Facet Biotech was spun off from PDL BioPharma in December 2008. From October 2004 to September 2008, Mr. Hasnain was at Biogen Inc., most recently as Executive Vice President in charge of the oncology/rheumatology strategic business unit. Prior to Biogen, Mr. Hasnain held roles with Bristol Myers Squibb, where he was President of the Oncology Therapeutics Network, and for 14 years at GlaxoSmithKline and its predecessor organizations. He serves as Chairman of the board of directors of Sente, Inc. and Tocagen Inc., and has served as a member of the board of directors of Kura Oncology, Inc. He previously served as a member of the board of directors of Ambit Biosciences Corporation, Aragon Pharmaceuticals, Pernix Sleep, Inc., Seragon Pharmaceuticals, Somaxon Pharmaceuticals, Inc. and Tercica, Inc. Mr. Hasnain received a B.H.K. and B.Ed. from the University of Windsor Ontario in Canada.
We believe that Mr. Hasnain is qualified to serve on our board of directors based on his extensive operational and leadership experience in biotechnology and pharmaceutical companies and as a director of publicly-traded companies.
Cheryl L. Cohen has served on our board of directors since July 2015. Ms. Cohen served as chief commercial officer of Medivation, Inc., a publicly-traded bio-pharmaceutical company, from September 2011 until July 2014. Ms. Cohen currently serves as president of CLC Consulting, a pharmaceutical and biotechnology consulting firm specializing in new product start-up and commercialization, where she also served as president from September 2008 until September 2011. From November 2007 to September 2008, she served as the vice president, strategic commercial group, of Health Care Systems, Inc., a Johnson & Johnson company, and from October 1998 to November 2007, she worked at Janssen Biotech, Inc. (formerly Centocor
Biotech, Inc.), a Johnson & Johnson company, in a variety of senior sales roles including vice president, rheumatology franchise. Ms. Cohen currently serves on the board of Novus Therapeutics, Inc. (reverse merger of Tokai Pharmaceuticals, Inc.,) a publicly-traded pharmaceutical company focused on the acquisition, development, and commercialization of ear, nose, and throat products. In addition, she currently serves on the board of Aerpio Pharmaceuticals, which is a biopharmaceutical company focused on advancing first-in class treatments for ocular disease. Ms. Cohen served on the board of Protein Sciences Corporation, a privately held bio-pharmaceutical company specializing in vaccine development from October 2014 to August 2017, and she served on the board of Cytrx Corporation, a publicly traded bio-pharmaceutical company specializing in oncology, from June 2015 through October 2016. Ms. Cohen began her career at Solvay Pharmaceuticals in a variety of sales positions. Ms. Cohen received her B.A. from Saint Joseph College.
We believe that Ms. Cohen is qualified to serve on our board of directors based on her experience as an executive officer and director of private and publicly-traded companies, including companies in the pharmaceutical and bio-pharmaceutical industries.
Lowell E. Sears, M.B.A. has served on our board of directors since May 2013. Mr. Sears is the Chairman and Chief Executive Officer of Sears Capital Management, a venture investment and portfolio management firm specializing in life sciences. From February 2012 to January 2017, he served on the board of directors of Cellerant Therapeutics, Inc., a clinical stage biotechnology company focused on the regulation of the hematopoietic, or blood-forming, system. From September 2005 to March 2017, Mr. Sears has also served on the board of directors of SymBio Pharmaceuticals, KK, Ltd., a biotechnology company that is engaged in identifying and developing therapeutics for the treatment of leukemia, multiple myeloma and lymphoma. He has served on the board of directors of SiteOne Therapeutics, Inc., a privately-held company developing small molecular pain therapies, and has been Chairman of the Board since September 2014. He has also served on the board of directors of Halcyon Medical, a cardiovascular device company, since April 2014. From 1986 until 1994, Mr. Sears was a part of the senior management team of Amgen, Inc., a developer and manufacturer of therapeutics targeting cancers, kidney ailments, inflammatory disorders, and metabolic diseases, where he was Chief Financial Officer as well as the Senior Vice President responsible for the Asia Pacific Region. Prior to joining Amgen, Mr. Sears held senior planning and financial positions with Atlantic Richfield Company, an oil company from 1976 until 1986, including Chief Financial Officer for its Ventures Division. He earned a B.A. in economics from Claremont McKenna College and an M.B.A. from the Stanford University Graduate School of Business.
We believe that Mr. Sears is qualified to serve on our board of directors based on his experience as a senior manager and director of private and publicly-traded companies, including several in the life sciences industry.
Family Relationships
There are no family relationships among any of our directors and executive officers.
Board Composition
Our board of directors is currently composed of four members. Three of the four directors that comprise our board of directors are independent within the meaning of the independent director guidelines of the Nasdaq Stock Market. Please see the section entitled “Director Independence” in Item 13 below for further information. Our certificate of incorporation and bylaws currently in effect provide that the number of directors shall be at least one and will be fixed from time to time by resolution of our board of directors.
Our board of directors is divided into three classes of directors. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the class whose terms are then expiring. The terms of the directors will expire upon the election and qualification of successor directors at the annual meeting of stockholders to be held during the years 2021 for the Class I directors, 2019 for the Class II directors and31, 2020, for the Class III directors.
The Class I director is Dr. Nash.
The Class II director is Mr. Hasnain.
The Class III directors are Ms. Cohen and Mr. Sears.
The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our board of directors or a change in control.
Board Leadership Structure and Lead Director
Our board of directors is currently chaired by Mr. Hasnain.
Our board of directors believes that the Company and its stockholders are currently best served by having Mr. Hasnain serve as Chairman of the Board. As Chairman, Mr. Hasnain promotes unified leadership and direction for our board and management and provides the critical leadership necessary for carrying out our strategic initiatives. Mr. Hasnain, together with our board’s committee system and substantial majority of independent directors, allows our board to maintain effective oversight of our business operations, including independent oversight of our financial statements, executive compensation, selection of director candidates, and corporate governance programs. We believe our current board leadership structure enhances the board’s ability to effectively carry out its roles and responsibilities on behalf of our stockholders.
Audit Committee
Our board of directors has a separately-designated standing audit committee, which operates pursuant to a charter. Our audit committee members currently consist of Messrs. Sears and Hasnain and Mrs. Cohen. Mr. Sears serves as the chairman. Our board of directors has determined that Mr. Sears qualifies as an audit committee financial expert within the meaning of the rules and regulations of the Securities and Exchange Commission, or SEC, and is independent under Rule 10A-3 of the Exchange Act and the current rules of the Nasdaq Stock Market and financially literate under the rulesheadings “Election of the SECDirectors,” “Corporate Governance,” “Executive Officers,” and Nasdaq Stock Market.
The audit committee has (1) reviewed and discussed the audited financial statements with management; (2) discussed with the independent auditors the matters required by Public Company Accounting Oversight Board, or PCAOB, Auditing Standard No. 16, Communications with Audit Committees; (3) received written disclosures and the letter from the independent accountants required by applicable requirements of the PCAOB regarding the independent accountant's communications with the audit committee concerning independence and has discussed their independence with the independent accountants; and (4) recommended to the board of directors that the audited financial statements be included in the annual report on Form 10-K for the last fiscal year.
Section“Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% ofWe have a registered class of our equity securities, to file reports of ownership and changes of ownership on Forms 3, 4 and 5 with the SEC. Such directors, executive officers and 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms we have received and written representations from certain reporting persons that they filed all required reports, we believe that all of our officers, directors and greater than 10% stockholders complied with all Section 16(a) filing requirements applicable to them with respect to transactions during 2018.
Code of Business Conduct and Ethics
Our board of directors has adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and our principal accounting officer or controller, or persons performing similar functions.and every other director, officer and employee of Immunic. The Code of Business Conduct and Ethics is available on our Internet website at www.imux.com. A copy of the codeCode of business conductBusiness Conduct and ethics is available onEthics will be provided free of charge by making a written request and mailing it to our corporate headquarters offices to the corporate governance sectionattention of our website, which is located at http://ir.vitaltherapies.com/corporate-governance.cfm.the Investor Relations Department. If we make any substantive amendmentsamendment to, or grant any waiversa waiver from, a provision of the codeCode of business conductBusiness Conduct and ethics for anyEthics that applies to the principal executive officer, or director, weprincipal financial officer and principal accounting officer is made, such information will disclose the nature of such amendment or waiverbe posted on our website.Internet website within four business days at www.imux.com.
Item 11. Executive Compensation.
Our named executive officers for the year ended December 31, 2018, which consist of our principal executive officer and our two other most highly compensated executive officers, are Russel J. Cox, our Chief Executive Officer from January 3, 2018 until January 25, 2019, Duane D. Nash, M.D., J.D., our Chief Executive Officer since January 26, 2019 and our President, and Robert A. Ashley, our Executive Vice President and Chief Scientific Officer.
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Name and Principal Position | | Year | | Salary ($) | | Option Awards ($)(1) | | Non-Equity Incentive Plan Compensation ($)(2) | | All Other Compensation ($)(3) | | Total ($) |
Russell J. Cox | | 2018 | | 572,626 |
| | 7,080,630 |
| | 330,000 |
| | 73,433 |
| | 8,056,689 |
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Chief Executive Officer | | 2017 | | — |
| | — |
| | — |
| | — |
| | — |
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Duane D. Nash, M.D., J.D. | | 2018 | | 414,800 |
| | 294,737 |
| | — |
| | 43,615 |
| | 753,152 |
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Chief Executive Officer and President | | 2017 | | 400,000 |
| | 193,647 |
| | 177,496 |
| | — |
| | 771,143 |
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Robert A. Ashley, M.A. | | 2018 | | 396,344 |
| | 260,062 |
| | — |
| | 47,769 |
| | 704,175 |
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Executive Vice President and Chief | | 2017 | | 381,000 |
| | 170,865 |
| | 158,200 |
| | — |
| | 710,065 |
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Scientific Officer | | | | | | | | | | | |
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(1) | The amounts in the “Option Awards” column reflect the aggregate grant date fair value of stock options granted during the calendar year computed in accordance with the provisions of Accounting Standards Codification, or ASC, 718, Compensation - Stock Compensation. The assumptions that we used to calculate these amounts are discussed in Note 7 to our financial statements appearing at the end of this Annual Report. These amounts do not reflect the actual economic value that will be realized by the named executive officer upon the vesting of the stock options, the exercise of the stock options, or the sale of the common stock underlying such stock options.
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(2) | Includes a cash signing bonus in 2018 for Mr. Cox, and 2017 bonuses approved by our board of directors on January 30, 2018 for Dr. Nash and Mr. Ashley. |
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(3) | "All Other Compensation" includes reimbursement for temporary housing, commuting expenses and legal fees for Mr. Cox, and the payment of accrued vacation for Dr. Nash and Mr. Ashley.
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Non-Equity Incentive Plan Compensation and Bonus
Executive Incentive Compensation Plan
Our Executive Incentive Compensation Plan, or Incentive Plan, was adoptedInformation required by our board of directors on July 8, 2013. Our Incentive Plan is administered by our compensation committee; provided, however, that our board of directors must approve any award or any amendment to any award made thereunder. Our compensation committee determines the performance goals applicable to any award, which goals may include, without limitation, the attainment of research and development milestones, sales bookings, business divestitures and acquisitions, cash flow, cash position, earnings (which may include earnings before interest and taxes, earnings before taxes and net earnings), earnings per share, net income, net profit, net sales, operating cash flow, operating expenses, operating income, operating margin, overhead or other expense reduction, product defect measures, product release timelines, productivity, profit, return on assets, return on capital, return on equity, return on investment, return on sales, revenue, revenue growth, sales results, sales growth, stock price, time to market, total shareholder return, working capital, and individual objectives or other subjective or objective criteria. Performance goals that include the Company’s financial results may be determined in accordance with United States generally accepted accounting principles, or GAAP, or such financial results may consist of non-GAAP financial measures. The performance goals may be on an individual, divisional, business unit, functional or company-wide basis. The performance goals may differ from participant to participant and from award to award.
Pursuant to the employment letter agreements entered into between us and our named executive officers, our named executive officers are each eligible to receive annual bonuses as a percentage of their annual base salary based upon achievement of the performance goals determined by our compensation committee. For additional information regarding the terms of these employment letter agreements, see below under “Agreements With Our Named Executive Officers.”
Notwithstanding the eligibility for bonus awards, our board of directors may, in its sole discretion and at any time, increase, reduce or eliminate a participant’s actual award, or increase, reduce or eliminate the amount allocated to the bonus pool for a particular performance period. The actual award may be below, at or above a participant’s target award, in the discretion of our board. Our board may determine the amount of any reduction on the basis of such factors as it deems relevant, and it is not required to establish any allocation or weighting with respect to the factors it considers.
Actual awards are paid in cash only after they are earned, which usually requires continued employment through the date of payment of the award. Payment of bonuses occurs as soon as administratively practicable after they are earned, but no later than the dates set forth in the Incentive Plan.
Our board of directors has the authority to amend, alter, suspend or terminate the Incentive Plan provided such action does not impair the existing rights of any participant with respect to any earned bonus.
Considering the results of our phase 3 clinical trial of our ELAD System, our board of directors did not make any bonus awards to any named executive officer or any other officer of the company pursuant to the Incentive Plan for 2018.
Agreements With Our Named Executive Officers
Russell J. Cox
We entered into an employment letter agreement, dated November 30, 2017, with Mr. Cox, which set forth the terms and conditions of his employment with us. The employment letter agreement had no specific term and provides for at-will employment. Mr. Cox's current annual base salary was $540,000 and he was awarded a signing bonus of $330,000 payable within 30 days of his start date of January 3, 2018, and he was eligible for an annual bonus equal to 50% of his base salary.
Duane D. Nash
We entered into an employment letter agreement, dated October 30, 2013, with Dr. Nash, which sets forth the terms and conditions of his employment with us. The employment letter agreement has no specific term and provides for at-will employment. This agreement supersedes all existing agreements he may have with us concerning his employment relationship. Dr. Nash’s current annual base salary is $414,800, and he is eligible for an annual bonus equal to 40% (increased to 50% for 2017) of his annual base salary.
Robert A. Ashley
We entered into an employment letter agreement, dated October 30, 2013, with Mr. Ashley, which sets forth the terms and conditions of his employment with us. The employment letter agreement has no specific term and provides for at-will employment. Mr. Ashley’s current annual base salary is $396,344, and he is eligible for an annual bonus equal to 35% (increased to 45% for 2017) of his annual base salary.
Executive Change of Control and Severance Agreements
We have entered into a change of control and severance agreement, with each of our executive officers, which requires us to make payments if the executive officer’s employment with us is terminated in certain circumstances. In January 2019, the compensation committee of the board of directors restructured the severance arrangements with our executive officers, including our chief executive officer, in an effort to advance and support our pursuit of strategic alternatives considering the results of our phase 3 clinical trial of the ELAD System.
In connection with the restructuring, the compensation committee approved (i) the cancellation of options held by our executive officers; (ii) amendments to the existing change of control and severance agreements with each of our executive officers; and (iii) grants of restricted stock units to such officers, contingent upon each officer agreeing and entering into all agreements necessary to effectuate these transactions. Under such agreements, Mr. Cox, Dr. Nash and Mr. Ashley cancelled outstanding options for 1,588,832 shares, 613,391 shares and 583,391 shares, respectively, and were granted 1,854,376, 886,316 and 816,634 restricted stock units, respectively. The restricted stock units can be settled in cash or shares of common stock at the discretion of the company and vest 25% annually.
Under the amended change of control and severance agreements, if prior to the six-month period before or after the twelve-month period following a change of control (such period, the Change of Control Period), an executive officer’s employment is terminated without “cause” or an executive officer resigns for “good reason” (as such terms are defined in the change of control and severance agreement), such officerthis item will be eligible to receive the following benefits if such officer timely signs and does not revoke a release of claims:
a lump sum payment equal to his base salary for a period of six months (12 monthsfound in the case of Mr. Cox);
reimbursement by us for up to six months (12 months in the case of Mr. Cox) of COBRA premiums to continue health insurance coverage for such officer and such officer’s eligible dependents, or taxable monthly payments for the equivalent period in the event payment for COBRA premiums would violate applicable law; and
100% accelerated vesting of all outstanding equity awards.
If, within the Change of Control Period, such officer’s employment is terminated without cause or such officer resigns for good reason, such officer will be entitled to the following benefits if such officer timely signs a release of claims:
a lump sum payment equal to (x) 12 months (18 months in the case of Mr. Cox) his annual base salary (for the year of the change of control or such officer’s termination, whichever is greater), plus (y) 1.0x (1.5x in the case of Mr. Cox) the greater of: (A) such officer’s target annual bonus (for the year of the change of control or such officer’s termination, whichever is greater) or (B) such officer’s actual bonus for performance relating to the calendar year immediately prior to the calendar year of such officer’s termination, less (z) an amount equal to the grant date fair value of the January 2019 restricted stock unit award; and
reimbursement by us for up to 12 months (18 months in the case of Mr. Cox) of COBRA premiums to continue health insurance coverage for such officer and such officer’s eligible dependents, or taxable monthly payments for the equivalent period in the event payment for COBRA premiums would violate applicable law; and
100% accelerated vesting of all outstanding equity awards.
In addition, in the event any of the amounts provided for under these agreements or otherwise payable to our executive officers would constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code and could be subject to the related excise tax, the executive officer would be entitled to receive either full payment of benefits under this agreement or such lesser amount which would result in no portion of the benefits being subject to the excise tax, whichever results in the greater amount of after-tax benefits to the executive officer. The agreements do not require us to provide any tax gross-up payments.
Further to the above, the stock awards granted to Mr. Cox, Dr. Nash and Mr. Ashley made pursuant to our 2014 Plan, provide for accelerated vesting in connection with a change in control in limited circumstances, as described below.
2014 Equity Incentive Plan
Our 2014 Plan provides that in the event of a merger or change in control, as defined in the 2014 Plan, each outstanding award will be treated as the administrator determines, including, without limitation, that awards may be assumed or substituted for by the acquiring or succeeding corporation, awards may be terminated immediately prior to the consummation of the merger or change in control, awards may vest in whole or in part prior to or upon consummation of the merger or change in control and, to the extent the administrator determines, terminate on or immediately prior to the effectiveness of the merger or change in control, or awards may be terminated in exchange for cash or property or replaced with other rights or property. If a successor corporation does not assume or substitute an equivalent award for any outstanding award, then such award will fully vest, all restrictions on such award will lapse and all performance goals or other vesting criteria applicable to such award will be deemed achieved at one hundred percent (100%) of target levels. Additionally, if a successor corporation does not assume or substitute an option or stock appreciation right, the administrator will notify the participant in writing or electronically that such award will be exercisable for a specified period of time determined by the administrator prior to the transaction, and such award will then terminate upon the expiration of such period.
In addition, pursuant to their stock option agreements, certain optionees, including our named executive officers who have awardsDefinitive Proxy Statement under the 2014 Plan, are eligible for full vesting acceleration of their outstanding options in the event their serviceheading "Executive Compensation" and is terminated other than for cause.incorporated herein by reference.
2012 Stock Option Plan and Option Agreements
Our 2012 Plan provides that in the event of a change in control, as defined in the 2012 Plan, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof may assume or substitute an equivalent award for each outstanding option under the 2012 Plan. If there is no assumption or substitution of outstanding options, such options will terminate upon the expiration of a stated notice period unless otherwise specified in the applicable stock option agreement.
In addition, pursuant to their stock option agreements, certain optionees are eligible for full vesting acceleration of their outstanding options in the event their service is terminated other than for cause or they resign from their service for good reason. Furthermore, if there is no assumption or substitution of outstanding options following a change in control and, provided further that, such optionee’s service has not terminated prior to such change in control, such outstanding options are
eligible for full vesting acceleration as of the date ten days prior to the date of a change in control and will terminate upon the expiration of the stated notice period unless exercised or terminated in exchange for cash or property.
