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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2019
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
VICAL INCORPORATED
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| Delaware | 93-0948554 | ||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||
| 5777 Central Avenue, |
| CO | 80301 | |||||
(Address of principal executive offices) | (Zip Code) | ||||||||
(858) 646-1100
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common stock, $0.01 par value per share | BBI | The Nasdaq Stock Market LLC |
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer |
| Smaller reporting company | ☒ |
Emerging growth company | ☐ | ||
Indicate the number
Total shares of common stock outstanding at October 25, 2018: 21,816,041
| PART I. FINANCIAL INFORMATION | ||||
| (Unaudited) |
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Condensed Consolidated Balance Sheets |
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| 2018 |
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| 2018 |
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| Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018 | ||||
| 2018 |
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| Notes to Condensed Consolidated Financial Statements for the Nine Months Ended June 30, 2019 and 2018 | ||||
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk |
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| ITEM 1. Legal Proceedings | ||||
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| ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||
ITEM 3. Defaults Upon Senior Securities | ||||
| ITEM 4. Mine Safety Disclosures | ||||
| ITEM 5. Other Information | ||||
| ITEM 6. Exhibits |
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| SIGNATURES | ||||
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September 30, December 31, 2018 2017 ASSETS Current assets: Cash and cash equivalents $ 12,101 $ 24,841 Marketable securities, available-for-sale 38,267 35,658 Restricted cash 192 192 Deferred contract costs — 10,502 Receivables and other assets 1,916 5,124 Total current assets 52,476 76,317 Long-term investments 2,190 2,209 Property and equipment, net 117 606 Intangible assets, net — 703 Other assets 844 659 Total assets $ 55,627 $ 80,494 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 3,522 $ 5,217 Deferred revenue 10 11,700 Total current liabilities 3,532 16,917 Stockholders' equity: Preferred stock, $0.01 par value, 5,000 shares authorized, none issued and outstanding — — Common stock, $0.01 par value, 50,000 shares authorized, 21,816 and 21,802 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively 218 218 Additional paid-in capital 490,244 489,975 Accumulated deficit (438,458 ) (426,738 ) Accumulated other comprehensive income 91 122 Total stockholders' equity 52,095 63,577 Total liabilities and stockholders' equity $ 55,627 $ 80,494 Three Months Ended Nine Months Ended September 30, September 30, 2018 2017 2018 2017 Revenues: Contract revenue $ 37 $ 3,188 $ 1,468 $ 9,458 License and royalty revenue 10 52 30 408 Total revenues 47 3,240 1,498 9,866 Operating expenses: Research and development 2,503 3,004 9,769 9,943 Manufacturing and production — 1,778 1,436 4,689 General and administrative 1,610 1,639 5,988 4,739 Total operating expenses 4,113 6,421 17,193 19,371 Loss from operations (4,066 ) (3,181 ) (15,695 ) (9,505 ) Other income: Investment and other income, net 2,555 93 3,046 273 Net loss $ (1,511 ) $ (3,088 ) $ (12,649 ) $ (9,232 ) Basic and diluted net loss per share $ (0.07 ) $ (0.27 ) $ (0.58 ) $ (0.82 ) Weighted average shares used in computing basic and diluted net loss per share 21,841 11,458 21,838 11,237 Three Months Ended Nine Months Ended September 30, September 30, 2018 2017 2018 2017 Net loss $ (1,511 ) $ (3,088 ) $ (12,649 ) $ (9,232 ) Other comprehensive (loss) gain: Unrealized (loss) gain on available-for-sale and long-term marketable securities: Unrealized (loss) gain arising during holding period, net of tax benefit of $(6) and $10 for three months ended September 30, 2018 and 2017, respectively, and $0 and $49 for nine months ended September 30, 2018 and 2017, respectively (39 ) 34 (31 ) 102 Other comprehensive (loss) gain (39 ) 34 (31 ) 102 Total comprehensive loss $ (1,550 ) $ (3,054 ) $ (12,680 ) $ (9,130 ) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) Nine Months Ended September 30, 2018 2017 Cash flows from operating activities: Net loss $ (12,649 ) $ (9,232 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 135 722 Accretion of discount on short-term investments (144 ) — Write-off of abandoned patents 673 — Gain on sale of property and equipment (2,286 ) — Compensation expense related to stock options and awards 268 611 Changes in operating assets and liabilities: Deferred contract costs — (4,061 ) Receivables and other assets 4,090 319 Accounts payable and accrued expenses (1,695 ) 174 Deferred revenue (259 ) 4,785 Deferred rent — (223 ) Net cash used in operating activities (11,867 ) (6,905 ) Cash flows from investing activities: Maturities of marketable securities 28,225 20,016 Purchases of marketable securities (30,702 ) (12,175 ) Sale of property and equipment 1,639 — Purchases of property and equipment (35 ) (27 ) Net cash (used in) provided by investing activities (873 ) 7,814 Cash flows from financing activities: Net proceeds from issuance of common stock 1 1,116 Payment of withholding taxes for net settlement of restricted stock units (1 ) (3 ) Net cash provided by financing activities - 1,113 Net (decrease) increase in cash, cash equivalents and restricted cash (12,740 ) 2,022 Cash, cash equivalents and restricted cash at beginning of period 25,033 8,380 Cash, cash equivalents and restricted cash at end of period $ 12,293 $ 10,402 Supplemental disclosure of noncash investing and financing activities: Gain related to deferred rent $ 1,067 $ — and related notes reflect the historical results of Private Brickell prior to the Merger and of the combined company following the Merger, and do not include the historical results of Vical prior to the completion of the Merger. These financial statements and related notes should be read in conjunction with the audited financial statements of Private Brickell for the year ended December 31, 2018, included in the Company’s Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September preferred stock issuance costs amounted to approximately $0.1 million and $30 thousand, respectively. equity. Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company Income Statement As Reported Balances Without Adoption of ASC 606 Effect of Change Increase/(Decrease) Revenues Contract revenue $ 1,468 $ 1,468 $ - Operating expenses Manufacturing and production 1,436 1,436 - Net loss (12,649 ) (12,649 ) - Balance Sheet As Reported Balances Without Adoption of ASC 606 Effect of Change Increase/(Decrease) Assets Deferred contract costs $ — $ 10,502 $ (10,502 ) Liabilities Deferred revenue 10 11,440 (11,430 ) Equity Accumulated deficit (438,458 ) (439,386 ) 928 In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Three Months Ended Nine Months Ended September 30, September 30, 2018 2017 2018 2017 Research and development $ 41 $ 61 $ 117 $ 184 Manufacturing and production — 30 (68 ) 95 General and administrative 18 92 219 332 Total stock-based compensation expense $ 59 $ 183 $ 268 $ 611 September 30, 2018 Amortized Cost Unrealized Gain Unrealized Loss Market Value U.S. treasuries $ 38,307 $ — $ 40 $ 38,267 $ 38,307 $ — $ 40 $ 38,267 December 31, 2017 Amortized Cost Unrealized Gain Unrealized Loss Market Value U.S. treasuries $ 34,462 $ — $ 29 $ 34,433 Certificates of deposit 1,225 — — 1,225 $ 35,687 $ — $ 29 $ 35,658 September 30, December 31, 2018 2017 Employee compensation $ 1,438 $ 2,654 Clinical trial accruals 1,042 1,017 Accounts payable 576 1,213 Other accrued liabilities 466 333 Total accounts payable and accrued expenses $ 3,522 $ 5,217 Fair Value Measurements September 30, 2018 Level 1 Level 2 Level 3 Total Money market funds 9,208 — — 9,208 U.S. treasuries 38,267 — — 38,267 Auction rate securities — — 2,190 2,190 $ 47,475 $ — $ 2,190 $ 49,665 Fair Value Measurements December 31, 2017 Level 1 Level 2 Level 3 Total Certificates of deposit $ 1,225 $ — $ — $ 1,225 Money market funds 21,760 — — 21,760 U.S. treasuries 34,433 — — 34,433 Auction rate securities — — 2,209 2,209 $ 57,418 $ — $ 2,209 $ 59,627 Balance at December 31, 2017 $ 2,209 Total unrealized gains, excluding tax impact, included in other comprehensive loss (19 ) Balance at September 30, 2018 $ 2,190 Total gains or losses for the period included in net loss attributable to the change in unrealized gains or losses relating to assets still held at the reporting date $ — Employee Termination Asset Benefits Impairments Total Research and development $ 272 $ 267 $ 539 Manufacturing and production 735 — 735 General and administrative 117 — 117 $ 1,124 $ 267 $ 1,391 Boulder Lease provide for rental payments on a monthly basis on a graduated scale. The other research and development. To date, we have financed operations primarily through private placements of convertible preferred stock, debt, funds received from license and collaboration agreements, the funds received in connection with the Merger, and funds received in connection with the NovaQuest Funding Agreement. We do not Three Months Ended Nine Months Ended September 30, September 30, Source 2018 2017 2018 2017 Astellas supply and services contract — $ 3.1 $ 1.2 $ 9.1 Astellas license — — — 0.2 Other contracts, licenses and royalties — 0.2 0.3 0.6 Total revenues $ — $ 3.3 $ 1.5 $ 9.9 Three Months Ended Nine Months Ended September 30, September 30, Program 2018 2017 2018 2017 CMV $ — $ 2.6 $ 1.5 $ 7.1 HSV-2 0.3 0.8 1.7 4.6 VL-2397 1.7 1.1 6.4 1.9 Other research, development, manufacturing and production 0.5 0.3 1.6 1.0 Total research, development, manufacturing and production $ 2.5 $ 4.8 $ 11.2 $ 14.6 human resources personnel, as well as professional fees, including legal and accounting fees, and sublicensing fees. 2019, the convertible promissory notes and related accrued interest converted into 1,069,740 shares of common stock, which resulted in a gain on extinguishment of $2.3 million. $2.3 million, and an increase in other changes in working capital of $0.9 million. 2019. suspended or terminated, and the FDA or comparable foreign regulatory authorities liability claims. Any of these Cosmetic Act (FDCA), as amended; Title 21 of the Code of Federal Regulations Part 202 (21 CFR Part 202); the 21st Century Cures Act, the federal Anti-Kickback penalty laws; the federal Health Insurance Portability and Accountability Act of 1996, drug product among other things); the federal illiquid. In the past, Restated Certificate of Certificate of Specimen Common Stock Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized. PARTVICAL INCORPORATEDInin thousands, except par valueshare and per share data)(Unaudited) September 30,