Outstanding Equity Awards at Fiscal Year-End for Fiscal 2018
The following table sets forth certain information concerning outstanding equity for our named executive officers awards at fiscal year-end December 31, 2018: |
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Name | | Vesting Commencement Date | | | Number of Securities Underlying Unexercised Options Exercisable | | Number of Securities Underlying Unexercised Options Unexercisable | | Option Exercise Price | | Option Expiration Date |
Russell J. Cox | | 1/3/2018 | (1) | | — |
| | 1,588,832 |
| | $ | 6.30 |
| | 1/2/2028 |
Chief Executive Officer | | | | | | |
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Duane D. Nash, M.D., J.D. | | 2/8/2012 | | | 93,377 |
| | — |
| | $ | 0.43 |
| | 3/31/2022 |
Chief Executive Officer and | | 4/25/2012 | | | 23,344 |
| | — |
| | $ | 0.43 |
| | 4/24/2022 |
President | | 9/13/2012 | | | 241,670 |
| | — |
| | $ | 8.00 |
| | 9/25/2022 |
| | 4/16/2016 | (2) | | 56,666 |
| | 28,334 |
| | $ | 8.28 |
| | 5/12/2026 |
| | 6/10/2017 | (2) | | 31,875 |
| | 53,125 |
| | $ | 3.20 |
| | 6/9/2027 |
| | 6/9/2018 | (2) | | 10,625 |
| | 74,375 |
| | $ | 5.00 |
| | 6/8/2028 |
Robert A. Ashley, M.A. | | 2/8/2012 | | | 93,377 |
| | — |
| | $ | 0.43 |
| | 3/31/2022 |
Executive Vice President and | | 4/25/2012 | | | 23,344 |
| | — |
| | $ | 0.43 |
| | 4/24/2022 |
Chief Scientific Officer | | 9/13/2012 | | | 241,670 |
| | — |
| | $ | 8.00 |
| | 9/25/2022 |
| | 4/16/2016 | (2) | | 50,000 |
| | 25,000 |
| | $ | 8.28 |
| | 5/12/2026 |
| | 6/10/2017 | (2) | | 28,125 |
| | 46,875 |
| | $ | 3.20 |
| | 6/9/2027 |
| | 6/9/2018 | (2) | | 9,375 |
| | 65,625 |
| | $ | 5.00 |
| | 6/8/2028 |
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(1) | These options vest 25% on the first anniversary of the vesting commencement date and then in equal monthly installments over the following 36 months. |
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(2) | These options vest in equal monthly installments over the four-year period following the vesting commencement date. |
Perquisites, Health, Welfare and Retirement Benefits
Our named executive officers are eligible to participate in our employee benefit plans, including our medical, dental, vision, group life, disability and accidental death and dismemberment insurance plans, in each case on the same basis as all of our other employees. We provide a 401(k) savings plan to our employees, including our current named executive officers, as discussed in the section below entitled “401(k) Savings Plan.”
We generally do not provide perquisites or personal benefits to our named executive officers, except in limited circumstances and as noted in the Summary Compensation Table above. Our board of directors may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in our best interests.
401(k) Plan
We maintain a tax-qualified retirement plan that provides eligible employees, including named executive officers, with an opportunity to save for retirement on a tax advantaged basis. All participants’ interests in their deferrals are 100% vested when contributed. Pre-tax and after-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participant’s directions. Currently, we do not make matching contributions into the plan. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan, and all matching contributions, if any, are deductible by us when made.
Director Compensation
Our compensation committee has retained Aon Hewitt to, among other things, provide recommendations on non-employee director compensation based on an analysis of market data compiled from comparable companies in the biotechnology industry. The following table summarizes compensation paid to our non-employee directors during or with respect to the fiscal year ended December 31, 2018.
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Name | | Fees Earned or Paid in Cash ($) | | Option Awards ($)(1) | | | All Other Compensation ($)(2) | | Total ($) |
Jean-Jacques Bienaimé | | 30,000 | | 124,958 | (3) | | — | | 154,958 |
Cheryl L. Cohen | | 48,951 | | 124,958 | (4) | | — | | 173,909 |
Philip M. Croxford, M.B.A. | | 15,699 | | — | (5) | | — | | 15,699 |
Douglas E. Godshall, M.B.A. | | 33,663 | | 124,958 | (6) | | — | | 158,621 |
Errol R. Halperin, J.D., L.L.M. | | 39,375 | | 124,958 | (7) | | — | | 164,333 |
Faheem Hasnain | | 60,375 | | 174,940 | (8) | | — | | 235,315 |
J. Michael Millis, M.D. | | 37,500 | | 124,958 | (9) | | 31,000 | | 193,458 |
Muneer A. Satter, J.D., M.B.A. | | 33,750 | | 124,958 | (10) | | — | | 158,708 |
Lowell E. Sears, M.B.A. | | 57,250 | | 124,958 | (11) | | — | | 182,208 |
Randolph C. Steer, M.D., Ph.D. | | 19,623 | | — | (12) | | — | | 19,623 |
(1) The amounts in the “Option Awards” column reflect the aggregate grant date fair value of stock options granted during the calendar year computed in accordance with the provisions of ASC 718. The assumptions that we used to calculate these amounts are discussed in Note 7 to our financial statements appearing at the end of this Annual Report. These amounts do not reflect the actual economic value that will be realized by the director upon the vesting of the stock options, the exercise of the stock options, or the sale of the common stock underlying such stock options. As of December 31, 2018, Mr. Cox, our Chief Executive Officer had outstanding and unexercised option awards for 1,588,832 shares.
(2) Dr. Millis’ was paid an aggregate of $31,000 in consideration for services as a consultant and for services rendered as chair of our Clinical Advisory Board in 2018.
(3) Mr. Bienaimé had a total of 147,225 stock options outstanding as of December 31, 2018.
(4) Ms. Cohen had a total of 108,740 stock options outstanding as of December 31, 2018.
(5) Mr. Croxford had a total of 111,416 stock options outstanding as of December 31, 2018.
(6) Mr. Godshall had a total of 167,043 stock options outstanding as of December 31, 2018.
(7) Mr. Halperin has a total of 111,924 stock options outstanding as of December 31, 2018.
(8) Mr. Hasnain has a total of 160,171 stock options outstanding as of December 31, 2018.
(9) Dr. Millis had a total of 106,059 stock options outstanding as of December 31, 2018.
(10) Mr. Satter has a total of 93,270 stock options outstanding as of December 31, 2018.
(11) Mr. Sears has a total of 196,581 stock options outstanding as of December 31, 2018.
(12) Dr. Steer had a total of 122,400 stock options outstanding as of December 31, 2018.
Mr. Cox was not eligible to receive board compensation because he was an employee. We reimburse our directors for their reasonable expenses incurred in connection with attending board and committee meetings.
Director Compensation Policy
In May 2013, our board of directors adopted and approved a compensation policy for our non-employee directors, which was subsequently amended on March 2015, December 2015 and May 2016, which provides for the following compensation to our non-employee directors:
each non-employee director receives an annual base retainer of $35,000 except that the Non-Executive Chairman of the Board receives an annual base retainer of $50,000;
in addition to the annual base retainer, the chairman of our audit committee receives an annual fee of $15,000 and other members of our audit committee receive an annual fee of $7,500;
in addition to the annual base retainer, the chairmen of our other committees receive an annual fee of $10,000 and other members of our other committees receive an annual fee of $5,000;
in addition to the fees listed above, each non-employee director shall receive a per-meeting attendance fee of $500 for attending telephonic meetings of the Board. In addition, each Outside Director will be paid a per-meeting attendance fee of $2,500 for attending in-person meetings of the Board in excess of four during each calendar year.
Pursuant to this policy, except as approved by our board of directors, each new director will receive an initial grant of non-qualified common stock options with a Black-Scholes value of approximately $250,000 on the date of grant with vesting monthly over forty-eight months, subject to the director’s continued service with us. In addition, on the date of each annual meeting of the Company’s stockholders, each Outside Director who was a Director for the entire 6-month period preceding each such meeting automatically will be granted a non-statutory stock option with a Black-Scholes value of approximately $125,000, or $175,000 in the case of the Non-Executive Chairman of the Board. Each annual award will fully vest on the earlier of (i) the one-year anniversary of its grant date or (ii) the day prior to the next annual meeting, subject to the director’s continued service with us.
Compensation Committee Interlocks and Insider Participation
As of December 31, 2018, the members of our compensation committee currently are Ms. Cohen and Messrs. Hasnain and Sears. None of the current or past members of our compensation committee is or has been an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) or director of any entity that has one or more executive officers serving on our compensation committee or our board of directors.
Compensation Committee Report
The compensation committee has reviewed and discussed the foregoing “Executive Compensation” section of this Annual Report on Form 10-K with management. Based on this review and discussion, the compensation committee recommended to our board of directors that such information be included in this Annual Report on Form 10-K.
The Compensation Committee
Cheryl L. Cohen (Chair)
Faheem Hasnain
Lowell E. Sears
The information contained in the Compensation Committee Report shall not be deemed to be soliciting material or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that Vital Therapies specifically incorporates it by reference in such filing.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Information required by this item will be found in our Definitive Proxy Statement under the headings "Securities
Authorized for Issuance Under Equity Compensation Plans,
The following table summarizes information about our equity compensation plans as of December 31, 2018. All outstanding option awards relate to our common stock.
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Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) (c) |
Equity compensation plans approved by security holders: | | | | | |
2012 Stock Option Plan | 2,266,206 |
| | $6.76 | | — |
|
2014 Equity Incentive Plan (1) | 2,328,228 |
| | $6.40 | | 2,813,218 |
|
Equity compensation plans not approved by security holders: | | | | | |
Amended & Restated 2017 Inducement Equity Incentive Plan
| 1,588,832 |
| | $6.30 | | 261,168 |
|
Total | 6,183,266 |
| | $6.51 | | 3,074,386 |
|
|
| |
(1) | Our 2014 Equity Incentive Plan provides for an annual increase in the number of shares available for issuance thereunder on each anniversary date of our initial public offering, equal to the lower of: (i) 1,200,000 shares of our common stock; (ii) 3% of the outstanding shares of our common stock on the second-to-last day prior to each anniversary date; (iii) an amount as our board of directors may determine. |
Security" "Security Ownership of Certain Beneficial OwnersOwners" and Management"Security Ownership of Directors and Executive Officers" and is incorporated herein by reference.
The following table sets forth the beneficial ownership of our common stock as of February 15, 2019 by:
each person, or group of affiliated persons, who we know to beneficially own more than 5% of our common stock;
each of our named executive officers;
each of our directors; and
all of our executive officers and directors as a group.
The percentage ownership information shown in the table is based on an aggregate of 42,369,694 shares of our common stock outstanding as of February 15, 2019.
We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options and warrants that are either immediately exercisable or exercisable on or before April 29, 2018, which is 60 days after February 28, 2018. These shares are deemed to be outstanding and beneficially owned by the person holding those options and warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
Unless otherwise noted below, the address of each of the individuals and entities named in the table below is c/o Vital Therapies, Inc., 15222-B Avenue of Science, San Diego, California 92128. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
|
| | | | | | |
| | Number of Shares of Common Stock Beneficially Owned | | Percentage of Common Stock Beneficially Owned |
5% Stockholders: | | | | |
KCK Ltd. (1) | | 2,788,181 |
| | 6.6 | % |
Named Executive Officers and Directors: | | | | |
Russell J. Cox(2) | | 1,854,376 |
| | 4.2 | % |
Duane D. Nash, M.D., J.D. (3) | | 8,224 |
| | * |
|
Robert A. Ashley, M.A. (4) | | 2,000 |
| | * |
|
Faheem Hasnain (5) | | 107,293 |
| | * |
|
Cheryl L. Cohen (6) | | 78,415 |
| | * |
|
Lowell E. Sears, M.B.A. (7) | | 225,615 |
| | * |
|
| | | | |
All directors and executive officers as a group and certain former named executive officers (8) | | 2,287,808 |
| | 5.1 | % |
(1) The address of KCK Ltd. is KCK Ltd. A/C KCK Ltd OMC Chambers, Wickhams Cay 1, Road Town, Tortola VG1110 British Virgin Islands. KCK Ltd., through a board of directors consisting of three or more persons, has sole voting and investment power with respect to 2,788,181 shares of common stock held by KCK Ltd. This information is based solely upon a Schedule 13G filed by KCK Ltd. on February 13, 2017 for beneficial ownership as of December 31, 2016.
(2) Consists of vested stock unit awards as of February 15, 2019.
(3) Consists of 8,224 shares held at February 15, 2019.
(4) Consists of 2,000 shares held at February 15, 2019.
(5) Consists of 4,500 shares held by Faheem Hasnain, 3,500 shares held by Faheem Hasnain Trust and options to purchase 99,293 shares of common stock that are exercisable or becoming exercisable within 60 days of February 15, 2019.
(6) Consists of options to purchase 78,415 shares of common stock that are exercisable or becoming exercisable within 60 days of February 15, 2019.
(7) Consists of 58,572 shares held and options to purchase 167,043 shares of common stock.
(8) Consists of 88,681 shares held or beneficially owned, 2,199,127 shares that may be acquired pursuant to restricted stock unit awards and the exercise of options to purchase shares of common stock that are exercisable or becoming exercisable within 60 days of February 15, 2019.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Since January 1, 2018, we have not been a party to any transactionsInformation required by this item will be found in which the amount involved exceeded $120,000 and in which any of our executive officers, directors, promoters or beneficial holders of more than 5% of our capital stock had or will have a direct or indirect material interest, other than compensation arrangements describedDefinitive Proxy Statement under the sectionheadings "The Board of this proxy statement titled “Executive Compensation.”Directors and Board Committees" and "Certain Relationships and Related-Party Transactions" and is incorporated herein by reference.
Senior Preferred Investors’ Rights Agreement
We and certain of our former directors, former executive officers and stockholders, are parties to the Senior Preferred IRA. The Senior Preferred IRA contains customary registration rights and related provisions, including customary market standoff provisions.
Series D Investors’ Rights Agreement
We and certain of our former directors, former executive officers and stockholders, are or were parties to an investors’ rights agreement, dated June 7, 2011, or the Series D IRA. The Series D IRA contains restrictions on transfer (for compliance with applicable securities laws) and customary registration rights. Upon the closing of our initial public offering in April 2014, all covenants in this agreement, except for the rights relating to the registration of shares under the Securities Act, terminated. The rights of any of our directors, officers or stockholders under the Series D IRA, who became parties to the Senior Preferred IRA, were superseded by the Senior Preferred IRA.
Indemnification of Officers and Directors
We have entered into indemnification agreements with each of our directors and executive officers. The indemnification agreements and our amended and restated certificate of incorporation and amended and restated bylaws require us to indemnify our directors, executive officers and certain controlling persons to the fullest extent permitted by Delaware law.
Related-Person Transactions Policy
We adopted a written Related Person Transactions Policy that sets forth our policies and procedures regarding the identification, review, consideration, approval and oversight of “related person transactions.”
For purposes of our policy only, a “related-person transaction” is a past, present or future transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any “related person” are participants, the amount involved exceeds $120,000 and a related person has a direct or indirect material interest. Various transactions are not covered by this policy, including transactions involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person, equity and debt financing transactions with a related person that are approved by the Board, and other transactions not otherwise required to be disclosed under Item 404 of Regulation S-K. A “related person,” as determined since the beginning of our last fiscal year, is any executive officer, director or nominee to become director, a holder of more than 5% of our common stock, including any immediate family members of such persons. Any related-person transaction may only be consummated if approved or ratified by the affirmative vote of seventy-five percent (75%) of our dis-interested directors then in office in accordance with the policy guidelines set forth below.
Under the policy, where a transaction has been identified as a related-person transaction, management must present information regarding the proposed related-person transaction to our audit committee for review and recommendation for approval to our board of directors. In considering related-person transactions, our audit committee and board of directors take into account the relevant available facts and circumstances including, but not limited to whether the terms of such transaction are no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction. In the event a director has an interest in the proposed transaction, the director must recuse himself or herself from the deliberations and approval process.
Director Independence
As a company listed on the Nasdaq Global Market we are required under the listing rules of Nasdaq, or the Nasdaq listing rules, to maintain a board comprised of a majority of independent directors as determined affirmatively by our board. In addition, the Nasdaq listing rules require that, subject to specified exceptions, each member of our audit, compensation and nominating and governance committees must be independent. Audit committee members and compensation committee members must also satisfy the independence criteria set forth in Rule 10A-3 and Rule 10C-1, respectively, under the Exchange Act. Under the Nasdaq listing rules, a director will only qualify as an “independent director” if, in the opinion of our board of directors, the director does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Our board of directors has undertaken a review of the independence of our directors and considered whether any director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that none of Ms. Cohen and Messrs. Hasnain and Sears, representing three of our four directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is an “independent director” as that term is defined under the Nasdaq listing rules. Mr. Cox was not considered an independent director, and Dr. Nash is currently not considered an independent director because of their respective positions as our chief executive officer.
In making these determinations, our board of directors considered the relationships that each non-employee director has with us and all other facts and circumstances our board of directors deemed relevant in determining their independence, including consulting relationships, family relationships and the beneficial ownership of our capital stock by each non-employee director.
Item 14. Principal Accounting Fees and Services.
The audit committeeInformation required by this item will be found in our Definitive Proxy Statement under the heading "Proposal to Ratify the Appointment of our board of directors selected PricewaterhouseCoopers LLP to be our independent registered public accounting firm for the year ended December 31, 2018.Independent Registered Public Accounting Firm" and is incorporated herein by reference.
The following table represents aggregate fees for services provided to us in the fiscal years ended December 31, 2018 and 2017 by PricewaterhouseCoopers LLP, our principal accountant. All fees below were pre-approved by the audit committee:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | 2018 | | 2017 |
Audit Fees (1) | | $ | 525,175 |
| | $ | 547,621 |
|
Audit-related Fees (2) | | — |
| | — |
|
Tax Fees (3) | | — |
| | — |
|
All Other Fees (4) | | 2,700 |
| | 1,800 |
|
Total Fees | | $ | 527,875 |
| | $ | 549,421 |
|
86
|
| |
(1) | Audit fees consist of fees incurred for professional services by PricewaterhouseCoopers LLP for audit and quarterly reviews of our financial statements, reviews of our registration statements on Form S-3 and Form S-8 and related services that are normally provided in connection with statutory and regulatory filings or engagements. |
|
| |
(2) | We did not engage PricewaterhouseCoopers LLP to perform audit-related services. |
|
| |
(3) | We did not engage PricewaterhouseCoopers LLP to perform tax advisory services. |
|
| |
(4) | Represents annual licensing fees for an accounting database subscription and, in 2018, to a disclosure checklist. |
In connection with the audit of the 2018 financial statements, we entered into an engagement agreement with PricewaterhouseCoopers LLP that sets forth the terms by which PricewaterhouseCoopers LLP will perform audit services for us. Such engagement was approved in advance by our audit committee.
Auditor Independence
In 2018, there were no other professional services provided by PricewaterhouseCoopers LLP that would have required our audit committee to consider their compatibility with maintaining the independence of PricewaterhouseCoopers LLP.