2019 December 31,
2018Assets Current assets: Cash and cash equivalents $ 7,225 $ 8,067 Marketable securities, available-for-sale 18,473 — Prepaid expenses and other current assets 5,034 204 Total current assets 30,732 8,271 Property and equipment, net 20 37 Operating lease right-of-use asset 176 — Intangible assets 441 441 Total assets $ 31,369 $ 8,749 Liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) Current liabilities: Accounts payable $ 1,291 $ 4,067 Accrued liabilities 3,475 3,272 Lease liability, current portion 75 — Deferred revenue, current portion 2,464 8,117 Note payable — 4,639 Total current liabilities 7,305 20,095 Contingent consideration 145 145 Lease liability, net of current portion 94 — Warrant liability — 242 Deferred revenue, net of current portion — 1,595 Research and development funding liability 5,600 — Total liabilities 13,144 22,077 Redeemable convertible preferred stock (Series A, B, C and C-1), $0.01 par value, 5,000,000 and 4,182,943 shares authorized at September 30, 2019 and December 31, 2018, respectively; 0 and 1,256,466 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively; aggregate liquidation preference of $0 and $46,985 at September 30, 2019 and December 31, 2018, respectively — 58,290 Commitments and contingencies (Note 8) Stockholders’ equity (deficit): Common stock, $0.01 par value, 50,000,000 and 8,000,000 shares authorized at September 30, 2019 and December 31, 2018, respectively; 7,810,680 and 589,001 issued and outstanding at September 30, 2019 and December 31, 2018, respectively 78 6 Additional paid-in capital 92,276 — Accumulated other comprehensive loss (11 ) — Accumulated deficit (74,118 ) (71,624 ) Total stockholders’ equity (deficit) 18,225 (71,618 ) Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) $ 31,369 $ 8,749 unauditedthese condensed consolidated financial statementsstatements.Inin thousands, except share and per share data)(Unaudited) Three Months Ended
September 30, Nine Months Ended
September 30, 2019 2018 2019 2018 Collaboration revenue $ 1,183 $ 3,042 $ 7,248 $ 8,415 Operating expenses: Research and development 3,337 4,135 13,585 8,571 General and administrative 3,901 1,206 7,290 4,694 Total operating expenses 7,238 5,341 20,875 13,265 Loss from operations (6,055 ) (2,299 ) (13,627 ) (4,850 ) Investment and other income, net 54 23 64 45 Gain on extinguishment 2,318 — 2,318 — Interest expense (1,098 ) (267 ) (1,982 ) (769 ) Change in fair value of derivative liability — — (11 ) — Change in fair value of warrant liability — 2 223 8 Net loss (4,781 ) (2,541 ) (13,015 ) (5,566 ) Reduction (accretion) of redeemable convertible preferred stock to redemption value (82 ) (966 ) 10,274 (5,071 ) Net loss attributable to common stockholders $ (4,863 ) $ (3,507 ) $ (2,741 ) $ (10,637 ) Net loss per share attributable to common stockholders, basic and diluted $ (1.65 ) $ (5.98 ) $ (1.98 ) $ (18.13 ) Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 2,943,896 586,738 1,382,592 586,701 unauditedthese condensed consolidated financial statementsstatements.Inin thousands)(Unaudited) Three Months Ended
September 30, Nine Months Ended
September 30, 2019 2018 2019 2018 Net loss $ (4,781 ) $ (2,541 ) $ (13,015 ) $ (5,566 ) Other comprehensive loss: Unrealized loss on available-for-sale marketable securities arising during holding period, net of tax benefit of $0 (11 ) — (11 ) — Total comprehensive loss $ (4,792 ) $ (2,541 ) $ (13,026 ) $ (5,566 ) unauditedthese condensed consolidated financial statementsstatements.CASH FLOWSIn thousands)(Unaudited) Series A, B, C & C-1 Redeemable
Convertible Preferred Stock Common Stock Additional
Paid-In Capital Accumulated Other Comprehensive Loss Accumulated
Deficit Total
Stockholders’
Equity (Deficit) Shares Carrying Value Shares Par Value Balance, December 31, 2018 1,256,466 $ 58,290 589,001 $ 6 $ — $ — $ (71,624 ) $ (71,618 ) Stock based compensation — — — — 384 — — 384 Reduction of redeemable convertible preferred stock to redemption value — (10,521 ) — — — — 10,521 10,521 Net loss — — — — — — (4,580 ) (4,580 ) Balance, March 31, 2019 (unaudited) 1,256,466 47,769 589,001 6 384 — (65,683 ) (65,293 ) Stock based compensation — — — — 299 — — 299 Accretion of redeemable convertible preferred stock to redemption value — 165 — — (165 ) — — (165 ) Net loss — — — — — — (3,654 ) (3,654 ) Balance, June 30, 2019 (unaudited) 1,256,466 47,934 589,001 6 518 — (69,337 ) (68,813 ) Accretion of redeemable convertible preferred stock to redemption value — 82 — — (82 ) — — (82 ) Conversion of redeemable convertible preferred stock and preferred stock dividends to common stock (1,256,466 ) (48,016 ) 2,783,951 28 47,988 — — 48,016 Common stock issued in recapitalization — — 3,367,988 34 36,059 — — 36,093 Conversion of convertible notes payable and accrued interest to common stock — — 1,069,740 10 5,082 — — 5,092 Reclassification of warrant liability to equity — — — — 1,511 — — 1,511 Common stock warrants issued in connection with the research and development funding liability — — — — 876 — — 876 Stock based compensation — — — — 324 — — 324 Unrealized loss on available-for-sale marketable securities — — — — — (11 ) — (11 ) Net loss — — — — — — (4,781 ) (4,781 ) Balance, September 30, 2019 (unaudited) — $ — 7,810,680 $ 78 $ 92,276 $ (11 ) $ (74,118 ) $ 18,225 Series A, B, C & C-1 Redeemable
Convertible Preferred Stock Common Stock Additional
Paid-In Capital Accumulated Other Comprehensive Loss Accumulated
Deficit Total
Stockholders’
Deficit Shares Carrying Value Shares Par Value Balance, December 31, 2017 1,256,466 $ 52,354 585,262 6 — $ — (59,942 ) (59,936 ) Effect of adoption of Topic 606 — — — — — — 2,734 2,734 Stock based compensation — — — — 190 — — 190 Issuance of common stock through exercise of stock option — — 1,438 — 17 — — 17 Accretion of redeemable convertible preferred stock to redemption value — 3,240 — — (207 ) — (3,033 ) (3,240 ) Net income — — — — — — 527 527 Balance, March 31, 2018 (unaudited) 1,256,466 55,594 586,700 6 — — (59,714 ) (59,708 ) Stock based compensation — — — — 175 — — 175 Accretion of redeemable convertible preferred stock to redemption value — 865 — — (175 ) — (690 ) (865 ) Net loss — — — — — — (3,552 ) (3,552 ) Balance, June 30, 2018 (unaudited) 1,256,466 56,459 586,700 6 — — (63,956 ) (63,950 ) Stock based compensation — — — — 151 — — 151 Issuance of common stock through exercise of stock option — — 863 — 10 — — 10 Accretion of redeemable convertible preferred stock to redemption value — 966 — — (161 ) — (805 ) (966 ) Net loss — — — — — — (2,541 ) (2,541 ) Balance, September 30, 2018 (unaudited) 1,256,466 $ 57,425 587,563 $ 6 $ — $ — $ (67,302 ) $ (67,296 ) Nine Months Ended
September 30, 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (13,015 ) $ (5,566 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 25 37 Accretion of discount on marketable securities (25 ) — Non-cash interest expense 666 — Change in fair value of derivative liability 11 — Change in fair value of warrant liability (223 ) (8 ) Gain on extinguishment (2,318 ) — Amortization of operating lease right-of-use assets 50 — Amortization of convertible promissory notes discount 828 — Amortization of debt discounts and financing costs 215 310 Stock-based compensation 1,007 516 Changes in operating assets and liabilities: Prepaid expenses and other current assets (2,480 ) 14 Accounts payable (2,776 ) 473 Accrued liabilities (2,207 ) (343 ) Lease liability (50 ) — Research and development funding liability 5,600 — Deferred revenue (7,248 ) 12,188 Net cash provided by (used in) operating activities (21,940 ) 7,621 CASH FLOWS FROM INVESTING ACTIVITIES: Cash and cash equivalents acquired in recapitalization 13,017 — Maturities of marketable securities 5,500 — Capital expenditures (8 ) (8 ) Net cash provided by (used in) investing activities 18,509 (8 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of principal of note payable (4,808 ) (509 ) Proceeds from issuance of convertible promissory notes 7,397 — Proceeds from the exercise of stock options — 27 Net cash provided by (used in) financing activities 2,589 (482 ) (842 ) 7,131 8,067 5,399 $ 7,225 $ 12,530 Supplement Disclosure of Cash Flow Information: Interest paid $ 319 $ 310 Supplement Disclosure of Non-Cash Investing and Financing Activities: Conversion of redeemable convertible preferred stock and preferred stock dividends to common stock $ 48,016 $ — Accretion (reduction) of redeemable convertible preferred stock to redemption value $ (10,377 ) $ 5,041 Shares issued in recapitalization $ 23,076 $ — Accretion of redeemable convertible preferred stock issuance costs $ 103 $ 30 Derivative liability issued with convertible promissory notes $ 1,442 $ — Warrants to purchase common stock issued with funding agreement $ 876 $ — Warrants to purchase common stock issued with convertible promissory notes $ 1,492 $ — Change in unrealized loss on available-for-sale marketable securities $ (11 ) $ — 30, 2018(Unaudited)1.BASIS OF PRESENTATIONIncorporated, oreffected a reverse stock split of its common stock, par value $0.01 per share, at a ratio of 1-for-7 (the “Reverse Stock Split”). Unless otherwise noted herein, references to share and per-share amounts give retroactive effect to the Reverse Stock Split.a Delaware corporation, was incorporated in April 1987 and has devoted substantially allissued shares of its resources sincecommon stock to Private Brickell stockholders, at an exchange rate of approximately 2.4165 shares of common stock in exchange for each share of Private Brickell common stock outstanding immediately prior to the Merger (the “Exchange Ratio”). The exchange rate was calculated by a formula that timewas determined through arms-length negotiations between the Vical and Private Brickell. Unless otherwise noted herein, references to itsshare and per-share amounts give retroactive effect to the Reverse Stock Split and the Exchange Ratio, which was effected upon the Merger.programs. The Company develops biopharmaceutical products for the prevention and treatment of chronic or life-threatening infectious diseases, including a candidate for treating chronic hepatitis B in preclinical development and an antifungal candidate in clinical development.All of the Company’s potential products arearrangement with NovaQuest Capital Management, LLC (“NovaQuest”) pursuant to which NovaQuest committed up to $25.0 million in research and development phases. No revenuesfunding to the Company following the closing of the Merger (the “Funding Agreement”). These proceeds will partially fund the Company's Phase 3 clinical trials in the United States for sofpironium bromide. The Company issued a warrant to NovaQuest to purchase 241,225 shares of common stock. Additional details of this agreement are described in Note 4. In October 2019, additional funding was temporarily suspended. Refer to Note 11 for additional details.generated fromprepared assuming that the saleCompany will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not reflect any such products, nor are any such revenues expectedadjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern. The Company has incurred significant operating losses and has an accumulated deficit as a result of ongoing efforts to develop product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. For the nine months ended September 30, 2019, the Company had a net loss of $13.0 million and net cash used in operating activities of $21.9 million. As of September 30, 2019, the Company had cash, cash equivalents, and marketable securities of $25.7 million, and an accumulated deficit of $74.1 million.several years. The Company earns revenue12 months from research and development agreements with pharmaceutical collaborators. The Company’s product candidates will require significant additional research and development efforts, including extensive preclinical and clinical testing. All product candidates that advance to clinical testing will require regulatory approval prior to commercial sale, and will require significant costs to commercialize. There can be no assurance that the Company’s research and development efforts, or thoseissuance of its collaborators, will be successful. these condensed consolidated financial statements.not generate positive cash flows from operations for at leastdevelopment activities. Additional funding will be required in the next several years. No assurancefuture to maintain the Company’s current and proposed research activities. There can be givenno assurance that additional equity or debt financing will be available on acceptable terms, if at all. If the Company can generate sufficient product revenueis unable to become profitableraise additional funding to meet its working capital needs in the future, it will be forced to delay or generate positive cash flows fromreduce the scope of its research programs and/or limit or cease its operations.unauditedaccompanying condensed consolidated financial statements at September 30, 2018,include the accounts of the Company and for the threeits wholly-owned subsidiary, Brickell Subsidiary, Inc., are presented in U.S. dollars and nine months ended September 30, 2018 and 2017, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and with accounting principles generally accepted in the United States of America (“US GAAP”) and applicable torules and regulations of the SEC for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial statements.information normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. These unauditedcondensed consolidated financial statements have been prepared on the same basis as the auditedannual financial statements included in the Company’s Annual Report on Form 10-K and, include all adjustments, consisting of only normal recurring accruals, which in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairlyfor a fair presentation of the Company’s financial position as of the interim date andinformation. The results of operations for the interim periods presented. Interim resultsthree and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for athe full year ending December 31, 2019, for any other interim period, or for any other future periods.period. The preparationcondensed consolidated balance sheet as of December 31, 2018 has been derived from audited financial statements at that date but does not include all of the information required by US GAAP for complete financial statements. All intercompany balances and transactions have been eliminated in consolidation.Cash and cash equivalents $ 13,017 Marketable securities 23,959 Prepaid expenses and other current assets 1,474 Accrued liabilities (2,357 ) Net acquired tangible assets $ 36,093 managementit to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosuresdisclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. These unaudited financial statements should be read in conjunction withAlthough these estimates are based on the Company’s auditedknowledge of current events and actions it may take in the future, actual results may ultimately differ from these estimates and assumptions.statementscondition.year endednext several years and will need to obtain additional financing in order to complete clinical studies and launch and commercialize any product candidates for which it receives regulatory approval. There can be no assurance that such financing will be available or will be at terms acceptable by the Company.2017, included2018 (in thousands): September 30, 2019 Assets: Money market funds $ 7,225 $ — $ — U.S. treasuries 18,473 — — Total $ 25,698 $ — $ — Liabilities: Contingent consideration $ — $ — $ 145 December 31, 2018 Level 1 Level 2 Level 3 Assets: Money market funds $ 8,067 $ — $ — Liabilities: Redeemable convertible preferred stock warrant liability $ — $ — $ 242 Contingent consideration — — 145 Total $ — $ — $ 387 its Annual Report on Form 10-K filed withestimating the SEC. Cash, Cash Equivalents and Marketable SecuritiesCashfair values of each class of financial instrument disclosed herein:consistin the condensed consolidated balance sheets approximate their fair values due to their short-term nature and/or market rates of cashinterest (Level 1 of the fair value hierarchy).highly liquidaccounts for them at their respective fair values. The securities with original maturities atare classified as short-term or long-term based on the datenature of acquisition of ninety days or lessthe securities and their availability to meet current operating requirements. Securities that can be liquidated without prior notice or penalty. Investments with an original maturity of more than ninety days are consideredreadily available for use in current operations are classified as short-term available-for-sale marketable securities and have been classified by managementare reported as available-for-sale. These investmentsa component of current assets in the condensed consolidated balance sheets (Level 1 of the fair value hierarchy).current assets, even though the stated maturity date may be one year or more beyond the current balance sheet date which reflects management’s intention to use the proceeds from sales of these securities to fund its operations, as necessary. Such investmentsavailable-for-sale are carriedmeasured at fair value, including accrued interest, with temporary unrealized gains and losses reported as a component of stockholders’ equity until their disposition. The Company reviews available-for-sale securities at the end of each period to determine whether they remain available-for-sale based on its then current intent. The cost of securities sold is based on the specific identification method. The securities are subject to a periodic impairment review. An impairment charge would occur when a decline in the fair value of the investments below the cost basis is judged to be other-than-temporary.2018 Expected term (in years) 7.1 Expected volatility 30.00 % Risk free interest rate 2.59 % Expected dividend yield — % Derivative
Liability Common
Stock
Warrant
Liability Redeemable
Convertible
Preferred
Stock Warrant
Liability Contingent
Consideration