Pre-Approval Policy
Our audit committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax services and other services. Our audit committee generally pre-approves particular services or categories of services on a case-by-case basis. The independent registered public accounting firm and management are required to periodically report to our audit committee regarding the extent of services provided by the independent registered public accounting firm in accordance with these pre-approvals, and the fees for the services performed to date. All of the services of PricewaterhouseCoopers LLP for 2018 and 2017 described above were pre-approved by our audit committee.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
| | | | | | | | |
| | |
| | Page |
1. Financial Statements. We have filed the following documents as part of this Annual Report: | |
| | |
Report of PricewaterhouseCoopersBaker Tilly U.S, LLP, Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets | |
Consolidated Statements of Operations | |
Consolidated Statements of Comprehensive Loss | |
Consolidated Statements of Stockholders’ Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements | |
| | |
2. Financial Statement Schedules. None. | |
| | |
3. Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously | |
filed with the U.S. Securities and Exchange Commission. | |
EXHIBITS
| | | | | | Incorporated by Reference | | | | | Incorporated by Reference |
Exhibit Number | | Exhibit Title | | Form | | File No. | | Exhibit | | Filing Date | Exhibit Number | | Exhibit Title | | Form | | Exhibit | | Filing Date |
2.1 | | | | 8-K | | 001-36201 | | 2.1 |
| | January 7, 2019 | |
3.1 | | | | S-1/A | | 333-191711 | | 3.2 |
| | November 6, 2013 | 3.1 | | | | 8-K | | 3.1 | | | July 17, 2019 |
3.2 | | | | S-1/A | | 333-191711 | | 3.4 |
| | November 6, 2013 | 3.2 | | | | 8-K | | 3.1 | | | July 17, 2019 |
4.1 | | | | S-1/A | | 333-191711 | | 4.1 |
| | November 6, 2013 | 4.1 | | | | S-8 | | 4.1 | | | September 20, 2019 |
4.2 | | | | S-1 | | 333-191711 | | 4.2 |
| | October 11, 2013 | |
4.3 | | | | S-1 | | 333-191711 | | 4.3 |
| | October 11, 2013 | |
4.4 | | | | S-1 | | 333-191711 | | 4.4 |
| | October 11, 2013 | |
4.2* | | 4.2* | | | | 10-Q | | 4.2 | | | February 26, 2020 |
10.1 | |
| | 8-K | | 001-36201 | | 10.1 |
| | January 7, 2019 | 10.1 | |
| | 8-K | | 10.1 | | | July 17, 2019 |
10.2 | | | | 8-K | | 001-36201 | | 10.1 |
| | October 12, 2018 | 10.2 | | | | 8-K | | 10.2 | | | July 17, 2019 |
10.3+ | | | | S-1/A | | 333-191711 | | 10.1 |
| | November 6, 2013 | |
10.3 | | 10.3 | | | | 8-K | | 10.3 | | | July 17, 2019 |
10.4+ | | | | S-1/A | | 333-191711 | | 10.2 |
| | November 6, 2013 | 10.4+ | | | | 8-K | | 10.4 | | | July 17, 2019 |
10.5+ | | | | S-1/A | | 333-191711 | | 10.3 |
| | November 6, 2013 | 10.5+ | | | | 8-K | | 10.5 | | | July 17, 2019 |
10.6+ | | | | 10-K | | 001-36201 | | 10.4 |
| | March 13, 2018 | 10.6+ | | | | 8-K | | 10.1 | | | September 5, 2019 |
10.7+ | | | | S-1/A | | 333-191711 | | 10.5 |
| | November 6, 2013 | 10.7+ | | | | 8-K | | 10.6 | | | July 17, 2019 |
10.8+ | | | | S-1/A | | 333-191711 | | 10.6 |
| | April 3, 2014 | 10.8+ | | | | 8-K | | 10.2 | | | September 5, 2019 |
10.9+ | | | | S-1/A | | 333-191711 | | 10.7 |
| | March 11, 2014 | 10.9+ | | | | 8-K | | 10.2 | | | April 20, 2020 |
10.10+ | | | | S-1/A | | 333-191711 | | 10.9 |
| | March 11, 2014 | 10.10+ | | | | 10-Q | | 10.12 | | November 6, 2020 |
10.11+ | | | | 10-K | | 001-36201 | | 10.10 |
| | March 20, 2015 | |
10.12+ | | | | 10-K | | 001-36201 | | 10.10 |
| | March 13, 2018 | |
10.13+ | | | | S-1 | | 333-191711 | | 10.6 |
| | October 11, 2013 | |
10.14+ | | | | S-1/A | | 333-191711 | | 10.11 |
| | March 11, 2014 | |
10.15+ | | | | 10-K | | 001-36201 | | 10.13 |
| | March 13, 2018 | |
10.11 | | 10.11 | | | | 8-K | | 10.1 | | April 20, 2020 |
10.12 | | 10.12 | | | | 8-K | | 10.2 | | April 20, 2020 |
10.13 | | 10.13 | | | | 8-K | | 10.1 | | June 12, 2020 |
10.14 | | 10.14 | | | | 8-K | | 10.2 | | June 12, 2020 |
10.15 | | 10.15 | | | | 8-K | | 1.1 | | August 10, 2020 |
10.16 | | 10.16 | | | | 8-K | | 10.1 | | October 20, 2020 |
10.17 | | 10.17 | | | | 8-K | | 10.2 | | October 20, 2020 |
10.18 | | 10.18 | | | | 8-K | | 10.1 | | January 4, 2021 |
10.19 | | 10.19 | | | | 8-K | | 10.1 | | November 13, 2020 |
21.1* | | 21.1* | | | |
23.1* | | 23.1* | | | |
24.1* | | 24.1* | | | |
31.1* | | 31.1* | | | |
|
| | | | | | | | | | | |
10.16+ | | | | 8-K | | 001-36201 | | 10.1 |
| | January 14, 2019 |
10.17+ | | | | S-8 | | 333-222886 | | 4.2 |
| | February 6, 2018 |
10.18+ | | | | S-8 | | 333-222886 | | 4.3 |
| | February 6, 2018 |
10.19+ | | | | S-1 | | 333-191711 | | 10.8 |
| | October 11, 2013 |
10.20+ | | | | S-1 | | 333-191711 | | 10.9 |
| | October 11, 2013 |
10.21+ | | | | 8-K | | 001-36201 | | 10.2 |
| | January 14, 2019 |
10.22+ | | | | S-1/A | | 333-191711 | | 10.10 |
| | November 15, 2013 |
10.23+ | | | | 8-K | | 001-36201 | | 10.1 |
| | May 27, 2016 |
10.24 | |
| | 10-Q | | 001-36201 | | 10.18 |
| | May 9, 2017 |
10.25 | | | | S-1 | | 333-191711 | | 10.12 |
| | October 11, 2013 |
10.26 | | | | 8-K | | 001-36201 | | 10.1 |
| | August 29, 2016 |
21.1* | | | | | | | | | | |
23.1* | | | | | | | | | | |
24.1* | | | | | | | | | | |
31.1* | | | | | | | | | | |
31.2* | | | | | | | | | | |
32.1** | | | | | | | | | | |
32.2** | | | | | | | | | | |
101.INS* | | XBRL Instance Document. | | | | | | | | |
101.SCH* | | XBRL Taxonomy Extension Schema Document. | | | | | | | | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Database. | | | | | | | | |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
+31.2* | | | | | | | | |
32.1** | | | | | | | | |
32.2** | | | | | | | | |
99.1+ | | | | 8-K | | 99.3 | | | September 5, 2019 |
99.2+ | | | | 8-K | | 99.2 | | | September 5, 2019 |
99.3+ | | | | 8-K | | 99.4 | | | September 5, 2019 |
101.INS* | | XBRL Instance Document. | | | | | | |
101.SCH* | | XBRL Taxonomy Extension Schema Document. | | | | | | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Database. | | | | | | |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | |
104* | | Cover Page Interactive Data File | | | | | | |
| | | | | |
+ | Indicates a management contract or compensatory plan or arrangement. |
* | Filed herewith. |
** | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
VITAL THERAPIES,
IMMUNIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | |
| Page |
| F-2 |
| F-3F-4 |
| F-4F-5 |
| F-5F-6 |
| F-6F-7 |
| F-7F-8 |
| F-8F-9 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Boardshareholders and the board of Directors and Stockholdersdirectors of Immunic, Inc.:
Vital Therapies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vital Therapies,Immunic, Inc. and its subsidiaries ("the Company"(the "Company") as of December 31, 20182020 and 2017, and2019, the related consolidated statements of operations, comprehensive loss, stockholders’stockholders' equity, and cash flows, for each of the threetwo years in the period ended December 31, 2018, including2020, and the related notes (collectively referred to as the “consolidated"consolidated financial statements”statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 20182020, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses from operations, cash outflows from operating activities, and its VTL-308 clinical trial failed to meet its primary or secondary endpoints that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements 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 consolidated 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 consolidated 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 consolidated 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 consolidatedfinancial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of accrual for research and development costs related to clinical trial activities
Critical Audit Matter Description
As described in Notes 2 and 5 to the consolidated financial statements, the Company records expenses and accruals for estimated costs of research and development activities, including third party contract services costs for clinical research. Clinical trial activities performed by third parties are expensed based upon estimates of work completed in accordance with agreements with the respective Clinical Research Organization (“CRO”). Billing terms and payments are reviewed by management to ensure estimates of outstanding obligations are appropriate as of period end. Tracking the progress of completion for clinical trial activities performed by third parties allows the Company to record the appropriate expense and accruals under the terms of the agreements.
Auditing the accounting for accrued clinical trial expenses is complex because of the high volume of data used in management’s estimates, the assumptions used by management to develop their estimates and the procedures necessary to verify the cost and extent of unbilled work performed during the reporting period.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company’s process and evaluated the design and implementation of internal controls related to the completeness and valuation of accrued clinical trial expenses.
To test the clinical trial accrual, our audit procedures included, among others, testing the accuracy and completeness of the underlying data used in the estimates and evaluating and testing the significant assumptions used by management to estimate the accruals. To test the significant assumptions, we corroborated the progress of clinical trials and other research and development projects with the Company’s research and development personnel that oversee the clinical trials, and obtained information received directly from third parties, which included the third parties’ estimate of costs incurred to date. We also tested subsequent invoicing received from third parties.
Baker Tilly US, LLP
San Diego, California
March 4, 2019
We have served as the Company’sCompany's auditor since 2010.2019.
Minneapolis, MN
VITAL THERAPIES,
February 26, 2021
IMMUNIC, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| | | December 31, | | December 31, |
| 2018 | | 2017 | | 2020 | | 2019 |
Assets | | | | Assets | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 13,324 |
| | $ | 56,901 |
| Cash and cash equivalents | $ | 127,452 | | | $ | 29,369 | |
Other current assets and prepaid expenses | 908 |
| | 1,220 |
| Other current assets and prepaid expenses | 6,293 | | | 2,861 | |
Total current assets | 14,232 |
| | 58,121 |
| Total current assets | 133,745 | | | 32,230 | |
Property and equipment, net | 709 |
| | 2,155 |
| Property and equipment, net | 203 | | | 80 | |
Other assets | 37 |
| | 108 |
| |
Goodwill | | Goodwill | 32,970 | | | 32,970 | |
Right of use asset, net | | Right of use asset, net | 901 | | | 633 | |
Other long-term assets | | Other long-term assets | 42 | | | 42 | |
Total assets | $ | 14,978 |
| | $ | 60,384 |
| Total assets | $ | 167,861 | | | $ | 65,955 | |
Liabilities and Stockholders’ Equity | | | | Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 268 |
| | $ | 1,049 |
| Accounts payable | $ | 3,700 | | | $ | 2,423 | |
Accrued expenses | 2,221 |
| | 9,141 |
| Accrued expenses | 4,318 | | | 3,298 | |
Other current liabilities | 21 |
| | 91 |
| Other current liabilities | 379 | | | 1,351 | |
Total current liabilities | 2,510 |
| | 10,281 |
| Total current liabilities | 8,397 | | | 7,072 | |
Long-term liabilities | 41 |
| | 59 |
| |
Commitments and contingencies (note 4) |
| |
| |
Long-term liabilities: | | Long-term liabilities: | | | |
Operating lease liabilities | | Operating lease liabilities | 679 | | | 520 | |
Total long-term liabilities | | Total long-term liabilities | 679 | | | 520 | |
Total liabilities | | Total liabilities | 9,076 | | | 7,592 | |
Commitments and contingencies (note 6) | | Commitments and contingencies (note 6) | 0 | | 0 |
Stockholders’ equity: | | | | Stockholders’ equity: | |
Preferred stock, $0.0001 par value; 20,000,000 authorized and no shares issued or outstanding at December 31, 2018 and 2017 | — |
| | — |
| |
Common stock, $0.0001 par value; 130,000,000 shares authorized at December 31, 2018 and 2017; 42,369,694 and 42,368,864 shares issued and outstanding at December 31, 2018 and 2017, respectively | 4 |
| | 4 |
| |
Preferred stock, $0.0001 par value; 20,000,000 authorized and 0 shares issued or outstanding at December 31, 2020 and 2019 | | Preferred stock, $0.0001 par value; 20,000,000 authorized and 0 shares issued or outstanding at December 31, 2020 and 2019 | 0 | | | 0 | |
Common stock, $0.0001 par value; 130,000,000 shares authorized and 21,168,240 and 10,744,806 shares issued and outstanding at December 31, 2020 and 2019, respectively | | Common stock, $0.0001 par value; 130,000,000 shares authorized and 21,168,240 and 10,744,806 shares issued and outstanding at December 31, 2020 and 2019, respectively | 2 | | | 1 | |
Additional paid-in capital | 349,771 |
| | 345,915 |
| Additional paid-in capital | 266,823 | | | 119,646 | |
Accumulated other comprehensive income | 80 |
| | 78 |
| |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (4,112) | | | (1,373) | |
Accumulated deficit | (337,428 | ) | | (295,953 | ) | Accumulated deficit | (103,928) | | | (59,911) | |
Total stockholders’ equity | 12,427 |
| | 50,044 |
| Total stockholders’ equity | 158,785 | | | 58,363 | |
Total liabilities and stockholders’ equity | $ | 14,978 |
| | $ | 60,384 |
| Total liabilities and stockholders’ equity | $ | 167,861 | | | $ | 65,955 | |
The accompanying notes are an integral part of these consolidated financial statements.
VITAL THERAPIES,IMMUNIC, INC.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| | | Years Ended December 31, | | Years Ended December 31, |
| 2018 | | 2017 | | 2016 | | 2020 | | 2019 |
Operating expenses: | | | | | | Operating expenses: | | | |
Research and development | $ | 24,825 |
| | $ | 39,341 |
| | $ | 30,046 |
| Research and development | $ | 38,637 | | | $ | 22,512 | |
General and administrative | 13,585 |
| | 13,314 |
| | 11,220 |
| General and administrative | 10,334 | | | 14,520 | |
Severance costs | 2,395 |
| | — |
| | — |
| |
Impairment loss | 1,219 |
| | — |
| | — |
| |
Total operating expenses | 42,024 |
| | 52,655 |
| | 41,266 |
| Total operating expenses | 48,971 | | | 37,032 | |
Loss from operations | (42,024 | ) | | (52,655 | ) | | (41,266 | ) | Loss from operations | (48,971) | | | (37,032) | |
Other income: | | | | | | Other income: | |
Interest income | 521 |
| | 650 |
| | 284 |
| Interest income | 58 | | | 107 | |
Other income (expense), net | 28 |
| | (73 | ) | | 13 |
| |
Other income, net | | Other income, net | 4,896 | | | 1,992 | |
Total other income | 549 |
| | 577 |
| | 297 |
| Total other income | 4,954 | | | 2,099 | |
Net loss | $ | (41,475 | ) | | $ | (52,078 | ) | | $ | (40,969 | ) | Net loss | $ | (44,017) | | | $ | (34,933) | |
| | | | | | | | | |
Net loss per share, basic and diluted | $ | (0.98 | ) | | $ | (1.31 | ) | | $ | (1.31 | ) | Net loss per share, basic and diluted | $ | (2.81) | | | $ | (4.52) | |
| | | | | | | | | |
Weighted-average common shares outstanding, basic and diluted | 42,369,245 |
| | 39,859,009 |
| | 31,387,579 |
| Weighted-average common shares outstanding, basic and diluted | 15,663,826 | | | 7,722,269 | |
The accompanying notes are an integral part of these consolidated financial statements.
VITAL THERAPIES,IMMUNIC, INC.
Consolidated Statements of Comprehensive Loss
(In thousands)
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Net loss | $ | (41,475 | ) | | $ | (52,078 | ) | | $ | (40,969 | ) |
Other comprehensive income (loss): | | | | | |
Unrealized gains (losses) on cash equivalents | (2 | ) | | (6 | ) | | 4 |
|
Foreign currency translation | — |
| | 1 |
| | (1 | ) |
Total comprehensive loss | $ | (41,477 | ) | | $ | (52,083 | ) | | $ | (40,966 | ) |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 |
Net loss | $ | (44,017) | | | $ | (34,933) | |
Other comprehensive loss: | | | |
Foreign currency translation, net of tax | (2,739) | | | (554) | |
Total comprehensive loss | $ | (46,756) | | | $ | (35,487) | |
The accompanying notes are an integral part of these consolidated financial statements.
VITAL THERAPIES,IMMUNIC, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands, except shares)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount | |
Balance at January 1, 2016 | 30,473,083 |
| | $ | 3 |
| | $ | 285,098 |
| | $ | 80 |
| | $ | (202,856 | ) | | $ | 82,325 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (40,969 | ) | | (40,969 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Exercise of stock options and change in stock option early exercise repurchase liability | 8,098 |
| | — |
| | 54 |
| | — |
| | — |
| | 54 |
|
Stock-based compensation | — |
| | — |
| | 4,678 |
| | — |
| | — |
| | 4,678 |
|
Issuance of common stock, net of issuance costs | 1,662,294 |
| | — |
| | 12,355 |
| | — |
| | — |
| | 12,355 |
|
Balance at December 31, 2016 | 32,143,475 |
| | 3 |
| | 302,185 |
| | 83 |
| | (243,825 | ) | | 58,446 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (52,078 | ) | | (52,078 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Exercise of stock options | 2,889 |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
Stock-based compensation | — |
| | — |
| | 5,480 |
| | — |
| | — |
| | 5,480 |
|
Common stock issued for services | 60,000 |
| | — |
| | 256 |
| | — |
| | — |
| | 256 |
|
Issuance of common stock, net of issuance costs | 10,162,500 |
| | 1 |
| | 37,939 |
| | — |
| | — |
| | 37,940 |
|
Other | — |
| | — |
| | 50 |
| | — |
| | (50 | ) | | — |
|
Balance at December 31, 2017 | 42,368,864 |
| | 4 |
| | 345,915 |
| | 78 |
| | (295,953 | ) | | 50,044 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (41,475 | ) | | (41,475 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Exercise of stock options | 830 |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
Stock-based compensation | — |
| | — |
| | 3,736 |
| | — |
| | — |
| | 3,736 |
|
Common stock issued for services | — |
| | — |
| | 115 |
| | — |
| | — |
| | 115 |
|
Balance at December 31, 2018 | 42,369,694 |
| | $ | 4 |
| | $ | 349,771 |
| | $ | 80 |
| | $ | (337,428 | ) | | $ | 12,427 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A-2 Preferred Stock | | Series A-1 Preferred Stock | | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | 299,456 | | | 34,313 | | | 13,541 | | | 2,879 | | | | 846,953 | | | 0 | | | 56 | | | (819) | | | (24,978) | | | (25,741) | |
Net loss | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | (34,933) | | | (34,933) | |
Foreign exchange translation adjustment | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | (554) | | | — | | | (554) | |
Stock-based compensation | — | | | — | | | — | | | — | | | | — | | | — | | | 529 | | | — | | | — | | | 529 | |
Conversion of Series A Preferred Stock to common stock | (299,456) | | | (34,313) | | | (13,541) | | | (2,879) | | | | 5,302,029 | | | 1 | | | 37,192 | | | — | | | — | | | 37,193 | |
Issuance of common stock in pre-closing financing for cash, net of issuance costs of $61 | — | | | — | | | — | | | — | | | | 2,197,742 | | | — | | | 29,935 | | | — | | | — | | | 29,935 | |
Issuance of common stock - Bonus share agreement | — | | | — | | | — | | | — | | | | 460,336 | | | — | | | 6,014 | | | — | | | — | | | 6,014 | |
Issuance of common stock - settlement of contingent payment | — | | | — | | | — | | | — | | | | 120,070 | | | — | | | 1,540 | | | — | | | — | | | 1,540 | |
Exchange of common stock in connection with Transaction | — | | | — | | | — | | | — | | | | 1,059,269 | | | — | | | 39,400 | | | — | | | — | | | 39,400 | |
Issuance of common stock under restricted stock unit agreements | — | | | — | | | — | | | — | | | | 127,500 | | | — | | | — | | | — | | | — | | | 0 | |
Public offering of common stock - net of issuance costs $377 | — | | | — | | | — | | | — | | | | 630,907 | | | — | | | 4,980 | | | — | | | — | | | 4,980 | |
Balance at December 31, 2019 | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | | 10,744,806 | | | $ | 1 | | | $ | 119,646 | | | $ | (1,373) | | | $ | (59,911) | | | $ | 58,363 | |
Net loss | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | (44,017) | | | (44,017) | |
Foreign exchange translation adjustment | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | (2,739) | | | — | | | (2,739) | |
Stock-based compensation | — | | | — | | | — | | | — | | | | — | | | — | | | 2,747 | | | — | | | — | | | 2,747 | |
Issuance of common stock - At The Market Sales Agreement net of issuance costs of $339 | — | | | — | | | — | | | — | | | | 733,728 | | | — | | | 10,925 | | | — | | | — | | | 10,925 | |
Issuance of common stock - April registered direct equity offering net of issuance costs of $1,082 | — | | | — | | | — | | | — | | | | 1,764,706 | | | — | | | 13,918 | | — | | | — | | | 13,918 | |
Issuance of common stock - June public equity offering net of issuance costs of $1,752 | — | | | — | | | — | | | — | | | | 2,175,000 | | | — | | | 23,048 | | — | | | — | | | 23,048 | |
Issuance of common stock - August public equity offering net of issuance costs of $6,960 | — | | | — | | | — | | | — | | | | 5,750,000 | | | 1 | | | 96,539 | | | — | | | — | | | 96,540 | |
Balance at December 31, 2020 | 0 | | | 0 | | | 0 | | | 0 | | | | 21,168,240 | | | 2 | | | $ | 266,823 | | | $ | (4,112) | | | $ | (103,928) | | | $ | 158,785 | |
The accompanying notes are an integral part of these consolidated financial statements.