LiabilitiesFair value as of December 31, 2018 $ — $ — $ 242 $ 145 Fair value of financial instruments issued 1,442 1,492 — — Change in fair value 11 17 (240 ) — Reclassification to equity (1,453 ) (1,509 ) (2 ) — Fair value as of September 30, 2019 $ — $ — $ — $ 145 separate componentreduction of stockholders’ equity. Realized gainsredeemable convertible preferred stock and losses fromwere amortized over the saleestimated redemption period until its conversion to common stock in August 2019. For the nine months ended September 30, 2019 and 2018, amortization of available-for-sale securities or the amounts, net of tax, reclassified out of accumulated other comprehensive income (loss), if any, are determined on a specific identification basis.Restricted Cashwas requiredaccounted for warrants to maintainpurchase shares of its redeemable convertible preferred stock as liabilities at their estimated fair value because the underlying shares were redeemable, which obligated the Company to transfer assets to the holders at a letterfuture date. The warrants were subject to remeasurement to fair value at each balance sheet date, and any fair value adjustments were recognized as change in fair value of credit securing an amount equalredeemable convertible preferred stock warrant liability in the condensed consolidated statements of operations. The Company continued to twelve monthsadjust the liability for changes in fair value until the conversion of the then current monthly installmentredeemable convertible preferred stock into common stock in August 2019. At that time, the redeemable convertible preferred stock warrant liability was adjusted to fair value in the condensed consolidated statements of base rent foroperations with the original term of the lease for its facilities, which ended on August 31, 2017. In July 2016, the term of the lease was extended for 16 months through December 2018. During the extended term, the Company is requiredfinal fair value reclassified to maintain a letter of credit securing an amount equal to $0.2 million.when controlupon the transfer of its products andpromised goods or services is transferred to its customers in an amount that reflects the consideration to which the Company expects to receive from its customersbe entitled in exchange for those products andgoods or services. This process involves identifyingTo determine revenue recognition for contracts with customers the contractCompany performs the following five steps: (i) identify the contract(s) with a customer, determiningcustomer; (ii) identify the performance obligations in the contract, determiningcontract; (iii) determine the contract price, allocatingtransaction price; (iv) allocate the contracttransaction price to the distinct performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations. At contract inception, the Company assesses the goods or services promised within each contract and recognizingassesses whether each promised good or service is distinct and determines those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) theperformance obligations have been satisfied. A performance obligation is consideredsatisfied.contract whenpoint in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition on a prospective basis.providesdoes not have the characteristics of a vendor and customer relationship. Reimbursable program costs are recognized proportionately with the delivery of drug substance and are accounted for as reductions to research and development expense and are excluded from the transaction price.either on its own or together with other resources that are readily availablerelationship. The Company has accounted for these under the provisions of Topic 606. This Collaboration R&D Payment will be initially recognized using an input method over the average estimated performance period of 1.45 years in proportion to the customercost incurred. Upon receipt of the Collaboration R&D Payment, on May 31, 2018, a milestone paymentis separately identified in the contract. The Company considers a performance obligation satisfied once it has transferred control of a good or serviceall future royalties to the customer, meaningCompany under the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when it determines there are no uncertainties regarding payment terms or transfer of control.Research and Development CostsResearch and development costs are expensed as incurred. Research and development costs include salaries and personnel-related costs, supplies and materials, outside services, costs of conducting preclinical and clinical trials, facilities costs and amortization of intangible assets. The Company accounts for its clinical trial costs by estimating the total cost to treat a patient in each clinical trial, and accruing this total cost for the patient over the estimated treatment period, which corresponds with the period over which the services are performed, beginning when the patient enrolls in the clinical trial. This estimated cost includes payments to the site conducting the trial, and patient-related lab and other costs related to the conduct of the trial. Cost per patient varies based on the type of clinical trial, the site of the clinical trial, the method of administration of the treatment, and the number of treatments that a patient receives. Treatment periods vary depending on the clinical trial. The Company makes revisions to the clinical trial cost estimates in the current period, as clinical trials progress.Manufacturing and Production CostsManufacturing and production costs include expenses related to manufacturing contracts and expenses for the production of plasmid DNA for use in the Company’s research and development efforts. Production expenses related to the Company’s research and development efforts are expensed as incurred.Net Loss Per ShareBasic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstandingCollaboration Agreement were reduced 150 basis points. the period. The weighted average number of shares used to compute diluted loss per share excludes any assumed exercise of stock options and warrants and any assumed issuance of common stock under restricted stock units (RSUs) as the effect would be antidilutive. Common stock equivalents covering 7.2 million shares for the three and nine months ended September 30, 2019, the Company recognized revenue of $1.2 million and $7.2 million, respectively related to the Collaboration R&D Payment. As of September 30, 2019, the Company has a deferred revenue balance related to the Collaboration R&D Payment of $2.5 million, which is recorded in deferred revenue, current portion on the accompanying condensed consolidated balance sheets.wereto accelerate payment of the Phase 3 Milestone. The Phase 3 Milestone was modified to be due upon the successful completion of the End of Phase 2 Meeting with the PMDA by Kaken on March 8, 2018, as determined by Kaken in its reasonable discretion (the “Third Milestone”). In March 2018, Kaken triggered the Third Milestone and paid the Company $5.0 million (the “Third Milestone Payment”). Upon receipt of the non-refundable Third Milestone Payment, the ROFN Agreement was amended (the “Amended ROFN Agreement”) to grant an additional option to exercise upon completion of a Subsequent Clinical Trial (first clinical trial after the Initial POC) for the Company’s other product candidates. The Company has determined that the ROFN Agreement is not a material right and has not allocated transaction price to this provision. As of September 30, 2019, Kaken has not exercised the Amended ROFN Agreement. In March 2018, the Company recognized collaboration revenue related to the Collaboration Agreement of $5.0 million in connection with the Third Milestone. Additionally, the Company recognized sublicensing costs of $1.0 million, which are included in general and administrative expenses.of their antidilutive effect. There were no common stock equivalents excludedinclusion would be anti-dilutive: Three and Nine Months Ended
September 30, 2019 2018 Warrants to purchase common stock 1,632,495 55,360 Options to purchase common stock 1,802,895 1,347,500 Redeemable convertible preferred stock (as converted into common stock) — 1,256,466 Warrants to purchase redeemable convertible preferred stock (as converted into common stock) — 9,005 Total 3,435,390 2,668,331 the threeFair Value Measurement (“ASU 2018-13”), which amends certain disclosure requirements over Level 1, Level 2, and nine months ended September 30, 2017. Stock-Based Compensationrecords its compensation expense associated with stock options and other forms of equity compensation based on their fair value atis currently evaluating the date of grant using the Black-Scholes-Merton option pricing model. Stock-based compensation includes amortization related to stock option awards based on the estimated grant date fair value. Stock-based compensation expense related to stock options is recognized ratably over the vesting period of the option. In addition, the Company records expense related to RSUs granted based on the fair value of those awards on the grant date. The fair value related to the RSUs is amortized to expense over the vesting term of those awards. Forfeitures of stock options and RSUs are recognized as they occur. Stock-based compensation expense for a stock-based award with a performance condition is recognized when the achievement of such performance condition is determined to be probable. If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized and any previously recognized compensation expense is reversed.Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted the new standard effective January 1, 2018 using the modified retrospective method applied to contracts not completed as of December 31, 2017. As it relates to process validation lots and stock piling lots completed but not delivered as of December 31, 2017 at the request of a customer, the Company concluded that, under ASC 606, the criteria for transfer of control were met prior to January 1, 2018 and as a result, the Company recorded an adjustment as of January 1, 2018 to recognize previously deferred revenue of $11.4 million and previously deferred contract costs of $10.5 million, with an adjustment to retained earnings of $0.9 million. The impact of adoptionadopting ASU 2018-13, but does not anticipate it will have a material impact on the Company’s income statement and balance sheet as of September 30, 2018 and for the nine months then ended was as follows (in thousands):” ASU 2016-02 is aimed at making leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective approach. The adoption did not have a material impact on the Company’s condensed consolidated statements of operations. The new standard requireshas required the Company to establish liabilities and corresponding right-of-use assets on its condensed balance sheet for operating leases of $0.2 million that existed as of the January 1, 2019 adoption date. The impact on the condensed consolidated balance sheets as of January 1, 2019 was as follows (in thousands):Balance Sheet
January 1, 2019
January 1, 2019 Impact of
AdoptionOperating lease right-of-use asset $ — $ 219 $ 219 Lease liability, current portion — (68 ) (68 ) Lease liability, net of current portion — (151 ) (151 ) lesseeresearch and development arrangement with NovaQuest pursuant to recordwhich NovaQuest committed up to $25.0 million in research and development funding to thethe assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 monthswill be expensed immediately as interest expense. The royalties will be expensed as incurred and will require both lessees and lessors to disclosealso be included in cost of sales.key information about lease transactions. The standardcircumstances, the Company will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluatingrequired to pay NovaQuest $25.0 million plus interest, ranging from 8% to 12%. However, in the effectevent that the adoptionCompany terminates its development program for sofpironium bromide for other specified reasons, including serious safety issues, a failure of the new guidanceproduct’s Phase 3 studies, or the FDA’s unwillingness to approve the product, the Company will have on its financial statementsnot be obligated to make any payments to NovaQuest.related disclosures.development arrangement (the “NovaQuest Warrant”). At issuance, the NovaQuest Warrant was classified as equity and recorded at fair value with no subsequent remeasurement. The fair value of the outstanding warrants was derived from the Black-Scholes option-pricing model using the following assumptions: expected volatility of 85.56%; risk free interest rate of 1.50%; expected term of 10 years; and expected dividend yield of 0.00%.2.STOCK-BASED COMPENSATIONTotal stock-based compensation expenseresearchthe NovaQuest Warrant and development, manufacturingdeferred on the balance sheet within other current assets and production and general and administrativewill be recorded as interest expense as followsover the term of the NovaQuest Warrant. In October 2019, NovaQuest notified the Company that additional funding was suspended temporarily based on a material adverse event. Refer to Note 11 for additional details. September 30,
2019 December 31,
2018Accrued contracted research and development services $ 1,715 $ 847 Accrued professional fees 992 1,269 Accrued compensation 768 569 Accrued note issuance costs — 587 Total $ 3,475 $ 3,272 2018 and September 30, 2017,2019, the Company granted stock-based awards with a total estimated valuerecognized $2.0 million of $0.4interest expense, including $0.8 million and $0.7 million, respectively. At September 30, 2018, total unrecognized estimated compensation expense related to unvested stock-based awards granted prior to that date was $0.3 million, which is expected to be recognized over a weighted-average period of 1.4 years. Stock-based awards granted during the nine months ended September 30, 2018 and 2017, were equal to 2.5% and 5.1%, respectively,accretion of the outstanding sharesdiscounts using an effective interest rate of common stock at the end of the applicable period.12.00%.3.MARKETABLE SECURITIES, AVAILABLE FOR SALEThe following is a summary of available-for-sale marketable securities (in thousands):At September 30, 2018, none of these securities were scheduled to mature outside of one year. The Company did not realize any gains or losses on sales of available-for-sale securities for the nine months ended September 30, 2018. As of September 30, 2018, none of the securities had been in a continuous material unrealized loss position longer than one year.4.OTHER BALANCE SHEET ACCOUNTSAccounts payable and accrued expenses consisted of the following (in thousands):5.LONG-TERM INVESTMENTSAs of September 30, 2018, the Company held an auction rate security with a par value of $2.5 million. This auction rate security has not experienced a successful auction since the liquidity issues experienced in the global credit and capital markets in 2008. As a result the security is classified as a long-term investment as it is scheduled to mature in 2038. The security was rated BBB by Standard and Poor’s as of September 30, 2018. The security continues to pay interest according to its stated terms.The valuation of the Company’s auction rate security is subjectConversion on August 31, 2019, the Prom Notes payable, warrant liability, and derivative liability balances were reclassified to uncertainties that are difficult to predict. The fair valueequity in the condensed consolidated balance sheets. A gain of $2.3 million resulted from the Conversion of the securityProm Notes, which is estimated utilizing a discounted cash flow analysis. The key drivers of the valuation model include the expected term, collateral underlying the security investment, the creditworthiness of the counterparty, the timing of expected future cash flows, discount rates, liquidity and the expected holding period. The security was also compared, when possible, to other observable market data for securities with similar characteristics. As of September 30, 2018, the inputs usedincluded in the Company’s discounted cash flow analysis assumed an interest rate of 5.70%, an estimated redemption period of five years and a discount rate of 1.00%. Basedgain on the valuation of the security, the Company has recognized cumulative losses of $0.4 million as of September 30, 2018, none of which were realized during the nine months ended September 30, 2018. The losses when recognized are included in investment and other income. The market value of the security has partially recovered. Included in other comprehensive income are unrealized (loss) gain of $(20,000) and $95,000 for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, the Company had recorded cumulative unrealized gains of $0.4 million. The resulting carrying value of the auction rate security at September 30, 2018, was $2.2 million. Any future decline in market value may result in additional losses being recognized.The Company measures fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:Level 1: Observable inputs such as quoted prices in active markets;Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; andLevel 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Cash equivalents, marketable securities and long-term investments measured at fair value are classifiedextinguishment line in the table below in onecondensed consolidated statements of the three categories described above (in thousands):The Company’s investments in U.S. treasury securities, certificates of deposit and money market funds are valued based on publicly available quoted market prices for identical securities as of September 30, 2018. The Company determines the fair value of corporate bonds and other government-sponsored enterprise related securities with the aid of valuations provided by third parties using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. The Company validates the valuations received from its primary pricing vendors for its Level 2 securities by examining the inputs used in that vendor’s pricing process and determines whether they are reasonable and observable. The Company also compares those valuations to recent reported trades for those securities. As of September 30, 2018 and December 31, 2017, the Company had no investments in Level 2 securities. The Company did not transfer any investments between level categories during the nine months ended September 30, 2018. The valuation of the Company’s investments in auction rate securities, which includes significant unobservable inputs, is more fully described in Note 5.Activity for assets measured at fair value using significant unobservable inputs (Level 3) is presented in the table below (in thousands):