VITAL THERAPIES,IMMUNIC, INC.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | |
| Years Ended December 31, | |
| 2020 | | 2019 | |
Cash flows from operating activities: | | | | |
Net loss | $ | (44,017) | | | $ | (34,933) | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Depreciation and amortization | 39 | | | 50 | | |
Gain on sale of ELAD Assets | 0 | | | (329) | | |
Gain on disposal of equipment | 0 | | | (26) | | |
Stock-based compensation | 2,747 | | | 6,512 | | |
Unrealized foreign currency gain | (2,528) | | | 0 | | |
Contingent payment settled in common stock | 0 | | | 1,540 | | |
Changes in operating assets and liabilities: | | | | |
Prepaid expenses and other assets | (2,779) | | | (2,224) | | |
Accounts payable | 1,000 | | | (462) | | |
Other current liabilities | (1,255) | | | 1,102 | | |
Accrued expenses and other liabilities | 669 | | | 225 | | |
Net cash used in operating activities | (46,124) | | | (28,545) | | |
Cash flows from investing activities: | | | | |
Purchases of property and equipment | (146) | | | (55) | | |
Cash distribution in connection with ELAD Assets sale | 0 | | | (75) | | |
Proceeds from sale of ELAD assets | 0 | | | 2,475 | | |
Cash acquired in connection with the Transaction | 0 | | | 8,151 | | |
Proceeds from sale of equipment | 0 | | | 40 | | |
Net cash (used in) provided by investing activities | (146) | | | 10,536 | | |
Cash flows from financing activities: | | | | |
Proceeds from issuance of preferred stock | 0 | | | 0 | |
Proceeds from issuance of common stock in pre-closing financing, net of issuance costs of $61 | 0 | | | 29,965 | | |
Proceeds from public offering of common stock through At The Market offering, net of issuance costs of $339 and $161, respectively | 10,925 | | | 5,200 | | |
Proceeds from April 2020 registered direct equity offering, net of issuance costs of $1,082 | 13,918 | | | 0 | | |
Proceeds from June 2020 public equity offering, net of issuance costs of $1,752 | 23,048 | | | 0 | | |
Proceeds from August 2020 public equity offering, net of issuance costs of $6,960 | 96,540 | | | 0 | | |
Deferred financing costs | 0 | | | (270) | | |
Net cash provided by financing activities | 144,431 | | | 34,895 | | |
Effect of exchange rate changes on cash and cash equivalents | (78) | | | (589) | | |
Net change in cash and cash equivalents | 98,083 | | | 16,297 | | |
Cash and cash equivalents, beginning of period | 29,369 | | | 13,072 | | |
Cash and cash equivalents, end of period | $ | 127,452 | | | $ | 29,369 | | |
| | | | |
| | | | |
Supplemental disclosure of noncash investing and financing activities: | | | | |
Stock issuance and deferred financing costs included in accounts payable and accrued expenses | $ | 0 | | | $ | 20 | | |
Conversion of convertible preferred stock to common stock | $ | 0 | | | $ | 37,193 | | |
Fair value of net assets acquired in the Transaction | $ | 0 | | | $ | 39,400 | | |
Offering costs in accrued expenses | $ | 114 | | | $ | 0 | | |
Purchases of property and equipment included in accounts payable | $ | 0 | | | $ | 19 | | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Cash flows from operating activities: | | | | | |
Net loss | $ | (41,475 | ) | | $ | (52,078 | ) | | $ | (40,969 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
Depreciation and amortization | 727 |
| | 998 |
| | 1,808 |
|
Fixed Asset Impairment | 1,219 |
| | — |
| | — |
|
Stock-based compensation | 3,736 |
| | 5,480 |
| | 4,678 |
|
Common stock issued for services | 115 |
| | 256 |
| | — |
|
Other | 119 |
| | (1 | ) | | 85 |
|
Changes in operating assets and liabilities: | | | | | |
Prepaid expenses and other assets | 165 |
| | 165 |
| | (232 | ) |
Accounts payable | (770 | ) | | 287 |
| | (459 | ) |
Accrued expenses | (6,914 | ) | | 4,490 |
| | (587 | ) |
Other liabilities | (87 | ) | | 6 |
| | (98 | ) |
Net cash used in operating activities | (43,165 | ) | | (40,397 | ) | | (35,774 | ) |
Cash flows from investing activities: | | | | | |
Purchases of property and equipment | (597 | ) | | (685 | ) | | (556 | ) |
Change in restricted cash | — |
| | — |
| | 533 |
|
Proceeds from sale of equipment | 182 |
| | 7 |
| | 2 |
|
Net cash used in investing activities | (415 | ) | | (678 | ) | | (21 | ) |
Cash flows from financing activities: | | | | | |
Proceeds from issuance of common stock, net of issuance costs | — |
| | 37,998 |
| | 12,355 |
|
Proceeds from exercise of stock options | 4 |
| | 5 |
| | 32 |
|
Deferred financing costs | — |
| | (19 | ) | | (13 | ) |
Net cash provided by financing activities | 4 |
| | 37,984 |
| | 12,374 |
|
Effect of exchange rate changes on cash and cash equivalents | (1 | ) | | 1 |
| | (4 | ) |
Net change in cash and cash equivalents | (43,577 | ) | | (3,090 | ) | | (23,425 | ) |
Cash and cash equivalents, beginning of period | 56,901 |
| | 59,991 |
| | 83,416 |
|
Cash and cash equivalents, end of period | $ | 13,324 |
| | $ | 56,901 |
| | $ | 59,991 |
|
| | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | |
Purchase of property and equipment included in liabilities | $ | — |
| | $ | 16 |
| | $ | 41 |
|
| | | | | |
Stock issuance costs included in liabilities | $ | — |
| | $ | 1 |
| | $ | — |
|
| | | | | |
Change in stock option early exercise repurchase liability | $ | — |
| | $ | — |
| | $ | 23 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
1. Description of Business and Basis of Financial Statements
Description of Business
We areImmunic, Inc. ("Immunic" or the "Company") a biotherapeuticclinical-stage biopharmaceutical company that has been developing a cell-based therapypipeline of selective oral immunology therapies aimed at treating chronic inflammatory and autoimmune diseases, including relapsing-remitting multiple sclerosis ("RRMS"), ulcerative colitis ("UC"), Crohn’s disease ("CD") and psoriasis. Immunic is headquartered in New York with its main operations in Gräfelfing, Germany. Immunic currently has 28 employees.
Immunic is currently pursuing three development programs, all orally available small molecule inhibitors in the clinical development phase. These include the IMU-838 program, which is focused on the development of oral formulations of small molecule inhibitors of the enzyme dihydroorotate dehydrogenase (“DHODH”); the IMU-935 program, which is focused on an inverse agonist of RORγt, an immune cell-specific isoform of retinoic acid receptor-related orphan nuclear receptor gamma (“RORγ”), and the IMU-856 program, which involves the development of a drug targeting the treatmentrestoration of acute forms of liver failure. Our initialintestinal barrier function. These product candidate, the ELAD®System, or ELAD, is a human-cell-based, bio-artificial liver, which wascandidates are being developed to improve rates of survival among patientsaddress diseases such as RRMS, UC, CD, and psoriasis. In addition to these large markets, these products are also being developed to address certain rare diseases with acute forms of liver failure. Since inception, we have devoted essentially all of our efforts to product development, clinical testinghigh unmet medical needs, such as primary sclerosing cholangitis (“PSC”), and pilot manufacturing and have not recognized revenues from our planned principal operations.Guillain-Barré syndrome (“GBS”). Immunic is also investigating IMU-838 as a potential treatment option for coronavirus disease 2019 (“COVID-19”).
In September 2018, we reported top-line data from our phase 3 clinical trial of ELAD, VTL-308, in 151 subjects with severe alcoholic hepatitis. Although there was a numerical improvement in survival in the ELAD-treated group between three months and one year following randomization, the study failed to meet the primary endpoint of a significant improvement in overall survival through at least ninety-one days. The secondary endpoint of the proportion of survivors at study day ninety-one also showed no statistically significant difference between the groups.
Considering these results, we do not believe the ELAD System can be approved in the United States or the European Union without additional clinical trials, if ever, and that such clinical trials would require substantial capital and time to complete. Consequently, we have ceased any further development of the ELAD System for the United States and Europe, substantially reduced our workforce, discontinued most of our supply and service agreements, and have shifted our strategic focus to identifying and exploring strategic alternatives including a merger, an acquisition or sale of assets or even a dissolution and liquidation of the company. See Note 11 for events subsequent to the reporting period.
OurCompany’s business, operating results, financial condition and growth prospects are subject to significant risks and uncertainties. As we currently have no commercial products or products in later stage development, it may be difficultuncertainties, including the failure of its clinical trials to securemeet their endpoints, failure to obtain regulatory approval and needing additional funding to complete the development and commercialization of the Company's three development programs.
Liquidity and Financial Condition
Immunic has no products approved for commercial sale and has not generated any revenue from product sales. Immunic has never been profitable and has incurred operating losses in light of these risks and circumstances. There can be no assurance any transaction will result from our evaluation of strategic alternatives.
Going Concern
We have a history of incurring losses and negative cash flows from operations and haveeach year since inception (2016). Immunic has an accumulated deficit of $337.4approximately $103.9 million as of December 31, 2020 and approximately $59.9 million as of December 31, 2019. Substantially all of Immunic’s operating losses resulted from expenses incurred in connection with its research and development programs and from general and administrative costs associated with its operations.
Immunic expects to incur significant expenses and increasing operating losses for the foreseeable future as it initiates and continues the preclinical and clinical development of its product candidates and adds personnel necessary to advance its clinical pipeline of product candidates. Immunic expects that its operating losses will fluctuate significantly from quarter-to-quarter and year-to-year due to timing of clinical development programs.
From inception through December 31, 2018. In consideration2020, Immunic has raised net cash of the resultsapproximately $216.8 million from private and public offerings of the VTL-308 clinical trialpreferred and our decision to cease the further developmentcommon stock. As of ELAD in the United States and Europe, we have made reductions in operating expenses as we pursue strategic alternatives for the company. As a result, we believe that our existingDecember 31, 2020, Immunic had cash and cash equivalents of $13.3 million as of December 31, 2018 wouldapproximately $127.5 million. With these funds, Immunic expects to be sufficientable to meet our known liabilities and commitments at such date based on our current operations; however, we expect our resource requirements to change materially to the extent we enter into and complete any strategic transactions. The timing and amount of our actual expenditures will be based on many factors, including, but not limited to, the strategic options that we pursue, any unforeseen cash needs which may deplete current cash and cash equivalents sooner than planned, or any future research and development efforts we decide to pursue.
We currently have an effective shelf registration statement on Form S-3 on file with the Securities and Exchange Commission, or SEC, which expires June 2021. The shelf registration statement permits the offering, issuance and sale by us of up to an aggregate offering price of $200.0 million of common stock, preferred stock, warrants, debt securities or units in one or more offerings and in any combination, of which $60.0 million may be offered, issued and sold under an “at-the-market” sales agreement with Cantor Fitzgerald & Co. However, amounts available under the shelf registration statement are significantly limited as our public float was below $75.0 million as measured on December 31, 2018. Additional funding is not likely at this time due to our past clinical trials not meeting their primary or secondary survival endpoints.
In addition, in October 2018, we received a letter from the staff of Nasdaq providing notification that, for the previous 30 consecutive business days, the closing bid price for our common stock was below the minimum $1.00 per share requirement, or the Bid Price Requirement, for continued listing on the Nasdaq Global Market. The notification had no immediate effect on the listing of our common stock. In accordance with Nasdaq listing rules, we are afforded 180 calendar days, or until April 23, 2019, to regain compliance with the Bid Price Requirement. If our common stock is delisted, this would, among other things, substantially impair our ability to raise additional funds to sustain ourfund its operations and our ability to successfully enter into strategic transactions, and could result in the loss of investor interest.
We believe that due to the factors described above, there is substantial doubt about our ability to continue as a going concern for one yearbeyond twelve months from the date of the issuance of ourthe accompanying audited consolidated financial statements.
Reverse Acquisition
On April 12, 2019, pursuant to the terms of the Agreement, dated as of January 6, 2019, between Vital Therapies, Inc., a Delaware corporation (“Vital”), Immunic AG, and the shareholders of Immunic AG party thereto (the “Agreement”), the holders of Immunic AG ordinary shares exchanged all of their outstanding shares for shares of Vital common stock, resulting in Immunic AG becoming a wholly-owned subsidiary of Vital (the “Transaction”). Immediately following the Transaction, Vital Therapies, Inc. changed its name to “Immunic, Inc.” and its ticker symbol to “IMUX”.
Immediately prior to the closing of the Transaction, (i) each Immunic AG preferred share was converted into one Immunic AG ordinary share, and (ii) each Immunic AG ordinary share was converted into the right to receive 17.17 shares of Vital’s common stock, after giving effect to the Reverse Stock Split (as defined below). The exchange ratio was determined through arm’s-length negotiations between Vital and Immunic AG.
The aggregate consideration issuable in the Transaction, after giving effect to the Reverse Stock Split, was 8,927,130 shares of Vital’s common stock. Following the Transaction and after giving effect to the Reverse Stock Split, the former shareholders of Immunic AG owned approximately 88.25% of the fully diluted common stock of the Company, and the
shareholders of Vital immediately prior to the Transaction owned 1,059,269 shares (plus 127,500 restricted stock units (“RSUs”) all of which have been issued to date to former Vital officers) of the common stock of the Company or approximately 11.75%. The issuance of shares of Vital’s common stock in the Transaction was registered with the Securities and Exchange Commission (“SEC”) on a Registration Statement on Form S-4 (Registration No. 333-229510).
Immediately prior to the closing of the Transaction, Immunic AG issued, in a private placement transaction (the “Financing”), an aggregate of 2,197,742 ordinary shares to certain of its shareholders for aggregate consideration of €26.7 million (approximately $29.9 million), pursuant to the terms of the Investment and Subscription Agreement, dated as of January 6, 2019, between Immunic and the shareholders and investors party thereto (the “Subscription Agreement”).
The Transaction has been accounted for as a reverse acquisition under the acquisition method of accounting. Because Immunic AG’s pre-Transaction owners held an 88.25% economic and voting interest in the combined company immediately following the closing of the Transaction, Immunic AG is considered to be the acquirer of Vital for accounting purposes. Additionally, Immunic AG is considered to be the predecessor for reporting purposes and the financial results of Immunic AG are reported in the historical comparable periods.
Reverse Stock Split
On April 12, 2019, immediately following the closing of the Transaction, the Company effected a 40-for-1 reverse stock split of its common stock (the “Reverse Stock Split”). Accordingly, all references to share and per share amounts in the accompanying audited consolidated financial statements and notes have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented. No fractional shares were issued in connection with the twelve months ended December 31, 2018.Reverse Stock Split. Unless otherwise noted, all references to common stock share and per share amounts have also been adjusted to reflect the exchange ratio of 17.17.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles, or GAAP,("U.S. GAAP") and include the accounts of Vital Therapies, Inc.Immunic and its wholly-owned subsidiaries, locatedImmunic AG and Immunic Research GmbH (which both began operations in 2016), Immunic Australia Pty Ltd. (which began operations in 2018) and Vital Therapies (Beijing) Company Limited (“VTL China”), acquired through the United Kingdom andTransaction (which began operations in 2005). VTL China bothwas sold in September 2019 in connection with the sale of which are currently inactive.certain of Vital's clinical development-related intellectual property rights (the "ELAD Assets"). All intercompany accounts and transactions have been eliminated in consolidation. We manage ourImmunic manages its operations as a single reportable segment for the purposes of assessing performance and making operating decisions. Certain prior period amounts have been reclassified to conform to the current basis of presentation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires usthe Company to make certain estimates and assumptions that affect the reported amounts reportedof assets, liabilities, expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements. The most significant estimates in the Company’s financial statements and accompanying notes.notes relate to the application of the acquisition method of accounting related to the Transaction, clinical trial expenses, share-based compensation. Management believes its estimates to be reasonable under the circumstances. Actual results could differ materially from those estimates and assumptions.
Foreign Currency Translation and Presentation
The Company’s reporting currency is United States (“U.S.”) dollars. During the twelve months ended December 31, 2020 and 2019, Immunic AG and Immunic Research GmbH’s operations were located in Germany with the euro being its functional currency. Immunic Australia Pty Ltd.’s functional currency is the Australian dollar. All amounts in the financial statements where the functional currency is not the U.S. dollar are translated into U.S. dollar equivalents at exchange rates as follows:
• assets and liabilities at reporting period-end rates;
• income statement accounts at average exchange rates for the reporting period; and
• components of equity at historical rates.
Gains and losses from translation of the financial statements into U.S. dollars are recorded in stockholders’ equity as a component of accumulated other comprehensive income (loss). Realized and unrealized gains and losses resulting from foreign currency transactions denominated in currencies other than the functional currency are reflected as general and administrative expenses in the Consolidated Statements of Operations. Foreign currency transaction gains and losses related to long-term intercompany loans that are payable in the foreseeable future are recorded in Other Income. The Consolidated Statements of Cash Flows were prepared by using the average exchange rate in effect during the reporting period which reasonably approximates the timing of the cash flows.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Cash and cash equivalents consist of cash on hand and highly-liquid investmentsdeposits in banks located in the U.S., Germany and Australia. The Company maintains cash and cash equivalent balances denominated in Euro and U.S. dollars with original maturitiesmajor financial institutions in the U.S. and Germany in excess of three months or less when acquired. Cashthe deposit limits insured by the government. Management periodically reviews the credit standing of these financial institutions and believes that the Company is not exposed to any significant credit risk. The Company currently deposits its cash and cash equivalents are stated at cost unless they are securities, in which case they are recorded at fair value, which approximates original cost.with two large financial institutions.
Fair Value of Financial InstrumentsMeasurement
Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets consisted of money market funds for the periods presented. WeThe Company had no Level 1 liabilities for the periods presented.
Level 2—Observable inputs Inputs other than Level 1observable quoted prices such asfor the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputsthat are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Wenot active. The Company had no Level 2 assets or liabilities for the periods presented.
Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. WeThe Company had no Level 3 assets or liabilities for the periods presented.
Any transfers into and out of levels within the fair value hierarchy will be recognized at the end of the reporting period in which the actual event or change in circumstances that caused the transfer occurs.
The carrying value of cash and cash equivalents, other current assets and prepaid expenses, accounts payable, accrued expenses, and other current liabilities approximates fair value due to the short period of time to maturity.
Property and Equipment
Property and equipment are recordedis stated at cost and depreciatedcost. Depreciation is computed using the straight-line method overbased on the estimated usefulservice lives of the assets (generallywhich range from three years to five years). Leasehold improvements are stated at costthirteen years. Depreciation and depreciated on a straight-line basis overamortization expense was $39,000 and $50,000 for the lesser of the remaining term of the related lease or the estimated useful lives of the assets. Construction in progress is not depreciated until the underlying asset is available to be placed in service. Repairsyears ended December 31, 2020 and maintenance costs are charged to expense as incurred.
2019, respectively.
Impairment of Long-Lived Assets
We evaluateThe Company records impairment losses on long-lived assets suchused in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. Impaired assets are then recorded at their estimated fair value. There were 0 impairment losses during the years ended December 31, 2020 and 2019.
Goodwill
Business combinations are accounted for under the acquisition method. The total purchase price of an acquisition is allocated to the underlying identifiable net assets, based on their respective estimated fair values as propertyof the acquisition date. Determining the fair value of assets acquired and equipment,liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, probabilities of success, discount rates, and asset lives, among other items. Assets acquired and liabilities assumed are recorded
at their estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Goodwill is tested for impairment wheneverat the reporting unit level annually in the fourth quarter, or more frequently when events or changes in circumstances indicate that the carrying amountasset might be impaired. Examples of the assets may not be recoverable. Suchsuch events or changes in circumstances include, but are not limited to, a significant decreaseadverse change in legal or business climate, an adverse regulatory action or unanticipated competition.
The Company assesses qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of the underlying asset or asset group, a significant decrease in the benefits realized from the acquired assets, difficulty and delays in integrating the business, or a significant change in the operations of the acquired assets or use of an asset or asset group. A long-lived assetreporting unit is considered impaired ifless than its carrying amount exceedsamount. If after assessing the estimated future undiscounted cash flowstotality of events or circumstances, the asset or asset groupCompany were to determine that it is expected to generate. If a long-lived asset is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset exceedsmore likely than not that the fair value of the asset or asset group. Determiningreporting unit is less than its carrying amount, then the Company would perform a quantitative test that compares the fair value to its carrying value to determine the amount of an asset or asset groupany impairment. Impairment testing for goodwill is highly judgmentaldone at the reporting unit level. The Company has determined that it operates in naturea single operating segment and involves the usehas a single reporting unit. The Company has determined there was 0 goodwill impairment as of significant estimatesDecember 31, 2020.