operations.In the ordinary course of business, the Company may become a party to additional lawsuits involving various matters. The Company is unaware of any such lawsuits presently pending against it which, individually or in the aggregate, are deemed to be material to the Company’s financial condition or results of operations.The Company prosecutes its intellectual property vigorously to obtain the broadest valid scope for its patents. Due to uncertainty of the ultimate outcome of these matters, the impact on future operating results or the Company’s financial condition is not subject to reasonable estimates.In July 2011,license agreementsa loan and security agreement (the “Loan Agreement”) with Astellas PharmaHercules Capital, Inc., or Astellas, granting Astellas exclusive, worldwide, royalty-bearing licenses (the “Lender”) under certainwhich the Company borrowed $7.5 million upon the execution of the Company's know-howLoan Agreement on February 18, 2016. The interest rate applicable to each tranche was variable based upon the greater of either (i) 9.2% and intellectual property to develop and commercialize certain products containing plasmids encoding certain forms(ii) the sum of cytomegalovirus, glycoprotein B and/or phosphoprotein 65, including ASP0113 (TransVax™) but excluding CyMVectin™.In January 2018, Astellas announced(a) the results from a Phase 3 trialPrime Rate as reported in The Wall Street Journal minus 3.5%, plus (b) 9.2%; notwithstanding the above, such rate could not exceed the permissible rates of ASP0113 in approximately 515 CMV seropositive subjects undergoing HCT procedures. Top-line results frominterest on commercial loans under the Phase 3 study demonstrated that the trial did not meet its primary endpoint in CMV end organ disease. Based on these results, Astellas determined to cease further clinical development of ASP0113 and terminated the license agreement.Under the termslaws of the agreements,State of California. Payments under the Loan Agreement were interest only until June 1, 2017, followed by equal monthly payments of principal and interest through the maturity date of September 1, 2019. The Company was required to make an end of term payment of 4.5% of the sum of (i) term loan advances, plus (ii) 50% of the aggregate unfunded term loan commitments. The Loan Agreement was further amended in December 2017, March 2018, and July 2018 (as further amended, “Loan Agreement”) to provide for an additional combined interest-only period of eight months, and the outstanding loan balance continued to be paid in equal monthly installments of principal and interest. As a result of the amendments, the Company was performing researchrequired to increase the end-of-term payment by $0.1 million. At the inception of the loan and development services and manufacturing services which were being paid for by Astellas. During the three months ended September 30, 2018 and 2017,following amendment dates, the Company recognized $30,000 and $3.1 million, respectively,paid the Lender aggregate facility fees of revenue related to these contract services. During the nine months ended September 30, 2018 and 2017, the Company recognized $1.2 million and $9.1 million, respectively, of revenue related to these contract services. The Company also recognized $0.2 million in license revenue underconnection with the Astellas agreements duringLoan Agreement.nine months ended September 30, 2017.9.FACILITY LEASEThe Company leases approximately 68,400 square feet of manufacturing, research laboratory and office space at a single site in San Diego, California. In July 2016, the term of the lease was extended for 16 months through December 2018. In July 2018,Loan Agreement, the Company entered into an agreement with Genopis, Inc., or Genopis, to sell the Company’s idle manufacturing assets. As part of the agreement, Genopis agreed to sublease 51,400 square feet of the Company’s facility through the remaining term of the Company’s lease. See Note 13 for additional information. 10.STOCKHOLDERS’ EQUITY As of the date of this filing, the Company has on file a shelf registration statement that allows it to raise up to an additional $40.0 million from the sale of common stock, preferred stock, debt securities and/or warrants, subject to limitations on the amount of securities that it may sell under the registration statement in any 12-month period. Specific terms of any offering under a shelf registration statement and the securities involved would be established at the time of sale.In November 2017, the Company sold 9,194,286 shares of its common stock in a public offering at a price of $1.75 per share, including an overallotment of 2,142,857 shares issued at a price of $1.75 per share, and pre-funded warrants to purchase 7,234,285the Lender, which are exercisable for 9,005 shares of common stock at a purchase price of $1.74 per share. Net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, totaled $26.4 million. The pre-funded warrants have anshare exercise price of $0.01 per share$33.31 (the “Hercules Capital Warrants”). The Hercules Capital Warrants will terminate, if not earlier exercised, on February 18, 2026. The fair value of the Hercules Capital Warrants was recorded at inception as a redeemable convertible preferred stock warrant liability upon issuance. The fair value of the Hercules Capital Warrants on the date of issuance of $0.3 million was determined using the Black-Scholes option-pricing model and may be exercised at any time.11.RELATED PARTY TRANSACTIONresearch collaboration agreement with AnGes. Asfive-year lease for office space in Boulder, Colorado that expires on October 31, 2021 (the “Boulder Lease”) subject to the Company’s option to renew the Boulder Lease for 2 additional terms of the date of the transaction, AnGes held 18.6% of the outstanding stock of the Company.three years each. Pursuant to the collaboration agreement, AnGes agreed to make a non-refundable payment toBoulder Lease, the Company leased 3,038 square feet of $750,000space in a multi-suite building. Rent payments under the Boulder Lease included base rent of $4,430 per month during the first year of the Boulder Lease with an annual increase of 3.5%, and additional monthly fees to cover the Company’s share of certain facility expenses, including utilities, property taxes, insurance, and maintenance, which were $2,160 per month during the first year of the Boulder Lease.agreed to conduct certain research activities related to a development program targeting chronic hepatitis B. An amendment toestimated the agreement was executedincremental borrowing rate based on industry peers. Industry peers consist of several public companies in September 2018 that added an additional non-refundable payment from AnGes to the Companybiotechnology industry with comparable characteristics, including clinical trials progress and therapeutic indications. Amortization of $145,000. In exchangethe operating lease right-of-use asset for the payments, AnGes received anoptionBoulder Lease amounted to negotiate exclusive rights in Japan related to the program. The parties also agreed to share the costs of prosecuting$17 thousand and maintaining intellectual property rights arising from the research program after such costs reach a specified limit. The decision to sell, license or sublicense rights is a contingent event within the Company’s control. There are no guarantees$50 thousand for any outcomes of the research activities, no purchase obligations required by the Company and no debt or equity arrangements connected with the research activities. There are no other written or oral side agreements between the Company and AnGes that indicate that the funding of the research activities will be repaid. The Company is responsible for the conduct of the research activities. The upfront payments, when received, are deferred and recognized as contract revenue as the related research costs are incurred. As of September 30, 2018, the Company had recognized $757,000 as contract revenue.12.RESTRUCTURING COSTSIn January 2018, the Company and Astellas announced that ASP0113 did not meet its primary endpoint in a Phase 3 clinical study in CMV end organ disease, after which Astellas informed the Company that it was terminating further development. As a result, the Company restructured its operations to conserve capital, which included a staff reduction of 40 employees and the write-off of certain intangible assets. The Company recorded charges for one-time employee termination benefits of $1.1 million and for intangible asset impairments of $0.3 million during the nine months ended September 30, 2018. Overhead costs associated with the former manufacturing facility of 0.2 million and $1.2 million have been recognized as general and administrative expense during the three and nine months ended September 30, 2018, respectively. 2019, respectively, and was included in operating expense. As of September 30, 2019, the remaining lease term was 2.1 years.following table summarizes the componentsterms of the restructuring charges (in thousands):following table sets forthCompany recognizes rent expense on a straight-line basis over the accrual activity for employee termination benefitslease period. Lease expense for the three and nine months ended September 30, 2019 and 2018 (in thousands). No additional chargeswas $22 thousand and $0.1 million, respectively.expectedentitled to be incurred.Balance at December 31, 2017$— Accruals1,124 Payments(1,124)Balance at September 30, 2018$—13.SALE OF MANUFACTURING ASSETSIn July 2018,receive dividends when and as declared or paid by its board of directors. At the Company entered into an agreement with Genopis to sell the Company’s idle manufacturing assets for $1.7 million. As parteffective date of the agreement, Genopis agreed to sublease 51,400 square feetMerger, each outstanding share of the Company’s facility throughcommon stock was converted into the remainingright to receive approximately 2.4165 shares of the Private Brickell’s common stock.September 30, 2019 Common stock options outstanding 1,802,895 Common stock warrants 1,632,495 Options available for grant under the Vical Plan 119,070 Options available for grant under the 2009 Plan 17,232 Total 3,571,692 Preferred
Shares
Authorized Preferred
Shares
Issued and
Outstanding Par
Value Carrying
Value Common
Stock Issued
Upon
ConversionSeries A 1,162,505 401,309 $ 4 $ 12,164 401,309 Series B 882,216 286,151 3 10,084 286,151 Series C 869,565 256,583 3 11,630 256,583 Series C-1 1,531,942 312,423 3 14,138 312,423 4,446,228 1,256,466 $ 13 $ 48,016 1,256,466 Preferred
Shares
Authorized Preferred
Shares
Issued and
Outstanding Par