Research and assumptions for market participants. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictableDevelopment Expenses
These costs primarily include external development expenses and inherently uncertain. Actual future results may differ from those estimates.
We recognized an impairment charge of $1.2 million on our property and equipment in the consolidated statements of operationsinternal personnel expenses for the twelve months ended December 31, 2018. We did not recognize any impairment losses inthree development programs, IMU-838, IMU-935 and IMU-856. Immunic has spent the years ended December 31, 2017 or 2016.
Clinical Trial Accruals
As partmajority of the process of preparing our financial statements, we are required to estimate our accrued expenses. Our clinical trial accrual process seeks to account for expenses resulting from our obligations under agreements with clinical sites, clinical research organizations, or CROs, vendors, and consultants in connection with conducting our clinical trials. We account for these expenses according to the progress of each trial as measured by subject enrollment, the timing of various aspects of the trial and if available, information from our service providers. During the course of a clinical trial, we are not able to access certain clinical information and must adjust our rate of clinical expense recognition if actual results differ from our estimates. As our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary, reported amounts that may later be determined to be higher or lower than our estimates for a particular period and adjustments to ourits research and development expenses may be necessary.
Asresources on IMU-838, the Company's lead development program for clinical trials in RRMS, UC, COVID-19, and PSC. IMU-935 is currently being tested in a result of the completion of our VTL-308Phase 1 clinical trial in healthy volunteers, which was initiated in September 2018, we gained access to subject-specific and clinical site information used for estimating our2019. IMU-856 is currently being tested in a Phase 1 clinical trial accruals. This enabled us to further analyze our clinical trial accrual against the actual services performed and to adjust our clinical trial accrual based on such information. As a result of this analysis and our ongoing review with the clinical sites, we reduced our clinical trial accrual and reduced research and development expense for the year ended December 31, 2018 by $670,000.
Research and Developmentin healthy volunteers, which was initiated in August 2020.
Research and development expenses consist of expenses incurred in research and development activities, which include clinical trials, contract research services, certain milestone payments, salaries and related employee benefits, allocated facility costs have consistedand other outsourced services. Research and development expenses are charged to operations as incurred.
The Company enters into agreements with contract research organizations (“CROs”) to provide clinical trial services for individual studies and projects by executing individual work orders governed by a Master Service Arrangement (“MSA”). The MSAs and associated work orders provide for regular recurrent payments and payments upon the completion of certain milestones. The Company regularly assesses the timing of payments against actual costs incurred to ensure a proper accrual of related expenses in the appropriate accounting period.
Collaboration Arrangements
Certain collaboration and license agreements may include payments to or from the Company of one or more of the following: non-refundable or partially refundable upfront or license fees; development, regulatory and commercial milestone payments; payment for manufacturing supply services; partial or complete reimbursement of research and development costs; and royalties on net sales of licensed products. The Company assesses whether such contracts are within the scope of Financial Accounting Standards Board (FASB) Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” and ASU No. 2018-18, “Collaborative Arrangements”, ("ASU 2018-18"). ASU 2018-18, clarifies that certain elements of collaborative arrangements could qualify as transactions with customers in the scope of ASC 606.
In October 2018, the Company entered into an option and license agreement (the "Daiichi Sankyo Agreement") with Daiichi Sankyo Co., Ltd. ("Daiichi Sankyo") which granted the Company the right to license a group of compounds, designated by the Company as IMU-856, as a potential new oral treatment option for diseases such as inflammatory bowel disease, irritable bowel syndrome with diarrhea, immune checkpoint inhibitor induced colitis and other barrier function associated diseases. During the option period, the Company performed agreed upon research and development activities for which it was reimbursed by Daiichi Sankyo up to a maximum agreed-upon limit. Such reimbursement was recorded as other income. There are no more research and development reimbursements expected under this agreement.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-relatedsalaries and related costs for personnel in executive, finance, business development and other support functions. Other general and administrative expenses include, but are not limited to, stock-based compensation, insurance costs, of contractors, clinical trial sitesprofessional fees for legal, accounting and CROs engaged in the development of ELAD,tax services, consulting, related facility costs related to our investigation of the mechanism of action of ELAD, expenses associated with obtaining regulatory approvals, and travel.
Stock-Based Compensation
The Company measures the cost of acquiringemployee and manufacturing clinical trial materials. All research and development costs are expensed as incurred.
Stock-Based Compensation
We measure and recognize compensation expensenon-employee services received in exchange for all stock-based compensation for employees and directorsequity awards based on the estimatedgrant-date fair value of the award recognized generally as an expense (i) on a straight-line basis over the requisite service period for those awards whose vesting is based upon a service condition, and (ii) on an accelerated method for awards whose vesting is based upon a performance condition, but only to the extent it is probable that the performance condition will be met. Stock-based compensation is (i) estimated at the date of grant and to consultants based on the ongoing estimatedaward’s fair value. Currently, our stock-based awards consist only of stock options; however, future grants under ourvalue for equity compensation plan may also consist of shares of restricted stock, restricted stock units, stock appreciation rights, performanceclassified awards and performance units (see Note 11 to(ii) final measurement date for liability classified awards. Forfeitures are recorded in the consolidated financial statements). We estimateperiod in which they occur.
The Company estimates the fair value of stock options using the Black-Scholes-Merton or BSM, option pricingoption-pricing model ("BSM"), which requires the use of estimates.
We recognize stock-based compensation cost for employeesestimates and directors for ratably vesting stock options on a straight-line basis over the requisite service period of the award. For performance-based stock options to employees and directors, we record stock-based compensation expense only when the performance-based milestone is deemed probable of achievement. We utilize both quantitative and qualitative criteria to judge whether milestones are probable of achievement. If performance-based milestones are later determined not to be probable of achievement, then all previously recorded stock-based compensation expense associated with such options is reversed in the period that we make this determination.
The fair value of options granted to consultants has been estimated using the BSM option pricing model and re-measured at each reporting date with changes in fair value prior to vesting recognized as expense in the consolidated statements of operations across the applicable vesting period. For performance-based stock options to consultants, we record stock-based compensation expense only when the performance-based milestone is achieved unless there is a performance commitment.
The BSM option pricing model requires the input of highly-subjectivesubjective assumptions, including the risk-free interest rate, the fair value of the underlying common stock, the expected dividend yield of ourthe Company’s common stock, the expected volatility of the price of ourthe Company’s common stock, and the expected term of the option. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, ourthe Company’s stock-based compensation expense could be materially different in the future. These assumptions
Leases
The Company leases office space and office equipment. The underlying lease agreements have lease terms of less than 12 months and up to 60 months. The short-term leases are estimateddeemed immaterial and have not been included in the operating lease right of use asset and operating lease liability.
The Company has 2 existing leases for office space. At inception of a lease agreement, the Company determines whether an agreement represents a lease and at commencement each lease agreement is assessed as follows:
Risk-free Interest Rate
We baseto classification as an operating or financing lease. The Company's 2 leases have been classified as operating leases and an operating lease right-of-use asset and an operating lease liability have been recorded on the risk-free interest rate assumption on zero-coupon U.S. treasury instruments appropriateCompany’s balance sheet. A right-of-use lease asset represents the Company’s right to use the underlying asset for the expectedlease term ofand the stock option grants.
Expected Dividend Yield
We baselease obligation represents its commitment to make the expected dividend yield assumption onlease payments arising from the fact that we have never paid cash dividendslease. Right-of-use lease assets and have no present intention to pay cash dividends. Consequently, we used an expected dividend yield of zero.
Expected Volatility
The expected stock price volatility for our common stock is estimated based on volatilities of a peer group of similar publicly-traded, biotechnology companies by takingobligations are recognized at the average historic price volatility for the peers for a period equivalent to the expected term of the stock option grants. We do not use our average historic price volatility as we have only been a publicly-traded company since April 2014.
Expected Term
The expected term represents the period of time that options are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we have determined the expected life assumption for employee and director stock options using the comparable average expected term utilizing those companies in the peer group as noted above. For consultant stock options, we estimate the expected termcommencement date based on the period we expect each consultant to provide services to us.
Leases
Wepresent value of remaining lease all of our office space and enter into various other operating lease agreements in conducting our business. At the inception of each lease, we evaluatepayments over the lease agreement to determine whetherterm. As the Company’s leases do not provide an implicit rate, the Company has used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease is an operating or capital lease. Some of ourpayments. The right-of-use lease agreements may contain renewal options, tenant improvement allowances, rent holidays or rent escalation clauses. When such items are included in a lease agreement, we record a deferred rent asset or liability equal to the difference between the rent expense and future minimumincludes any lease payments due.made prior to commencement and excludes any lease incentives. The rentlease term used in estimating future lease payments may include options to extend when it is reasonably certain that the Company will exercise that option. Operating lease expense related to operating leases is recognized on a straight-line basis in the statements of operations over the term of each lease. In cases where our lessor grants us leasehold improvement allowances that reduce our rent expense, we capitalize the improvements as incurred and recognize deferred rent, which is amortized over the shorter of the lease term, subject to any changes in the lease or changes in expectations regarding the expected useful lifelease term. Variable lease costs such as common area costs and property taxes are expensed as incurred. Leases with an initial term of twelve months or less are not recorded on the improvements.balance sheet.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Accumulated other comprehensive income (loss) has been reflected as a separate component of stockholders’ equity in the accompanying consolidated balance sheets.
Foreign Currency TranslationConsolidated Balance Sheets and Transactions
The functional currencyconsists of each of our subsidiaries in the United Kingdom and China, both of which are currently inactive, is the local currency. Assets and liabilities of the subsidiaries are translated at the rate of exchange at the balance sheet date. Expenses are translated at the average exchange rates in effect during the reporting period. Gains and losses resulting from foreign currency translation are included in accumulated other comprehensive income in the accompanying consolidated balance sheets. Gains and losses resulting from foreign currency transactions are included in the consolidated statementsadjustments (net of operations, which to date have not been significant.tax).
Income Taxes
We account forThe Company is subject to corporate income taxes undertax laws and regulations in the U.S., Germany and Australia. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment in their application.
The Company utilizes the asset and liability method of accounting for income taxes which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the audited consolidated financial statements. Under this method, deferredDeferred income tax assets and liabilities are determined based on the basis of the differences between the financial statementsstatement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a changechanges in tax rates on deferred tax assets and liabilities is recognized in incomeoperations in the period that includes the enactment date.
We recognize net Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not some portion or the entire deferred tax assetsasset will not be realized. As of December 31, 2020, and December 31, 2019, the Company maintained a full valuation allowance against the balance of deferred tax assets.
It is the Company’s policy to provide for uncertain tax positions and the extent we believe these assets arerelated interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that we would be able to realize our deferredsustained upon examination by tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. As of December 31, 2018 and 2017, we maintained a full valuation allowance against our entire balance of deferred tax assets.
We record uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, managementauthorities. The Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related toaccrued on any unrecognized tax benefits if any, withinas a component of income tax expense, and any accrued interest and penalties are included within the related tax liability line.expense.
Net Loss Per Share
Basic net loss per share attributable to common stockholders is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of common shares and, if dilutive, common stock equivalents outstanding for the period determined using the treasury-stock method. Common stock equivalents are comprised of options outstanding under our stock option plan and warrants for the purchase of common stock. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to ourthe Company’s net loss position.
Potentially dilutive securities, not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive, are as follows:
|
| | | | | | | | |
| As of December 31, |
| 2018 | | 2017 | | 2016 |
Options to purchase common stock | 6,183,266 |
| | 6,083,482 |
| | 4,841,274 |
|
Warrants to purchase common stock | 240,620 |
| | 240,620 |
| | 240,620 |
|
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
Options to purchase common stock | 1,117,160 | | | 471,048 | |
Recently Issued and/or Adopted Accounting PronouncementsStandards
In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, "Leases," or ASU 2016-02. ASU 2016-02 will require that lease arrangements longer than 12 months result in an entity recognizing an asset and liability equal to the present value of the lease payments in the statement of financial position. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We will adopt ASU 2016-02 in 2019. The adoption of this guidance is expected to result in a significant increase in the total assets and liabilities reported on our consolidated balance sheets.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash," or ASU 2016-18. ASU 2016-18 provides guidance on the classification of restricted cash in the statements of cash flows. This ASU requires that our statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. We adopted this standard in the first quarter of 2018, and the adoption did not have any impact on our consolidated financial statements.
In MayJanuary 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation2017-04, "Intangibles-Goodwill and Other (Topic 718)350): Scope of Modification Accounting,” or ASU 2017-09. The amendments in this update provideSimplifying the Test for Goodwill Impairment." This guidance on determining which changes toeliminates Step 2 from the terms and conditions of share-based payment awards requiregoodwill impairment test, instead requiring an entity to apply modification accounting under Topic 718. Werecognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The Company adopted this standardASU, as required, in the first quarter ended March 31, 2020 on a prospective basis. The adoption of 2018, and the adoptionthis ASU did not have a significant impact on ourthe Company's consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, "Improvements to Non-employee Share-Based Payment Accounting," or ASU 2018-07. ASU 2018-07, which simplifies the accounting for non-employee share-based payment transactions, specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, and early adoption is permitted. We currently expect to adopt ASU 2018-07 in the first quarter of 2019. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, "“Fair Value Measurement - Disclosure Framework,Framework” (" or ASU 2018-13.") ASU 2018-13 modifies the disclosure requirements for fair value measurements. The amendments relate to disclosures regarding unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty, and are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments shouldmust be applied retrospectively to all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and earlyCompany adopted this ASU, as required, in the quarter ended March 31, 2020. The adoption is permitted. The Company is currently evaluating theof this ASU did not have a significant impact of ASU 2018-13 on the Company's disclosures.
consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements” ("ASU 2018-18"). ASU 2018-18, clarifies that elements of collaborative arrangements could qualify as transactions with customers in the scope of ASC 606. The Company adopted this ASU, as required, in the quarter ended March 31, 2020. The Company does not have any agreements that meet the definition of a collaboration arrangement at this time.
3. Other Financial InformationAccounting for the Transaction
PropertyBased on the exchange ratio of 17.17 shares of Vital common stock for each share of Immunic AG, immediately following the Transaction, former Vital stockholders owned approximately 11.75% of the capital stock of the combined organization on a fully diluted basis, and Equipmentformer Immunic AG stockholders owned approximately 88.25% of the capital stock of the combined organization on a fully diluted basis. At the closing of the Transaction, all shares of Immunic AG common stock then outstanding were exchanged for Vital common stock.
PropertyIn addition, pursuant to the terms of the Agreement, the Company, for accounting purposes, assumed all outstanding stock options to purchase 16,987 shares of Vital common stock and equipment, leasehold improvements,127,500 RSUs at the closing of the Transaction, after giving effect to the Reverse Stock Split. Since the exercise prices of the outstanding options to purchase common stock were less than the trading price on the day of the consummation of the Transaction, they were not included in the formula below in calculating the purchase price.
The tangible and intangible assets and liabilities of Vital acquired in the Transaction are recorded based on their fair values as of the completion of the Transaction, with the excess of the purchase consideration over the fair value of net assets assigned to and recorded as goodwill. The following summarizes the purchase price paid in the Transaction (amounts in thousands except share and per share amounts):
| | | | | |
Number of shares owned by Vital stockholders (1) | 1,059,269 | |
RSUs (2) | 127,500 | |
Total fully-diluted shares | 1,186,769 | |
Multiplied by the fair value per share of Vital common stock (3) | $ | 33.20 | |
Estimated purchase price | $ | 39,400 | |
(1)The number of shares of 1,059,269 represents the historical 42,369,694 shares of Vital common stock outstanding immediately prior to the closing of the Transaction, adjusted for the Reverse Stock Split.
(2)The number of RSUs of 127,500 represents the historical 5,100,000 Vital RSUs of which all have been issued to date to Vital former officers in 2019.
(3)Based on the last reported sale price of Vital common stock on the Nasdaq Global Market on April 12, 2019, the closing of the Transaction, adjusted for the Reverse Stock Split.
The following summarizes the allocation of the purchase price to the net tangible and intangible assets acquired:
| | | | | |
| (in thousands) |
Cash and cash equivalents | $ | 8,151 | |
Prepaid expenses and other assets | 307 | |
Supplies and working cell banks | 1,000 | |
Clinical development equipment | 306 | |
Other property and equipment | 30 | |
In-process research and development (“IPR&D”) | 764 | |
Accounts payable, accrued expenses and other liabilities | (4,128) | |
Goodwill | 32,970 | |
Purchase price | $ | 39,400 | |
The fair value of IPR&D was estimated based on the sales price of the ELAD Assets (including the present value of the promissory note issued by the ELAD buyer) less the fair value of the ELAD Assets. See Note 4 below for a description of the ELAD Assets transaction.
The goodwill of $32.97 million is not tax deductible. Goodwill is mainly attributable to the enhanced value of the combined company, as reflected in the increase in market value of the Vital common shares following the announcement of the Transaction with Immunic AG. The Company incurred costs directly related to the Transaction of approximately $10.0 million for the year ended December 31, 2019, which were expensed as incurred ($7.5 million of such costs were non-cash charges related to the 4SC settlement share issuances and the Immunic exit bonus shares as described below in Note 6 and Note 9, respectively).
4. ELAD Sales Agreement
In March 2019, Vital entered into an asset purchase agreement (the “Vital APA”) to sell certain of Vital’s clinical development-related assets and related accumulated depreciationintellectual property rights to RH Cell Therapeutics (the “Purchaser”) for approximately $2.5 million. The assets sold were clinical development equipment, supplies, intellectual property and amortization wereworking cell banks in addition to the equity interest in VTL China (collectively the “ELAD Assets”). The Purchaser deposited $1.1 million into escrow and paid the Company $50,000 prior to the Transaction. The Vital APA was amended and restated on May 28, 2019, to allow for two closings. In the first closing which occurred on May 28, 2019, the $1.1 million was released from escrow to the Company. In addition, the Purchaser executed a promissory note with a face amount of $1.325 million, which accrues simple interest of 10% per annum. The fair value of the promissory note was estimated to be $920,000. Therefore, the fair value of the ELAD Assets was based on the cash in escrow, the $50,000 deposit and the fair value of the promissory note.
The estimated fair value of the ELAD Assets was included in the purchase accounting allocation as follows (in thousands):
| | | | | |
Clinical development equipment | 306 | |
Supplies and working cell banks | 1,000 | |
In process research & development (“IPR&D”) | 764 | |
Total | $ | 2,070 | |
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
Manufacturing, clinical and laboratory equipment | $ | 6,480 |
| | $ | 7,500 |
|
Leasehold improvements | 4,627 |
| | 4,727 |
|
Office furniture and equipment | 105 |
| | 234 |
|
Construction in progress | — |
| | 17 |
|
| 11,212 |
| | 12,478 |
|
Less: accumulated depreciation and amortization | (10,503 | ) | | (10,323 | ) |
Total | $ | 709 |
| | $ | 2,155 |
|
Depreciation and amortization expense was $727,000, $998,000 and $1.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.
In the first closing, the Company transferred title of the clinical development equipment and supplies to the Purchaser. Also, the fair value of the promissory note was recorded as a note receivable and the fair value of the IPR&D and working cell banks assets were removed from the Company’s audited consolidated balance sheet.
The promissory note was paid in full upon the second closing on September 2018, we ceased substantially all4, 2019, at which time the Company transferred title to the intellectual property and working cell banks as well as its equity interest in VTL China. The difference of our development efforts related to ELAD. This resulted in a substantial change$405,000 between the $1.325 million face value of the promissory note collected and the fair value of $920,000 was recorded as other income in the expected use of our long-lived assets and a significant decrease in the benefits expected to be realized from these assets. Accordingly, we recognized an impairment charge of $1.2 million on our property and equipment in theaccompanying consolidated statements of operations for the year ended December 31, 2018 reflecting the difference in the carrying value2019. The Purchaser is not a related party.
5. Balance Sheet Details
Prepaid Expenses and Other Current Assets
Prepaid Expense and Other Current Assets consist of such property and equipment and its estimated fair value. The impairment charge is reflected as a reduction in the cost(in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Prepaid clinical and related costs | $ | 3,416 | | | $ | 1,307 | |
VAT receivable | 295 | | | 408 | |
Australian research and development tax incentive | 1,348 | | | 350 | |
Other | 1,234 | | | 796 | |
Total | $ | 6,293 | | | $ | 2,861 | |
Accounts Payable
Accounts Payable consist of the related assets.(in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Clinical costs | $ | 3,408 | | | $ | 1,981 | |
Legal and audit costs | 139 | | | 226 | |
Other | 153 | | | 216 | |
Total | $ | 3,700 | | | $ | 2,423 | |
Accrued Expenses
Accrued expenses consist of (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Accrued clinical and related costs | $ | 3,301 | | | $ | 2,863 | |
Accrued legal and audit costs | 114 | | | 211 | |
Accrued compensation | 658 | | | 0 | |
Accrued other | 245 | | | 224 | |
Total | $ | 4,318 | | | $ | 3,298 | |
Other Current Liabilities
Other Current Liabilities consist of (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Deferred income | $ | 0 | | | $ | 1,008 | |
Other | 379 | | | 343 | |
Total | $ | 379 | | | $ | 1,351 | |
Deferred income represents cash reimbursement on invoices received from third party billings, prior to the related services being performed.