Value Carrying
Value Common
Stock Issuable
Upon
ConversionSeries A 1,162,505 401,309 $ 4 $ 16,098 401,309 Series B 882,216 286,151 3 13,011 286,151 Series C 869,565 256,583 3 13,018 256,583 Series C-1 1,268,657 312,423 3 16,163 312,423 4,182,943 1,256,466 $ 13 $ 58,290 1,256,466 Three Months Ended
September 30, Nine Months Ended
September 30, 2019 2018 2019 2018 Research and development $ 81 $ 76 $ 237 $ 263 General and administrative 243 75 770 253 Total stock-based compensation expense $ 324 $ 151 $ 1,007 $ 516 lease, which expires on December 31, 2018. Genopis was also required to sign a long-term lease with the facility’s landlord beginning on January 1, 2019. Genopis agreed to sublease 17,000 square feetalleged breach of the facility (consistingLicense Agreement. The complaint seeks: (i) a declaratory judgment that the termination of labthe License Agreement by the Plaintiffs was valid and office space)enforceable; (ii) an injunction requiring the Company to cease and desist use of the Plaintiffs’ intellectual property; and (iii) damages for breach of contract and breach of the covenant of good faith and fair dealing.at no costof its determination that a “Material Adverse Event” (as defined in Section 1.1 of the Funding Agreement) occurred as a result of the matters described above. As a result, NovaQuest exercised its right under Section 3.3(e) of the Funding Agreement to suspend further Development Payments (as defined in Section 3.1(a) of the Funding Agreement). Pursuant to the Funding Agreement, NovaQuest is obligated to resume Development Payments if the Material Adverse Event is resolved or cured by the Company to NovaQuest’s reasonable satisfaction by October 25, 2020. If the Material Adverse Event is not resolved or cured to NovaQuest’s reasonable satisfaction by such date, then NovaQuest may, in its sole discretion, terminate any future payment obligation under the Funding Agreement and Brickell may be obligated to make certain payments to NovaQuest.one-year period endingSouthern District of Florida a motion to dismiss the complaint brought against the Company by Bodor and Nicholas S. Bodor described above.2019. A gain on the sale of assets of $2.3 million was recorded and is2018, included in Investment and Other Income, Net. The gain includes $1.1 million for the fair value of rent of the lab and office space that the Company is occupying at no cost,Form 8-K filed with the offset recorded to deferred rent expense in ReceivablesSEC on September 3, 2019, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and Other Assets.
our website.This Quarterly ReportForm 10-Q, or Report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including statements regarding our business, our financial position, the research and development of biopharmaceutical products, the funding of our researchinnovative and development efforts, and other statements describing our goals, expectations, intentions or beliefs. These statements often contain words such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or other words indicating future results, though not all forward-looking statements necessarily contain these identifying words. Such statements reflect our current views and assumptions and are subject to risks and uncertainties, particularly those inherent in the process of developing and commercializing biopharmaceutical products based on our patented DNA delivery and other technologies. Actual results could differ materially from those projected herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, and in our subsequent filings with the SEC, and those identified in Part II, Item 1A of this Report under the caption “Risk Factors”. As a result, you are cautioned not to rely on these forward-looking statements. We disclaim any duty to update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made.OverviewWe research and develop biopharmaceutical products, including those based on our patented DNA delivery technologies, for the prevention and treatment of serious or life-threatening diseases. We currently have two active development programs in the area of infectious disease comprised of:An ongoing Phase 2 trial of our novel antifungal candidate, VL-2397,differentiated prescription therapeutics for the treatment of patients with invasive aspergillosis. The multicenter, open label randomized clinical study, will comparedebilitating skin diseases. Our pipeline consists of potential novel therapeutics for hyperhidrosis, cutaneous T-cell lymphoma, psoriasis, and other prevalent dermatological conditions. We believe that our portfolio of product candidates targets significant market opportunities where innovative therapies are needed. Our executive management team and board of directors bring extensive experience in product development and global commercialization, having served in leadership roles at large global pharmaceutical companies and biotechs that have developed and/or launched successful products, including several that were first-in-class and/or achieved iconic status, such as Cialis®, Taltz®, Gemzar®, Prozac®, Cymbalta® and Juvederm®. Our strategy is to leverage this experience to in-license, acquire, develop, and commercialize innovative products that we believe can be successful in the efficacycurrently underserved dermatology global marketplace.safetyare potentially rapidly metabolized once absorbed into the blood. This proposed mechanism of VL-2397action may allow for highly effective doses to standardbe used while limiting systemic side effects. We are developing sofpironium bromide as a potential best-in-class, self-administered, once-daily, topical therapy for the treatment of primary axillary hyperhidrosis. Hyperhidrosis is a life-altering condition of sweating beyond what is physiologically required to maintain normal thermal regulation. It is believed to be caused by an overactive cholinergic response of the sweat glands and affects an estimated 15.3 million, or 4.8%, of the U.S. population. According to a 2016 update on the prevalence and severity of hyperhidrosis in the United States by Doolittle et al., axillary (underarm) hyperhidrosis, which is the targeted first potential indication for invasive aspergillosis in acute leukemia patients and recipientssofpironium bromide, is the most common occurrence of allogeneic hematopoietic cell transplant (HCT). The global Phase 2 trial will enrollhyperhidrosis, affecting approximately 200 patients and will be randomized on a 2:1 basis with approximately 134 patients treated with VL-2397 and approximately 66 patients treated with a standard treatment course65% of their physician's choice of voriconazole, isavuconazole, or liposomal amphotericin B. The patients in the VL-2397 arm will receive daily treatmentUnited States or an estimated 10 million individuals.VL-2397 for 4 weeks, followed by a 2-week courseprimary axillary hyperhidrosis in Japan, achieving statistical significance on all primary and secondary endpoints. Based on the positive results of their physician’s choicethese clinical trials, we intend to initiate two pivotal Phase 3 clinical trials in up to 450 subjects per trial with primary axillary hyperhidrosis in the United States, subject to resolution of matters currently in dispute with Bodor Laboratories, Inc. and Nicholas S. Bodor, or collectively, Bodor, and assuming the results of the comparator. The primary endpoint of all-cause mortality will be measured at 4 weeks and again at 6 weeks forPhase 3 clinical trials are favorable, we plan to submit a New Drug Application, or an NDA, to the key secondary endpoint. The trial will be conducted at selected sites in North America, Europe and Asia. The U.S. Food and Drug Administration, (FDA) has advised that VL 2397 would be eligible for a Limited Use Indication (LUI) approval assuming a successful outcome of a single Phase 2 trial carried out in accordance with a protocol and statistical analysis plan consistent withor the FDA's advice. The final determination of whether the VL-2397 is approvable will be made by the FDA, after review of all relevant data. The LUI is a provision of the Limited Population Pathway established under the 21st Century Cures Act of 2016.The FDA has granted us Qualified Infectious Disease Product (QIDP), Orphan Drug and Fast Track designations for VL-2397 for the treatment of invasive aspergillosis.primary axillary hyperhidrosis.An ongoing early stageRecent Developmentsnovel treatment for chronic hepatitis B virus (CHB) infection basedrepresentation or covenant under the Funding Agreement. We also entered into a security agreement with NovaQuest, or the Security Agreement, immediately following consummation of the Merger. Under the Security Agreement, NovaQuest will be able to exercise certain rights in the event of an uncured default by us of the Funding Agreement. NovaQuest’s rights following an uncured event of default include, among other things, foreclosing on our DNA and lipid-delivery technologies. The initial stage of this program will be to demonstrate preclinical proof of concept for inhibiting hepatitis B virus (HBV) infection in a mouse modelassets in the fourth quarterUnited States relating to sofpironium bromide and, in certain circumstances, accelerating payment obligations under the Funding Agreement. NovaQuest also has the right to suspend its funding obligations owed to them by us under the Funding Agreement in the event of 2018. The ultimate aimcertain adverse developments relating to sofpironium bromide and in the event that certain of this program wouldour senior executives leave the Company and we do not find replacements acceptable to NovaQuest.demonstrate eradication of persistent HBV infection in CHB patients. This preclinical development effort is being