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
Accrued clinical and related costs | $ | 1,336 |
| | $ | 5,377 |
|
Accrued compensation and related taxes | 543 |
| | 3,591 |
|
Accrued other | 342 |
| | 173 |
|
Total | $ | 2,221 |
| | $ | 9,141 |
|
4.6. Commitments and Contingencies
Operating LeasesLease
We leaseThe Company leases certain office manufacturing and research and development facilities, and equipmentspace under various non-cancellablenon-cancelable operating lease agreements with expiration dates into 2022. In August 2016, we entered into amendments to extend certainleases. The leases terminate on April 30, 2023 for the New York City office and research and development space to January 2019. These amended leases are being allowed to expire. In May 2017, we entered into a new lease, or the Lease, extending the term of our existing manufacturing and research and development facility lease from June 2017 to June 2022. The Lease includes a renewal option, provides for periodic rent increases and requires the payment of our proportionate share of the facility's operating expenses. Future minimum annual obligations under non-cancellable operating lease commitments at December 31, 2018 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter |
Operating lease obligations | $ | 1,511 |
| | $ | 469 |
| | $ | 387 |
| | $ | 434 |
| | $ | 221 |
| | $ | — |
| | $ | — |
|
We recognize rent expense for our facility operating leases on a straight-line basis. We account30, 2025 for the difference betweenGräfelfing, Germany office. The Company formerly leased office space in Martinsried, Germany pursuant to a modified lease that terminated on August 31, 2020. These leases include both lease (e.g., fixed rent) and non-lease components (e.g., common-area and other maintenance costs). The non-lease components are deemed to be executory costs and are therefore excluded from the minimum lease payments used to determine the present value of the operating lease obligation and related right-of-use asset. The New York City lease has renewal options but they were not included in calculating the right of use asset and liabilities. On April 7, 2020, the Company signed a five year lease for its new facility in Gräfelfing, Germany. Renewal options were not included in calculating the right of use asset and liabilities for this facility. The leases do not have concessions, leasehold improvement incentives or other build-out clauses. Further, the leases do not contain contingent rent provisions. The New York City lease had a six month rent holiday at the beginning of the lease. There were net additions to right of use assets of $427,000 as a result of signing the Gräfelfing lease and shortening the term of the Martinsried lease during the year ended December 31, 2020.
The leases do not provide an implicit rate and, due to the lack of a commercially salable product, the Company is generally considered unable to obtain commercial credit. Therefore, the Company estimated its incremental interest rate to be 6%, considering the quoted rates for the lowest investment-grade debt and the straight-line amount as deferred rent. Total rent, property taxesinterest rates implicit in recent financing leases. Immunic used its estimated incremental borrowing rate and routine maintenance expense under ourother information available at the lease commencement date in determining the present value of the lease payments.
Immunic’s operating leases was $1,120,000, $999,000lease costs and $993,000 duringvariable lease costs were $354,000 and $135,000 for the years ended December 31, 2018, 20172020 and 2016,2019, respectively. CurrentVariable lease costs consist primarily of common area maintenance costs, insurance and long-term deferred rent totaled $22,000 and $41,000 at December 31, 2018 and $91,000 and $59,000 at December 31, 2017, respectively.taxes which are paid based upon actual costs incurred by the lessor.
Contractual Commitments
In October 2018, we entered into an investment banking agreement, or the Engagement Agreement, with Ladenburg Thalmann & Co. Inc., or Ladenburg, pursuant to which Ladenburg is acting as our strategic financial advisor to assist in the review of our business and assets and exploration of strategic opportunities for enhancing stockholder value, including the potential sale or merger Maturities of the company. Under the Engagement Agreement,operating lease obligation are as compensation for the services provided by Landenburg, we shall pay, or cause to be paid, to Ladenburg, the following nonrefundable fees: (i) if we consummate a transaction, we shall pay Ladenburg a transaction fee of $1,000,000 (the “Transaction Fee”) at the closing of the transaction, (ii) a retainer fee of $75,000, which was paid in 2018 and is creditable against the Transaction Fee, and (iii) an opinion fee of $250,000 paid in 2019. In January 2019, we entered into an exchange agreement Immunic AG which, if completed, would result in the payment of the Transaction Fee to Ladenburg.
Purchase Commitments
We have no significant purchase commitmentsfollows as of December 31, 2018.2020 (in thousands):
| | | | | | | | |
2021 | | $ | 348 | |
2022 | | $ | 348 | |
2023 | | $ | 198 | |
2024 | | $ | 124 | |
2025 | | $ | 62 | |
Thereafter | | $ | 0 | |
Total lease payments | | $ | 1,080 | |
Less: interest portion | | $ | 107 | |
Present value of lease obligation | | $ | 973 | |
Contractual Obligations
As of December 31, 2020, the Company has non-cancelable contractual obligations under certain agreements related to its development programs IMU-838, IMU-935 and IMU-856 totaling approximately $1.2 million, all of which is expected to be paid in 2021.
Other Commitments and Obligations
In May 2016 the Company entered into a purchase agreement (the “Agreement”) with 4SC AG whereby the Company acquired certain assets, including the rights to patents and patent applications, trademarks and know-how. This transaction has been accounted for as an asset acquisition under Accounting Standards Update 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business. The Agreement included payments (Tranches III and IV) that were contingent upon the occurrence of certain events and required the Company to pay royalties equal to 4.4% of the aggregated net sales for a certain period as defined in the Agreement (Tranche III) upon commercialization of the acquired assets. Effective April 12, 2019, the parties agreed to settle Tranche IV by issuing 120,070 shares of the Company’s common stock, immediately following the Transaction, to 4SC AG while keeping Tranche III in effect. Approximately $1.5 million of expense was recorded as a result of
the issuance of these shares on April 12, 2019. No royalties are payable as of December 31, 2020 or 2019 as sales have not commenced.
Daiichi Sankyo Agreement
On January 5, 2020, the Company exercised its option to obtain the exclusive worldwide right to commercialization of IMU-856. Among other things, the option exercise grants Immunic AG the rights to Daiichi Sankyo’s patent application related to IMU-856. In connection with the option exercise, the Company paid a one-time upfront licensing fee to Daiichi Sankyo. Under the Daiichi Sankyo Agreement, Daiichi Sankyo is also eligible to receive future development, regulatory and sales milestone payments, as well as royalties related to IMU-856.
Legal Proceedings
We areThe Company is not currently a party to any litigation, nor are weis it aware of any pending or threatened litigation, against us, that we believeit believes would materially affect ourits business, operating results, financial condition or cash flows. However, ourits industry is characterized by frequent claims and litigation including securities litigation, claims regarding patent and other intellectual property rights and claims for product liability. As a result, in the future, wethe Company may be involved in various legal proceedings from time to time.
5.7. Fair Value
The following fair value hierarchy table presentspresent information about each major category of ourthe Company’s financial assets and liabilities measured at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurement at December 31, 2018 |
| Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Money market funds | $ | 12,940 |
| | $ | 12,940 |
| | $ | — |
| | $ | — |
|
| | | Fair Value Measurement at December 31, 2017 | | Fair Value Measurement at December 31, 2020 |
| Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | Assets | | | | | | | |
Money market funds | $ | 55,245 |
| | $ | 55,245 |
| | $ | — |
| | $ | — |
| Money market funds | $ | 39,615 | | | $ | 39,615 | | | $ | 0 | | | $ | 0 | |
| | | | Fair Value Measurement at December 31, 2019 |
| | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | Assets | | | | | | | |
Money market funds | | Money market funds | $ | 4,491 | | | $ | 4,491 | | | $ | 0 | | | $ | 0 | |
There were no liabilities measured at fair valuetransfers between Level 1, Level 2 or Level 3 assets during the periods presented.
For the Company’s money market funds, which are included as a component of cash and cash equivalents on a recurring basis asthe consolidated balance sheet, realized gains and losses are included in interest income (expense) on the consolidated statements of December 31, 2018 or 2017. operations.
The carrying amounts of other current assets and prepaid expenses, accounts payable, accrued expenses, and other current liabilities approximate their fair values due to their short-term nature.
For our The fair value and book value of the money market funds unrealized gains and lossespresented in the table above are reported as accumulated other comprehensive income (loss), and realized gains and losses are included in interest income on the consolidated statements of operations. We estimated the fair value of certain property and equipment based on third-party market value appraisals, and classified the fair value of such property and equipment as a Level 3 measurement due to the significance of the unobservable inputs. There were no transfers between Level 1, Level 2 or Level 3 for our assets or liabilities during the periods presented.same.
6.8. Common Stock and Preferred Stock Warrants(Converted into Common Stock)
Certificate of Incorporation
The material terms of our amended restated certificate of incorporation, which became effective as of the closing of our IPO, are as follows:
Authorized Shares
Our amended and restated certificate of incorporation authorizes us to issue 150,000,000 shares of stock consisting of 130,000,000 shares of common stock, par value of $0.0001 per share, and 20,000,000 shares of preferred stock, par value $0.0001 per share.
Dividends
Subject to preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.
Liquidation Preference
In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preferences that may be granted to the holders of any then outstanding shares of preferred stock.
Rights and Preferences
Holders of common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate and issue in the future.
Voting Rights
Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Our amended and restated certificate of incorporation and amended and restated bylaws do not provide for cumulative voting rights. Because of this absence of cumulative voting, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they should so choose. In addition, our amended and restated certificate of incorporation also provides that our directors may be removed only for cause by the affirmative vote of the holders of at least 75% of the combined voting power of all our stockholders entitled to vote on the election of directors, voting together as a single class.
Subject to supermajority votes for some matters, matters shall be decided by the affirmative vote of our stockholders having a majority in voting power of the votes cast by the stockholders present or represented and voting on such matter, provided that the holders of our common stock are not allowed to vote on any amendment to our certificate of incorporation that relates solely to the terms of one or more series of preferred stock if the holders of such affected series are entitled, either separately or together with the holders or one or more such series, to approve such amendment. The affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in any annual election of directors and, in some cases, the affirmative vote of a majority of minority stockholders entitled to vote in any annual election of directors, are required to amend or repeal our bylaws, amend or repeal certain provisions of our certificate of incorporation, approve certain transactions with certain affiliates, or approve the sale or liquidation of the company. The vote of a majority of minority stockholders applies when an individual or entity and its affiliates or associates together own more than 50% of the voting power of our then outstanding capital stock, excluding any such person that owned 15% or more of our outstanding voting stock immediately prior to our IPO, and such a vote would require the approval of the majority of our voting stock, excluding the voting stock held by such a majority holder.
Public Offerings of Common StockShelf Registration Statements
In May 2018, weVital filed a shelf registration statement on Form S-3, or the 2018(the “2018 Shelf Registration Statement,Statement”), which became effective in June 2018. The 2018 Shelf Registration Statement permits: (i)permits the offering, issuance and sale by us of up to a maximum aggregate offering price of $200.0 million of common stock, preferred stock, warrants, debt securities, and/or units in one or more offerings and in any combination; (ii) sales of up to 2.5 million shares of common stock by certain selling stockholders; and (iii)combination.
In November 2020, Immunic filed a shelf registration statement on Form S-3. The 2020 Shelf Registration Statement permits the offering, issuance and sale by usof up to $250.0 million of common stock, preferred stock, warrants, debt securities, and/or units in one or more offerings and in any combination of the foregoing.
In July 2019, the Company filed a Prospectus Supplement for the offering, issuance and sale of up to a maximum aggregate offering price of $60.0$40.0 million of our common stock that may be issued and sold under an “at-the-market”at-the-market sales agreement ("July 2019 ATM") with SVB Leerink LLC (“SVB Leerink”) as agent. The Company intends to use the net proceeds from the offering to continue to fund the ongoing clinical development of its product candidates and for other general corporate purposes, including funding existing and potential new clinical programs and product candidates. The July 2019 ATM will terminate upon the earlier of (i) the issuance and sale of all of the shares through SVB Leerink on the terms and subject to the conditions set forth in the July 2019 ATM or (ii) termination of the July 2019 ATM with Cantor Fitzgerald & Co. However, amounts availableas otherwise permitted thereby. The July 2019 ATM may be terminated at any time by either party upon ten days’ prior notice, or by SVB Leerink at any time in certain circumstances, including the occurrence of a material adverse effect on the Company.As of December 31, 2020, $23.3 million in capacity remains under the shelf registration statement are significantly limitedJuly 2019 ATM.
In December 2020, the Company filed another Prospectus Supplement for the offering, issuance and sale of up to a maximum aggregate offering price of $50.0 million of common stock that may be issued and sold under another at-the-market sales agreement ("December 2020 ATM") with SVB Leerink as longagent. The Company intends to use the net proceeds from the offering to continue to fund the ongoing clinical development of its product candidates and for other general corporate purposes, including funding existing and potential new clinical programs and product candidates. The December 2020 ATM will terminate upon the earlier of (i) the issuance and sale of all of the shares through SVB Leerink on the terms and subject to the conditions set forth in the December 2020 ATM or (ii) termination of the December 2020 ATM as our our public floatotherwise permitted thereby. The December 2020 ATM may be terminated at any time by either party upon ten days’ prior notice, or by SVB Leerink at any time in certain circumstances, including the occurrence of a material adverse effect on the Company.As of December 31, 2020, $50.0 million in capacity remains below $75.0 million.
Under our prior registration statement filed on Form S-3 in May 2015, or the 2015 Shelf Registration Statement, we completed follow-on public offerings in March 2017 and October 2015, and under the ATM in 2017December 2020 ATM.
The Company has agreed to pay SVB Leerink a commission equal to 3.0% of the gross proceeds from the sales of common shares pursuant to both ATM's and 2016. We did not sell any shares under the 2018 or 2015 Shelf Registration Statements duringhas agreed to provide SVB Leerink with customary indemnification and contribution rights.
For the year ended December 31, 2018. The 2015 Shelf Registration Statement was replaced by2020, the 2018 Shelf Registration Statement in June 2018.
In March 2017, we completed follow-on public offering under the 2015 Shelf Registration statement raising gross proceeds of $40.3 million. Under this follow-on public offering, we sold 10.1 million shares of our common stock at a price of $4.00 per share. The net proceeds to us from the March 2017 follow-on offering were $37.5 million, after deducting underwriting discounts and commissions of $2.4 million and offering expenses of approximately $362,000. During the year ended December 31, 2017, we alsoCompany raised gross proceeds of $600,000 pursuant to the ATM selling 100,000 shares of our common stock at a price of $6.00 per share. The net proceeds to us from the ATM were $468,000 after deducting underwriter commissions of $18,000 and estimated offering expenses of $114,000.
During the year ended December 31, 2016, we raised gross proceeds of $12.2$11.3 million pursuant to the July 2019 ATM selling 1.5 millionthrough the sale of 733,728 shares of our common stock at a weighted average price of $7.90$15.42 per share. The net proceeds to us from the July 2019 ATM were $11.7$11.0 million after deducting underwriter commissions of $366,000$339,356.
For the year ended December 31, 2019, the Company raised gross proceeds of $5.4 million pursuant to the July 2019 ATM through the sale of 630,907 shares of common stock at a weighted average price of $8.49 per share. The net proceeds from the July 2019 ATM were $4.9 million after deducting underwriter commissions of $161,000 and estimated offering expenses of $173,000.$305,000. As of December 31, 2019, there was $34.6 million available under the July 2019 ATM.
Public Equity Offerings
April 2020 Registered Direct Offering
On April 23, 2020, the Company entered into an engagement letter with ROTH Capital Partners, LLC ("RCP") relating to the Company’s registered direct offering of Common Stockcommon stock to select institutional investors. Pursuant to this agreement, the Company agreed to pay RCP a cash fee of 6.5% of the gross proceeds from the offering raised from investors and to reimburse RCP for certain costs incurred in connection therewith.
In August 2016, weaddition, on April 23, 2020, the Company and the investors entered into a securities purchase agreement orrelating to the Securities Purchase Agreement, with a newly-appointed board member pursuant to which we agreed to issueissuance and sellsale of an aggregate of $700,0001,764,706 shares of our common stock instock. The purchase price per share was $8.50 for aggregate gross proceeds to the Company of approximately $15.0 million.
The net proceeds to the Company from this offering, after deducting the Company’s offering expenses, were approximately $13.9 million.
June 2020 Offering
On June 10, 2020, the Company entered into a private placement agency agreement with RCP and Ladenburg Thalmann & Co. Inc. relating to the Company’s public offering of 2,175,000 shares that have not been registered underof common stock. Pursuant to this agreement, the Securities ActCompany agreed to pay the placement agents a cash fee of 1933, or6.5% of the Securities Act, by reason of a specific exemptiongross proceeds from the registration provisionsoffering raised from investors and to reimburse the placement agents for certain costs incurred in connection therewith.
In addition, on June 10, 2020, the Company and certain institutional investors entered into securities purchase agreements relating to the issuance and sale of an aggregate of 2,175,000 shares of the Securities Act. Company’s common stock. The purchase price per share in the Offering was $11.40 for aggregate gross proceeds to the Company of approximately $25.0 million.
The net proceeds to the Company from this offering, after deducting the Company’s offering expenses, were approximately $23.0 million.
August 2020 Offering
On August 12, 2016, we sold 118,2434, 2020, the Company entered into an underwriting agreement with SVB Leerink LLC, as representative of the several underwriters in connection with the Company’s public offering of 5,000,000 shares of common stock, under the Securities Purchase Agreement at a public offering price of $5.92$18.00 per share. Under the terms of the Underwriting Agreement, the Company granted the Underwriters an option, exercisable for 30 days, to purchase up to an additional 750,000 shares of Common Stock at the public offering price, less underwriting discounts and commissions, which was exercised in full on August 6, 2020.
On August 7, 2020, the Company closed the Offering. The net proceeds to the Company from the Offering, after giving effect to the exercise in full by the Underwriters of their option to purchase the Option Shares, was approximately $96.5 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.
Stock Subscription Not Yet Issued
On March 27, 2019, stockholders of the Company resolved to increase the Company’s share capital by an additional 156,920 ordinary shares, par value €1.00 per share, of which 27,176 shares related to bonuses for executive officers of the Company. Under German law a capital increase is valid as soon as the consummation of the capital increase has been officially registered with the commercial register, which occurred on April 3, 2019. Therefore, the capital increase became effective subsequent to March 31, 2019.
Common Stock Issued for Services
In October 2017, we entered into an independent consulting agreement, or the Consulting Agreement, with two consulting groups, or the Consultants, pursuant to which we issued 60,000 restrictedImmunic AG, a non-public company as of December 31, 2018, had authorized 846,953 shares of our common stock, par value €1.00 per share, which were issued in March 2016 for approximately $56,000.
As of December 31, 2020, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 130,000,000 shares of common stock, par value of $0.0001.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any. Through December 31, 2020, 0 cash dividends had been declared or paid.
Preferred Stock
From inception (2016) through 2018, Immunic AG issued 13,541 Series A-1 Convertible and 299,456 Series A-2 Convertible preferred shares, par value €1.00 per share, to investors as part of its growth financing plan in the total amount of €31.7 million (approximately $37.2 million). Series A-1 Convertible and Series A-2 Convertible preferred shares were converted into Immunic AG’s ordinary shares immediately prior to the Consultants as partial considerationTransaction and were then exchanged for investor relations services to be rendered. The restricted shares were not registered based on a specific exemption from the registration requirements of the Securities Act. We had the right to terminate this agreement for any reason within 180 days following the effective date, whereby each of the Consultants would have been required to promptly surrender to us 40% of the number of restricted shares issued to it. In connection with this transaction, we valued 36,000 shares, or 60% of theImmunic (former Vital) common shares at the quoted market price of $207,000, or $5.75, per share, on the dateconsummation of the agreement. Transaction.
The remaining 24,000Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue 20,000,000 shares of $0.0001 par value preferred stock, rights and preferences to be set by the board of directors. NaN preferred shares were adjusted to fair value based on the closing price at the endoutstanding as of each reporting period with the expense being recorded ratably over the 180-day period. We recognized expense in connection with these consulting shares of $115,000 and $256,000 during the year ended December 31, 2018 and 2017, respectively, in general and administrative expenses.2020.
Stock Warrants
WeThe Company issued warrants to purchase common stock in connection with financing activities and for consulting services in years prior to our initial public offering. As of December 31, 2018 and 2017, warrants2011. Warrants for 240,6206,015 shares of common stock were outstanding and exercisable at an exercise price of $92.99 and expire in$3,719.60 expired on September 25, 2019.
Stock Reserved for Future Issuance
Shares reserved for future issuance atas of December 31, 20182020 are as follows:
|
| | | | |
| Number of
Shares |
Common stock options outstandingreserved for issuance for: | 6,183,266 |
|
Outstanding stock options | 1,117,160 | |
Common stock options available for future grant: |
|
|
2014 Equity Incentive Plan | 2,813,21843,311 |
|
2017 Inducement Equity Incentive Plan | 261,16846,250 |
|
Common stock reserved for issuance for outstanding warrants2019 Omnibus Equity Incentive Plan | 240,620831,474 |
|
Total common shares reserved for future issuance | 9,498,2722,038,195 |
|
7.
9. Stock Compensation Plans
Stock Option Programs
Under German law, (i) a company’s management board consists of employee members and is responsible for overseeing its daily business, and (ii) a company’s supervisory board supervises the management board and serves a role equivalent to the board of directors of an American corporation. Under two stock option programs, the Company granted stock options to the members of the Immunic AG supervisory board (the “Supervisory Board”) and to key employees in 2018 and in 2019 prior to the Transaction. The programs were intended to incentivize the beneficiaries to dedicate their working capabilities in the best manner possible to the benefit of the Company. The stock options vest if and when an exit event occurs. An exit event is defined as a direct initial public offering has taken place, or an indirect initial public offering has taken place, or a trade sale has been consummated, or a disposal of the Company’s assets has been consummated, or another financially equivalent realization event has occurred.
Under the stock option program for the members of the Supervisory Board (the “VSOP SB”), the Company granted stock options of the Company to members of the Company’s Supervisory Board for the time period of their service as members of the Supervisory Board. The shareholders’ approved the VSOP SB with a total of 31,593 stock options, corresponding to approximately 0.5% of the Company’s issued share capital at the time of the decision. Under the stock option program for key employees (the “VSOP”), the Company granted stock options of the Company to certain key employees. With the approval of the Supervisory Board, Immunic AG’s management board determined how many stock options were granted and how they were allocated to the respective beneficiaries up to a total of 31,593.
Further terms and conditions of both programs, the VSOP SB and the VSOP, were substantially similar. The following information is therefore shown aggregated for both programs. The Company accounts for both programs as cash-settled options and classifies their fair value as a liability upon vesting. Vesting of options granted under the VSOP SB and VSOP was contingent upon an exit event. Upon consummation of the Transaction, which occurred on April 12, 2019, all of the awards vested and were settled for cash of $508,000 based on their fair value. As a result, the Company recorded $508,000 in compensation expense related to these stock options in the twelve months ended December 31, 2019.
In July 2019, the Company’s stockholders approved the 2019 Omnibus Equity Incentive Plan (the “2019 Plan”) which was adopted by the Board with an effective date of June 14, 2019. The 2019 Plan allows for the grant of equity awards to employees, consultants and non-employee directors. An initial maximum of 1,500,000 shares of the Company’s common stock are available for grant under the 2019 Plan. The 2019 Plan includes an evergreen provision that allows for the annual addition of up to 4% of the Company’s fully-diluted outstanding stock, with a maximum allowable increase of 4,900,000 shares over the term of the 2019 Plan. In accordance with this provision, the shares available for grant were increased by 448,634 shares effective April 1, 2020. The 2019 Plan is currently administered by the Board, or, at the discretion of the Board, by a committee of the Board, which determines the exercise prices, vesting schedules and other restrictions of awards under the 2019 Plan at its discretion. Options to purchase stock may not have an exercise price that is less than the fair market value of underlying shares on the date of grant, and may not have a term greater than ten years. Incentive stock options granted to employees typically vest over four years. Non-statutory options granted to employees, officers, members of the Board, advisors, and consultants of the Company typically vest over three or four years.
Shares that are expired, terminated, surrendered or canceled under the 2019 Plan without having been fully exercised will be available for future awards.
Movements during the year
The following table illustrates the number and weighted average exercise prices of, and movements in, stock options for the VSOP SB and VSOP during the year ended December 31, 2019. There were no awards granted or outstanding after the awards settled in 2019:
| | | | | | | | | | | | | | | | | |
| | | 2019 |
| | | | | Unvested Awards | | Weighted-Average Fair Value |
Outstanding as of January 1 | | | | | 6,937 | | | $ | 12.87 | |
Granted during the period | | | | | 32,177 | | | $ | 12.87 | |
Forfeited during the period | | | | | 0 | | | $ | 0 | |
Settled in cash during the period | | | | | (39,114) | | | $ | 12.87 | |
Expired during the period | | | | | 0 | | | $ | — | |
Outstanding at December 31 | | | | | 0 | | | $ | 0 | |
Exercisable at December 31 | | | | | 0 | | | $ | — | |
NaN expense was recognized during the year ended December 31, 2020. There was $508,000 of expense recognized in 2019 upon the vesting of the awards as a result of closing the Transaction. There were no cancellations or modifications to the awards in 2019.
The following table summarizes stock option activity since January 1, 2019 under the 2019 Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding as of January 1, 2019 | 0 | | | $ | 0 | | | | | |
Granted | 456,645 | | | $ | 12.57 | | | | | |
Exercised | 0 | | | $ | 0 | | | | | |
Forfeited or expired | 0 | | | $ | 0 | | | | | |
Outstanding as of December 31, 2019 | 456,645 | | | $ | 12.57 | | | 9.63 | | $ | 114,399 | |
Options vested and expected to vest as of December 31, 2019 | 456,645 | | | $ | 12.57 | | | 9.63 | | $ | 114,399 | |
Options exercisable as of December 31, 2019 | 31,956 | | | $ | 13.00 | | | 9.59 | | $ | 3,382 | |
| | | | | | | |
| Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding as of January 1, 2020 | 456,645 | | | $ | 12.57 | | | | | |
Granted | 744,406 | | | $ | 13.24 | | | | | |
Exercised | 0 | | | $ | 0 | | | | | |
Forfeited or expired | (83,891) | | | $ | 13.32 | | | | | |
Outstanding as of December 31, 2020 | 1,117,160 | | | $ | 12.96 | | | 9.24 | | $ | 2,894,754 | |
Options vested and expected to vest as of December 31, 2020 | 1,117,160 | | | $ | 12.96 | | | 9.24 | | $ | 2,894,754 | |
Options exercisable as of December 31, 2020 | 263,507 | | | $ | 13.04 | | | 8.92 | | $ | 661,952 | |
| | | | | | | |
Measurement
The fair value of the Company’s stock for purposes of determining the exercise price of options granted under the VSOP for the year ended December 31, 2019 was $12.87, which was determined based on prices negotiated with investors participating in the Financing as noted above. The fair value of the zero-cost VSOP SB and the VSOP options was equal to the fair value of the underlying stock.
The weighted-average assumptions used in the BSM option pricing model to determine the fair value of the employee and non-employee stock option grants relating to the 2019 Plan were as follows:
Risk-Free Interest Rate
The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the stock options.
Expected Dividend Yield
The Company has not issued any dividends and does not expect to issue dividends over the life of the options. As a result, the Company has estimated the dividend yield to be zero.
Expected Volatility
Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company estimates expected volatility based on the historical volatility of a group of comparable companies that are publicly
traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.
Expected Term
The expected term of options is estimated considering the vesting period at the grant date, the life of the option and the average length of time similar grants have remained outstanding in the past.
The weighted-average grant date fair value of stock options granted under the 2019 Plan during the years ended December 31, 2020 and 2019 was $9.50 and $8.28, respectively. The following are the underlying assumptions used in the Black-Scholes-Merton option pricing model to determine the fair value of stock options granted to employees and to non-employees under this stock plan:
| | | | | | | | |
| 2020 | 2019 |
Risk-free interest rate | 0.42% | 1.71% |
Expected dividend yield | 0% | 0% |
Expected volatility | 88.5% | 75.3% |
Expected term of options (years) | 5.8 | 5.9 |
Early Exit Bonus Share Agreement (Anti-Dilution Adjustment)
In accordance with an Early Exit Bonus Share Agreement (Anti-Dilution Adjustment) between the shareholders of Immunic AG dated August 2017, each of the four members of the Management Board of Immunic AG, through a limited liability company controlled by the respective board member, received new shares in Immunic AG as a form of anti-dilution protection. The AG shares were subscribed by the Management Board members at a price corresponding to their nominal value in the course of the Additional Financing of Immunic AG, which was carried out in March 2019. As part of the closing of the share exchange with Vital, Therapies, Inc., now Immunic, Inc., in April 2019, the AG shares were exchanged for 460,336 restricted shares in with Vital, Therapies, Inc., now Immunic, Inc., which were issued to the members of the management Board. Upon consummation of the Transaction, compensation cost of €5.3 million (approximately $6.0 million) was recognized.
Stock-Based Compensation Expense
Total stock-based compensation expense for all stock awards recognized in the accompanying audited consolidated statements of operations is as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
Research and development | $ | 731 | | | $ | 1,824 | |
General and administrative | 2,016 | | | 6,736 | |
Total | $ | 2,747 | | | $ | 8,560 | |
As of December 31, 2020 there was $7.0 million in total unrecognized compensation expense relating to the 2019 Plan to be recognized over a weighted average period of 2.72 years. General and administrative expenses for the year ended December 31, 2019 include $6.0 million of stock compensation expense related to the Early Exit Bonus Share Agreement disclosed above. Research and development expense for the year ended December 31, 2019 includes $1.5 million of stock compensation expense as a result of the settlement of Tranche IV with 4SC AG as explained in Note 6.
Summary of Equity Incentive Plans Assumed from Vital
OurUpon completion of the Transaction with Vital on April 12, 2019, Vital’s 2012 Stock Option Plan (the “2012 Plan”), Vital’s 2014 Equity Incentive Plan (the “2014 Plan”) and Vital’s 2017 Inducement Equity Incentive Plan (the “Inducement Plan”), were assumed by the Company. All awards granted under these plans have either been forfeited or the 2014 Plan, became effective in April 2014 and replaced our 2012 Stock Option Plan, or the 2012 Plan, with respect to future awards. The 2014 Plan provides for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards and performance units to employees, directors, and consultants. The 2012 Plan provided for the grant of stock options, restricted stock, restricted stock units, stock purchase rights, and performance awards to employees, directors, and consultants.expired.
There remain 43,311 shares available for grant under the 2014 Plan include any shares remaining available or becoming available in the future under the 2012 Plan due to cancellation or forfeiture. In addition, the 2014 Plan provides for annual increases in the number of shares available for issuance thereunder beginning upon its effective date in April 2014, and on each annual anniversary, equal to the lower of:
1,200,000 shares of our common stock;
3% of the outstanding shares of our common stock on the second-to-the-last day prior to each anniversary date of the effectiveness date of our initial public offering; or
an amount as our board of directors may determine.
Pursuant to such provisions, the number of shares available for issuance under the 2014 Plan was increased by 1,200,000 shares effective April 16, 2018. Shares available for grant under the 2014 Plan totaled 2,813,218 shares as of December 31, 2018.
2020.
In September 2017, ourVital’s board of directors approved the 2017 Inducement Equity Incentive Plan, andwhich was amended and restated the plan in November 2017, or the Inducement Plan, which has terms and conditions substantially similar to our 2014 Plan.2017. Under the Inducement Plan 1,850,00046,250 shares of ourVital’s common stock were reserved to be used exclusively for non-qualified grants to individuals who were not previously our employees or directors as an inducement material to the individual’sa grantee's entry into employment with us within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. During
No expense was recorded for the twelve monthsplans assumed from Vital during the years ended December 31, 2018, we granted options to purchase 1,699,636 shares of our common stock under the Inducement Plan2020 and 110,804 shares were forfeited or cancelled, leaving 261,168 shares available for grant under the Inducement Plan.2019.
Option grants made under the 2014 Plan and the 2012 Plan generally vest over one year or ratably over four years, except for performance-based stock options. Our performance-based stock options were set to become fully vested and exercisable only on achievement of the performance conditions while the participant was a continuing service provider. Options currently outstanding under the Inducement Plan become 25% vested on the one year anniversary of the grant date and then vest ratably over an additional three years or ratably over four years. Options generally expire ten years from the grant date or earlier in accordance with the terms of the plans and the related stock option agreement.
In 2015, the Board approved grants for performance-based stock options to certain employees and consultants under the 2014 Plan. Performance-based stock options that had not been forfeited would have fully vested on the third anniversary of the grant date if (i) our VTL-308 clinical trial had achieved statistical significance in its primary efficacy endpoint and (ii) the participant was a continuing service provider through the third anniversary of the grant date (as such terms are defined in the 2014 Plan). Prior to the announcement of the VTL-308 clinical trial results, we deemed the performance conditions as being probable and recorded stock-based compensation expense over the requisite service period for all performance-based stock options held by employees of $357,000 for the twelve months ended December 31, 2018. In September 2018, we announced that the VTL-308 clinical trial failed to achieve its primary efficacy endpoint. Accordingly, the performance conditions of the performance-based stock options were not met. In connection with this determination, we recorded a reversal of stock-based compensation expense of $1.7 million, including $873,000 to research and development expense and $862,000 to general and administrative expense in the consolidated statements of operations for the year ended December 31, 2018.
The following table summarizes stock option activity since January 1, 2019 under the 2012plans assumed from Vital:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding as of January 1, 2019 | 0 | | | $ | 0 | | | | | |
Assumed in the Transaction with Vital | 17,117 | | | $ | 306.99 | | | | | |
Granted | 0 | | | $ | 0 | | | | | |
Exercised | 0 | | | $ | 0 | | | | | |
Forfeited or expired | (2,714) | | | $ | 312.18 | | | | | |
Outstanding as of December 31, 2019 | 14,403 | | | $ | 306.01 | | | 2.58 | | $ | 0 | |
Options vested and expected to vest as of December 31, 2019 | 14,403 | | | $ | 306.01 | | | 2.58 | | $ | 0 | |
Options exercisable as of December 31, 2019 | 14,403 | | | $ | 306.01 | | | 2.58 | | $ | 0 | |
| | | | | | | |
| Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding as of January 1, 2020 | 14,403 | | | $ | 306.01 | | | | | |
Granted | 0 | | | $ | 0 | | | | | |
Exercised | 0 | | | $ | 0 | | | | | |
Forfeited or expired | (14,403) | | | $ | 306.01 | | | | | |
Outstanding as of December 31, 2020 | 0 | | | $ | 0 | | | | | |
Options vested and expected to vest as of December 31, 2020 | 0 | | | $ | 0 | | | 0.00 | | $ | 0 | |
Options exercisable as of December 31, 2020 | 0 | | | $ | 0 | | | 0.00 | | $ | 0 | |
| 0 | | | $ | 0 | | | 0.00 | | $ | 0 | |
| | | | | | | |
In an effort to maximize the cash on Vital’s balance sheet for the Transaction, Vital restructured existing change of control and
2014 Plans andseverance agreements with certain of its executive officers in January 2019. At the
2017 Inducement Plan: |
| | | | | | | | | | | | |
| Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (In thousands) |
Outstanding as of January 1, 2018 | 6,083,482 |
| | $ | 6.76 |
| | | | |
Granted | 2,815,900 |
| | $ | 6.05 |
| | | | |
Exercised | (830 | ) | | $ | 5.35 |
| | | | |
Forfeited and expired | (2,715,286 | ) | | $ | 6.60 |
| | | | |
Outstanding as of December 31, 2018 | 6,183,266 |
| | $ | 6.51 |
| | 5.6 | | $ | — |
|
Options vested and expected to vest as of December 31, 2018 | 5,599,448 |
| | $ | 6.57 |
| | 5.2 | | $ | — |
|
Options exercisable as of December 31, 2018 | 3,908,151 |
| | $ | 6.80 |
| | 3.6 | | $ | — |
|
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of our common stock for those shares that had exercise prices lower than the fair value of our common stock as of December 31, 2018. The number of options vested and expected to vest is calculated as the total number of options vested plus the number of unvested options remaining after applying our estimated forfeiture rate.
The following table summarizes information about stock options (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
Aggregate intrinsic value of options exercised | $ | 2 |
| | $ | 10 |
| | $ | 39 |
|
We have not capitalized any stock based-compensation into the cost of inventory nor have we recognized an income tax benefit from the exercise of any stock options as we continue to record a full valuation allowance on our deferred tax assets.
Stock-based Compensation Expense
The weighted-average grant date fair value of stocksame time, Vital canceled options granted to employeessuch officers and directors duringgranted them a total of 127,500 RSUs. The primary effect of the years ended December 31, 2018, 2017amendments and 2016the RSU grants was $4.26, $2.34 and $5.70, respectively. The following are the rangesto substitute stock awards for cash payments owed upon a change of underlying assumptions used to determine the fair value of stock options granted to employees and non-employees:
|
| | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Employees and Directors: | | | | | |
Risk-free interest rate | 2.0% - 2.5% |
| | 1.5% - 2.0% |
| | 1.5% - 1.7% |
|
Expected dividend yield | — | % | | — | % | | — | % |
Expected volatility | 80% - 82% |
| | 82% - 85% |
| | 77% - 86% |
|
Expected term of options (years) | 5.9 - 6.2 |
| | 5.9 - 6.1 |
| | 5.9 - 6.0 |
|
Range of common stock value | $0.45 - $8.00 |
| | $2.75 - $5.80 |
| | $5.90 - $8.97 |
|
|
| | | | | | | | |
Non-Employees: | | | | | |
Risk-free interest rate | 2.1% - 3.0% |
| | 1.0% - 2.1% |
| | 0.5% - 1.9% |
|
Expected dividend yield | — | % | | — | % | | — | % |
Expected volatility | 71% - 82% |
| | 66% - 84% |
| | 77% - 97% |
|
Expected term of options (years) | 0.1 - 9.3 |
| | 0.5 - 4.5 |
| | 0.2 - 5.5 |
|
Range of common stock value | $0.19 - $6.85 |
| | $2.90 - $5.95 |
| | $4.35 - $9.07 |
|
control.The following tables summarizeRSUs vested in full upon consummation of the allocation of stock-based compensation expense to employees and non-employees (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Employees and Directors: | | | | | |
Research and development | $ | 364 |
| | $ | 1,645 |
| | $ | 1,758 |
|
General and administrative | 3,160 |
| | 3,742 |
| | 2,751 |
|
Total | $ | 3,524 |
| | $ | 5,387 |
| | $ | 4,509 |
|
|
| | | | | | | | | | | |
Non-Employees: | | | | | |
Research and development | $ | 81 |
| | $ | 93 |
| | $ | 153 |
|
General and administrative | 131 |
| | — |
| | 16 |
|
Total | $ | 212 |
| | $ | 93 |
| | $ | 169 |
|
Transaction. As of December 31, 2018, there was $7.5 million of total compensation cost related to unvested employee stock option awards not yet recognized. Stock-based compensation expense for employee stock option awards is expected to be recognized over a remaining weighted-average vesting period of 2.7 years, respectively.2019, all RSUs were settled.
8.10. Income Taxes
Our netNet loss before income tax was subject to tax in the following jurisdictions for the following periods (in thousands):
| | | | | | | | | | | | | | |
| Years Ended December 31, |
0 | 2020 | | 2019 | |
United States | $ | (8,681) | | | $ | (20,258) | | |
Germany | (33,617) | | | (23,674) | | |
Foreign | (1,719) | | | (827) | | |
| $ | (44,017) | | | $ | (44,759) | | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
United States | $ | (41,467 | ) | | $ | (52,066 | ) | | $ | (40,929 | ) |
Foreign | (8 | ) | | (12 | ) | | (40 | ) |
| $ | (41,475 | ) | | $ | (52,078 | ) | | $ | (40,969 | ) |
OurThe rate reconciliation consists of the following:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 |
Federal statutory rate | 21.0 | % | | 21.0 | % |
State tax (net of federal benefit) | 0.0 | % | | 0.0 | % |
Foreign rate differential | 3.0 | % | | 3.3 | % |
Stock options | (0.9) | % | | (1.1) | % |
| | | |
Tax effect of rate change | (1.9) | % | | 0.0 | % |
Other | (0.9) | % | | (3.0) | % |
Change in valuation allowance | (20.3) | % | | (20.2) | % |
Effective tax rate | 0.0 | % | | 0.0 | % |
|
| | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
Federal statutory rate | 21.0 | % | | 35.0 | % | | 35.0 | % |
State tax (net of federal benefit) | 0.0 | % | | 0.0 | % | | 0.1 | % |
Effects of U.S. tax rate change | 0.0 | % | | (47.6 | )% | | 0.0 | % |
Federal and state tax credits | 0.2 | % | | 46.8 | % | | 2.9 | % |
Uncertain tax positions | 0.0 | % | | (5.3 | )% | | (16.0 | )% |
Stock options | (1.6 | )% | | (1.4 | )% | | (1.5 | )% |
Other | (0.3 | )% | | (0.2 | )% | | (2.5 | )% |
Change in valuation allowance | (19.3 | )% | | (27.3 | )% | | (18.0 | )% |
Effective tax rate | 0.0 | % | | 0.0 | % | | 0.0 | % |
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As tax laws and rates change, deferred tax assets and liabilities are adjusted through income tax expense.
On December 22, 2017, H.R. 1/Public Law No. 115-97 known as the Tax Cuts and Jobs Act, There is no current or the Tax Act, was signed into law. The effects of this new federal legislation are recognized upon enactment, which is the date a bill is signed into law. The Act included numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21% effective on January 1, 2018. As a result of the Tax Act, we revalued our net deferred tax assets as of December 31, 2017 to reflect the rate reduction and recorded a reduction in our net deferred tax assets of $24.8 million. However, the revaluation did not result in any change to net income tax expense as our net deferred tax assets are fully offset by a valuation allowance. As ofin the years ended December 22, 2018, the Company’s accounting for the remeasurement of its deferred tax assets31, 2020 and liabilities was complete and there were no changes to the amount previously recorded.2019, respectively.
Significant components of ourthe Company's net deferred tax assets are shown below. A valuation allowance has been established as realization of such net deferred tax assets has not met the more likely-than-not threshold requirement. If ourthe Company's judgment changes and it is determined that wethe Company will be able to realize these net deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on the net deferred tax assets will be accounted for as a reduction to income tax expense.
| | | December 31, | | December 31, |
| 2018 | | 2017 | | 2020 | | 2019 |
| (in thousands) | | (in thousands) |
Deferred tax assets: | | | | Deferred tax assets: | |
Net operating loss carryforwards | $ | 44,540 |
| | $ | 43,600 |
| Net operating loss carryforwards | $ | 17,369 | | | $ | 16,357 | |
Federal and state tax credits | 43,701 |
| | 35,903 |
| Federal and state tax credits | 0 | | | 0 | |
Stock-based compensation | 2,538 |
| | 2,371 |
| Stock-based compensation | 125 | | | 0 | |
Foreign net operating loss carryforwards | 122 |
| | 169 |
| Foreign net operating loss carryforwards | 18,998 | | | 12,237 | |
Other, net | 955 |
| | 1,809 |
| Other, net | 30 | | | 72 | |
Total deferred tax assets | 91,856 |
| | 83,852 |
| Total deferred tax assets | 36,522 | | | 28,666 | |
Deferred tax liabilities: | | Deferred tax liabilities: | |
Property, plant and equipment | | Property, plant and equipment | (5) | | | (311) | |
Total deferred tax liability | | Total deferred tax liability | (5) | | | (311) | |
Net deferred tax assets | | Net deferred tax assets | 36,517 | | | 28,355 | |
Less valuation allowance | (91,856 | ) | | (83,852 | ) | Less valuation allowance | (36,517) | | | (28,355) | |
| $ | — |
| | $ | — |
| | $ | 0 | | | $ | 0 | |
We have
The Company has incurred net operating losses each year since inception due to ourits history as a development stage company with no realized revenues from ourits planned principal operations. These cumulative operating losses provide significant negative evidence in the determination of whether or not wethe Company will be able to realize our deferred tax assets such as our net operating losses and other favorable temporary differences. There can be no assurance that weit will ever generate taxable income. As a result, we havethe Company has maintained a full valuation allowance against the entire balance of ourits net deferred tax assets since the date of inception. The valuation allowance has increased by $8.0$6.8 million and $14.2$23.7 million for the years ended December 31, 20182020 and 2017,2019, respectively.
In 2017, we made the decision to amend our federal tax returns to claim an orphan drug credit for the tax periods from 2013 through 2016. As a result, before consideration of any uncertain tax positions, we recorded orphan drug credit carryforwards of $34.2 million and reductions to our federal research and development credit and NOL carryforwards of $4.5 million and $7.3 million, respectively, in 2017.
As of December 31, 2018, we2020, Immunic had available net operating loss, orNOLs of approximately $75.7 million in Germany and Australia. These NOLs do not expire.
The U.S. federal NOL carryforwards of approximately $208.6$15.6 million and $203.0 million for federal and state income tax purposes, respectively. These state NOL carryforwards include $191.1 million in California NOL carryforwards generated in 2013 through 2017, which have been determined to be uncertain tax positions and, accordingly, are not included in our deferred tax assets. The federal NOL carryforwardswere generated prior to 2018 and unexpired state NOL carryforwards begin to expire over 20 years beginning in 2032.2023. The 2018$67.1 million of post 2017 federal NOL carryforwards do not expire. In addition, as of December 31, 2018, before consideration of any uncertain tax positions, we had federal orphan drug, federal research and development, and state research and development tax credit carryforwards of $43.8 million, $0.9 million and $3.6 million, respectively. Certain federal orphan drug tax credits and federal research and development credits begin to expire in 2033 and 2032, respectively, and the state research and development tax credits do not expire. These carryforwards and tax credits are net of the Section 382 and 383 limitations discussed below.
During the year ended December 31, 2018, $194,000 of NOL carryforwards from our Chinese subsidiary expired leaving $490,000 of NOL carryforwards from our Chinese subsidiary as of December 31, 2018. There will be further expirations of this NOL carryforward in 2019 and beyond.
Sections 382 and 383 of the Internal Revenue Code orof 1986, as amended, subject the IRC, limit a company’s ability to utilize certain net operating losses and tax credit carryforwards in the event of a cumulative change in ownership in excess of 50%, as defined. We experienced changes in ownership, as defined in Section 382, in February 2012 and in December 2013. As a result, the deferred tax asset associated with our federal and state net operating loss carryforwards and federal and state tax credits have been reduced based on the Section 382 limitations. The amount of the reduction in our deferred tax assets is based on the estimated amount of the NOL carryforwards and federal and state research credits we believe cannot be used based on the estimated amount of our Section 382 annual limitation. We have reduced our deferred tax assets by $15.0 million and have estimated that approximately $58.7 million and $37.8 million, respectively, of our federal and state NOL carryforwards for tax purposes cannot be used in future years as a result of this change in ownership. Additionally, we have estimated that approximately $2.2 million and $1.6 million of our federal and state research and development tax credits, respectively, cannot be used in future years due to the Section 382 limitation. If additional Section 382 changes occur, such as due to a merger or a similar transaction, limitations against the utilization of net operating losses, and tax credits could further reduce up to substantially all of our NOL and credit carryforwards and impact our future cash flows, but would not impact our 2018 consolidated financial statements, due to the existence of a full valuation allowance against our deferred tax assets.
The following table summarizes the activity related to our uncertain tax positions (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 |
Balance at beginning of year | $ | 23,270 |
| | $ | 16,095 |
|
Additions based on tax positions related to the current year | — |
| | 5,134 |
|
Changes for prior period tax positions | 108 |
| | 2,041 |
|
Balance at end of year | $ | 23,378 |
| | $ | 23,270 |
|
Our uncertain tax positions relate to the apportionment of losses to California and to expenses qualifying for federal and state tax credits. In 2013, California adopted a single factor, sales, for apportioning income and losses to the state. However, we have filed our 2013 through 2017 California state tax returns utilizing a multiple factor apportionment based on salaries, property and salesan annual limitation in the stateevent of certain ownership changes, as most of our operations are in California. This position is based on a prior court ruling supporting the use of the multiple factor apportionment; however, this ruling was overturned by the California Supreme Court in December 2015.defined thereunder. The ruling was filed with the U.S. Supreme Court,Company may have undergone such an ownership change and in October 2016, the U.S. Supreme Court declined to hear the case. California has no regulations or guidance nor have there been any rulings addressing how a company with no sales should apportion losses to California.
We do not anticipate any significant changestherefore may be limited in the amount of net operating losses available for utilization in the future.
The Company did not have any uncertain tax positions as offor the years ended December 31, 2018 over the next twelve months; however, should California rule or provide guidance on apportionment to companies operating in the state, we would again recognize deferred tax assets for NOL carryforwards for losses apportioned to California based on such rule or guidance. 2020 and 2019, respectively.
Due to the full valuation allowance that we havethe Company has on ourits net deferred tax asset balance, there are no uncertain tax positions that would impact the effective tax rate if recognized.
We are
The Company is subject to U.S. federal, New York, California, Texas, German and various other states and ChineseAustralian income taxes. We are no longerThe Company is subject to U.S. federal or state income tax examination by tax authorities for tax returns filed for the years ended on or before December 31, 20142003 and 2013, respectively. However,forward due to the extent allowedcarryforward of NOLs. Tax years 2016 through 2019 are subject to audit by law, the taxing authorities may have the right to examine the period from 2003 through 2018 where NOL carryforwards orGerman and Australian tax credits were generated and carried forward, and make adjustments to the amount of the NOL or tax credit carryforwards. We areauthorities. The Company is not currently under examination by any federaltax jurisdictions.
Immunic, Inc. recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet. There were no such interest or state jurisdictions.
penalties for any of the years presented.
9.
11. EIB Loan
On October 19, 2020, Immunic, Inc. (the “Company”) and Immunic AG, its wholly-owned subsidiary, entered into a Finance Contract (the “Loan Agreement”) with the European Investment Bank (“EIB”), pursuant to which EIB agreed to provide Immunic AG with a term loan in an aggregate amount of up to €24.5 million to support the development of Immunic’s lead asset, IMU-838, in moderate coronavirus disease 2019 (“COVID-19”), to be made available to be drawn in 3 tranches,
with the second and third tranches subject to the completion of certain pre-defined milestones. The Company has the right to defer payment of principal and interest on the first and second tranches until five years after the respective borrowing dates, at which point such tranches must be repaid in full. The third tranche is repayable in annual installments commencing one year after its respective borrowing date and must be repaid in full no later than five years after such date. Any outstanding borrowings under the Loan Agreement will accrue interest as provided in the Loan Agreement.
From January 1, 2021 until December 31, 2030, the Company and Immunic AG are also obligated to pay EIB a very low single digit percentage of their revenue, as set forth in the Loan Agreement, subject to certain conditions and limitations tied to the total amount drawn under the Loan Agreement and subject to a cap of €8.6 million if only the first tranche is drawn and subject to a cap of €30 million if the full loan amount is drawn. The Loan Agreement also includes certain prepayment penalties that may be triggered by certain prepayments prior to the maturity date. As of December 31, 2020, nothing was drawn down under this loan agreement.
The Company will guarantee Immunic AG’s obligations to EIB pursuant to a Guarantee Agreement to be executed by the Company, Immunic AG and EIB (the “Guarantee Agreement”, and together with the Loan Agreement, the “Agreements”).
12. Related Party Transactions
As previously disclosed, on April 15, 2020, the compensation committee of the Company’s Board independently reviewed and approved entering into an employment agreement with the Company’s current Chairman of the Board, Duane Nash, MD, JD, MBA (the “Executive Chairman Agreement”) and pursuant to such approval, on April 17, 2020, the Company and Mr. Nash entered into the Executive Chairman Agreement.
Pursuant to the Executive Chairman Agreement, Mr. Nash serves as the Executive Chairman of the Board as long as he is a member of the Board, or until termination of the Executive Chairman Agreement (as described below) or upon his earlier death, incapacity, removal, or resignation. Pursuant to the Executive Chairman Agreement, Mr. Nash is entitled to receive: (i) a monthly base salary of $25,417 (it being agreed that such fee is inclusive of any fees associated with Mr. Nash’s services as both a director of the Company and in the capacity of Executive Chairman), (ii) employee benefits including, health insurance, dental insurance, basic life and accidental death and dismemberment insurance, long and short term disability insurance and participation in the Company’s 401(k) Plan, and (iii) reimbursements for pre-approved reasonable business-related expenses incurred in good faith in the performance of the Mr. Nash’s duties for the Company. The Executive Chairman Agreement establishes an “at will” employment relationship pursuant to which Mr. Nash serves as Executive Chairman. The Executive Chairman Agreement contemplated a term that ended on October 15, 2020 and was subsequently extend. On October 15, 2020, the Company and Mr. Nash entered into an addendum to the Executive Chairman Agreement, pursuant to which the term of the agreement was extended to April 15, 2021. The Company made a one-time award to Mr. Nash of 120,000 stock options, which vest monthly starting on November 15, 2020. All other terms of the employment agreement remained the same.
13. Selected Quarterly Data (unaudited)
The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for 20182020 and 20172019 are as follows (in thousands, except per share data): |
| | | | | | | | | | | | | | | | | | | |
| For the Quarters Ended | | |
| March 31 | | June 30 | | September 30 | | December 31 | | Total Year |
2018: | | | | | | | | | |
Operating expenses | $ | 14,492 |
| | $ | 12,917 |
| | $ | 12,064 |
| | $ | 2,551 |
| | $ | 42,024 |
|
Net loss | $ | (14,388 | ) | | $ | (12,682 | ) | | $ | (11,941 | ) | | $ | (2,464 | ) | | $ | (41,475 | ) |
Basic and diluted net loss per share (1) | $ | (0.34 | ) | | $ | (0.30 | ) | | $ | (0.28 | ) | | $ | (0.06 | ) | | $ | (0.98 | ) |
2017: | | | | | | | | | |
Operating expenses | $ | 12,687 |
| | $ | 12,549 |
| | $ | 12,639 |
| | $ | 14,780 |
| | $ | 52,655 |
|
Net loss | $ | (12,602 | ) | | $ | (12,407 | ) | | $ | (12,481 | ) | | $ | (14,588 | ) | | $ | (52,078 | ) |
Basic and diluted net loss per share (1) | $ | (0.39 | ) | | $ | (0.29 | ) | | $ | (0.30 | ) | | $ | (0.35 | ) | | $ | (1.31 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarters Ended | | |
| March 31 | | June 30 | | September 30 | | December 31 | | Total Year |
2020 | | | | | | | | | |
Operating expenses | $ | 9,014 | | | $ | 12,222 | | | $ | 13,545 | | | $ | 14,190 | | | $ | 48,971 | |
Net loss | $ | (8,487) | | | $ | (11,458) | | | $ | (12,913) | | | $ | (11,159) | | | $ | (44,017) | |
Basic and diluted net loss per share (1) | $ | (0.79) | | | $ | (0.90) | | | $ | (0.70) | | | $ | (0.53) | | | $ | (2.81) | |
2019 | | | | | | | | | |
Operating expenses | $ | 4,662 | | | $ | 15,007 | | | $ | 9,177 | | | $ | 8,186 | | | $ | 37,032 | |
Net loss | $ | (4,313) | | | $ | (14,714) | | | $ | (8,215) | | | $ | (7,691) | | | $ | (34,933) | |
Basic and diluted net loss per share (1) | $ | (5.09) | | | $ | (1.52) | | | $ | (0.82) | | | $ | (0.75) | | | $ | (4.52) | |
(1) Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share calculations will not necessarily equal the annual per share calculation.
10. Severance Costs
In September 2018, we announced a staff reduction plan in order to reduce operating expenses and to conserve cash resources. The plan reduced our workforce by approximately 85%. As a result, we estimate we will incur approximately $2.4 million in costs for the affected employees, including severance payments, limited reimbursement of medical insurance premiums and outplacement services. The staff reduction plan was completed by the end of September 2018.
During the twelve months ended December 31, 2018, we paid $2.1 million in severance benefits to separating employees related to the staff reduction plan. At December 31, 2018, unpaid severance costs of $254,000 are included in current liabilities in the condensed consolidated balance sheet and are expected to be paid by the end of the first quarter of 2019.
11. Subsequent Events
Exchange Agreement with Immunic AG
In January 2019, we entered into an exchange agreement with, Immunic AG, or Immunic, and all of the current shareholders of Immunic, or the Exchange Agreement, pursuant to which all of the Immunic shareholders will exchange all of their Immunic shares for shares of our common stock, with the result of Immunic becoming a wholly-owned subsidiary of the Company, which is referred to as the Transaction. Following the closing of the Transaction, the company, which will be renamed “Immunic, Inc.” and will focus on advancing Immunic’s pipeline of treatments for chronic inflammatory and autoimmune diseases. As a result of the exchange, Immunic shareholders are expected to own approximately 89% of the company subject to adjustment as provided in the Exchange Agreement.
Prior to entry into the Exchange Agreement, all current Immunic shareholders as well as certain of Immunic’s executive officers and directors entered into an Investment and Subscription Agreement, or the Subscription Agreement, with Immunic, pursuant to which certain Immunic shareholders have agreed, subject to the terms and conditions of such agreement, to invest, prior to the consummation of the Transaction, an aggregate amount of approximately €26.7 million, or approximately $30.5 million based on the exchange rate at December 31, 2018.
The issuance of the company common stock to be issued under the Exchange Agreement and certain related transactions must be approved by the company’s stockholders. There can be no assurance that such transactions will be approved by the stockholders or that the Transaction will be consummated.
Cancellation of Stock Options and Issuance of Stock Equity Awards
In an effort to maximize the cash on our balance sheet in the share exchange transaction with Immunic, in January 2019, the compensation committee of the board of directors, or the Committee, agreed and approved the restructuring of our executive officers’ existing severance and change of control agreements. Among other things, the Committee approved (i) the cancellation of options for 3,100,614 shares having a weighted average exercise price of $6.53 and representing all the stock options held by such executive officers; (ii) grants of 5,100,000 restricted stock units, or RSUs, under the 2014 Plan to such executive officers; and (iii) amended the existing change of control and severance agreements with each of the executive officers to include a total reduction of $1.3 million in cash severance payments the executive officers would otherwise receive on a termination as a result of a change of control such as pursuant to the Transaction; all conditioned upon the executive officers agreeing to and entering into each of the agreements necessary to effectuate these transactions. Following Committee approval, each of the executive officers executed the respective amendments to their change of control and severance agreements, executed an option cancellation agreement, and received the RSU grants.
The RSU grants vest 25% annually over four years, however, the vesting accelerates and the grants fully vest on termination by the company without cause or the executive officer's resignation for good reason pursuant to the amended change of control and severance agreements. The RSUs can be settled in cash or shares of common stock solely at the company’s discretion and the RSU’s have a ten-year term.
CEO Termination
In January 2019, in an effort to further reduce operating costs, our board of directors notified Mr. Russell J. Cox, our chief executive officer at the time, that his employment with us would be terminated without cause and Mr. Cox submitted his resignation as a director to coincide with his termination date. Pursuant to his amended change of control and severance agreement, Mr. Cox will receive a lump sum cash payment equivalent to twelve months salary and the 1,854,376 restricted stock units held by Mr. Cox on his termination date vested.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| Immunic, Inc. |
| | |
Date: February 26, 2021 | Vital Therapies, Inc.By: | /s/ DANIEL VITT |
| | Daniel Vitt |
Date: March 4, 2019 | By: | /s/ Duane D. Nash |
| | Duane D. Nash, M.D. |
| | Chief Executive Officer and President |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Duane D. NashDaniel Vitt and Michael V. Swanson,Glenn Whaley, and each of them, his or her true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | |
/s/ DANIEL VITT | | Director, Chief Executive Officer and President | | February 26, 2021 |
Daniel Vitt | | | | |
| | | | |
Signature | | Title | | Date |
/s/ GLENN WHALEY | | Principal Financial and Accounting Officer | | February 26, 2021 |
Glenn Whaley | | | | |
| | | | |
/s/ DUANE D. NASH | | Director, Chief Executive Officer and President (Principal Executive Officer)Chairman | | March 4, 2019February 26, 2021 |
Duane D. Nash M.D. | | | | |
| | | | |
/s/ MICHAEL V. SWANSONTAMAR HOWSON | | Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) Director | | March 4, 2019February 26, 2021 |
Michael V. SwansonTamar Howson | | | | |
| | | | |
/s/ FAHEEM HASNAINJOERG NEERMANN | | ChairmanDirector | | March 4, 2019February 26, 2021 |
Faheem HasnainJoerg Neermann | | | | |
| | | | |
/s/ CHERYL L. COHENVINCENT OSSIPOW | | Director | | March 4, 2019February 26, 2021 |
Cheryl L. CohenVincent Ossipow | | | | |
| | | | |
/s/ LOWELL E. SEARSBARCLAY A. PHILLIPS | | Director | | March 4, 2019February 26, 2021 |
Lowell E. SearsBarclay A. Phillips | | | | |
| | | | |
/s/ JAN VAN DEN BOSSCHE | | Director | | February 26, 2021 |
Jan Van den Bossche | | | | |