conducted in collaboration withmake certain payments to NovaQuest.strategic partner, AnGes, Inc.The table below summarizes our active development programs.Product/ConceptIntended UseDevelopment Status1VL-2397 antifungalTreatment of invasive fungal infectionsPhase 2VR-CHB-01 chronic hepatitis BEradication of persistent HBV infectionPreclinical1“Preclinical” (or “nonclinical”) indicates that a specific product candidate is undergoing in vitro testing and/or in vivo testing in animals. “Phase 1” clinical trials are typically conducted with a small number of patients or healthy subjects to evaluate safety, determine a safe dosage range, identify side effects, and, if possible, gain early evidence of effectiveness. “Phase 2” clinical trials are conducted with a larger group of patients to evaluate effectiveness of an investigational product for a defined patient population, and to determine common short-term side effects and risks associated with the product candidate. “Phase 3” clinical trials involve large scale, multi-center, comparative trials that are conducted with patients afflicted with a target disease to evaluate the overall benefit-risk relationship of the investigational product and to provide an adequate basis for product labeling.Research, Developmentpipeline assets (in particular sofpironium bromide), identifying product candidates, and Manufacturing Programsreceived revenueshave any products approved for sale and have not generated any product sales. Since inception and through September 30, 2019, we have raised an aggregate of $130.8 million to fund our operations, of which $39.1 million was through license and collaboration agreements, $37.0 million was from cash and investments acquired in the Merger, $33.6 million was from the sale of independently developed pharmaceutical products and have received minimal revenuesconvertible preferred stock, $7.5 million was from the sale of commercially marketed products by our licensees. We have previously earned revenues by performing services underdebt, and $7.4 million was from the sale of convertible notes, and $5.6 million was from research and development and manufacturing contracts, from grants, and from licensing access to our proprietary technologies. Revenues by source were as follows (in millions):In January 2018, we and Astellas announced that ASP0113 did not meet its primary endpoint in a Phase 3 clinical study in CMV end organ disease, after which Astellas informed us that it was terminating further development.arrangements. As a result, we do not expect additional collaboration or license revenue absent new agreements with third parties.Research, development, manufacturing and production costs by major program, as well as other costs, were as follows (in millions): Each of our on-going programs will require significant additional funds to advance through development to commercialization. From inception through September 30, 2018,2019, we had spent approximately $17.4cash and cash equivalents totaling $7.2 million on our VL-2397 program. The developmentand marketable securities of our CMV$18.5 million.HSV-2 vaccine programs has been terminated following negative trial results$5.6 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we do not expect additional material spending on these programs going forward.Our chronic hepatitis B product candidate is in the research stage. It can take many years to develop product candidates from the initial decision to screen product candidates, perform preclinical and safety studies, and perform clinical trials leading up to possible approvalhad an accumulated deficit of a product by the FDA or comparable foreign agencies. The outcome of the research is unknown until each stage of the testing is completed, up through and including registration-enabling clinical trials. Accordingly, we are unable to predict which potential product candidates we may proceed with, the time and cost to complete development, and ultimately whether we will have a product approved by the FDA or comparable foreign agencies.As a result, we$74.1 million. We expect to incur substantialcontinue incurring significant expenses and operating losses for at least the next several years due primarilyas we:advancementregulatory approval and commercialization of any of our product candidates. Until such time, if ever, that we generate substantial product revenues, we expect to finance our operations through public or private equity or debt financings, collaborations or licenses, or other available financing transactions. However, we may be unable to raise additional funds through these or other means when needed.programs,expenses related to sofpironium bromide by categories of costs for the costperiods presented. The other expenses category includes travel, lab and office supplies, clinical trial management software, license fees, and other miscellaneous expenses. Three Months Ended
September 30, Nine Months Ended
September 30, 2019 2018 2019 2018 (in thousands) Direct program expenses related to sofpironium bromide $ 2,452 $ 3,496 $ 10,871 $ 5,359 Personnel and other expenses Salaries, benefits, and stock-based compensation 863 691 2,518 2,485 Regulatory and compliance 18 116 158 603 Other expenses 4 (168 ) 38 124 Total research and development expenses $ 3,337 $ 4,135 $ 13,585 $ 8,571 preclinical studies andthe clinical trials spending for outside services,may be negatively impacted by recent developments discussed above. Once NovaQuest has resumed additional funding, we intend to increase our investments in research and development in order to advance our clinical trials.related to maintaining our intellectual property portfolio, costsincluding wages, benefits, and share-based compensation, related to our facilities,executive, sales, marketing, finance, and possible advancement toward commercialization activities.The preparation and presentation ofthat managementus to make a number ofestimates, assumptions, and informed estimatesjudgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the condensed consolidated financial statements. On an ongoing basis, management evaluates its critical estimates, including those related to revenue recognition, accrued research and development expenses, convertible promissory notes, redeemable convertible preferred stock, warrants, and stock-based compensation. We base our estimates on our historical experience and on assumptions that we believe are reasonable; however, actual results differ materially from these estimates under different assumptions or conditions.and accompanying notes. Management bases its estimates on historical information and assumptions believed to be reasonable. Although these estimates areas of each balance sheet date based on management’s best knowledge of current eventsfacts and circumstances that may impactknown to us inat the future, they are inherently uncertaintime; and actual results may differ materially from these estimates.Our critical accounting policies are those that affectfinancial statements materiallyestimates with service providers and involve a significant levelmaking adjustments, if necessary.judgment by management. Our critical accounting policies regarding revenue recognition are in the following areas: license and royalty agreements, manufacturing contracts, contract services and grant revenues. Our critical accounting policies also include recognition ofestimated research and development expenses that we accrue include:valuationcompletion of long-livedclinical trial milestones. In accruing costs, we estimate the period over which services will be performed and intangible assets.We describethe level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from estimates.accounting policies in Note 1 of the Notes to Financial Statements includedchanges in our Annual Report on Form 10-K forestimates of accrued research and development expenses after a reporting period. However, due to the year ended December 31, 2017. We discussnature of estimates, we cannot assure that we will not make changes to our critical accounting policies and estimates in the section titled “Management’s Discussionfuture as we become aware of additional information about the status or conduct of our clinical trials and Analysisother research activities.Financial Conditiongrant, net of forfeitures, and Resultsare recorded on a straight-line basis over the requisite employee service period. We use the Black-Scholes option-pricing model to estimate the fair value of Operations”stock options at the grant date. For performance-based awards where the vesting of the options may be accelerated upon the achievement of certain milestones, vesting and the related stock-based compensation is recognized as an expense when it is probable the milestone will be met.our Annual Reportthe Black-Scholes option-pricing model is the estimated fair value of common stock. After the date of the Merger, the estimated value of common stock is based on Form 10-Kclosing price of the common stock on The Nasdaq Capital Market at the date of grant. Prior to the Merger there had been no public market for the yearour common stock, and the fair value was determined with the assistance of a third-party valuation firm at each balance sheet date by considering a number of objective and subjective factors, including valuation of comparable companies, sales of capital stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock, and general and industry specific economic outlook, among other factors. The valuations were prepared in accordance with methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.DecemberSeptember 30, 2019, we issued an aggregate principal amount of $7.4 million of convertible debt to investors containing a redemption feature, which was deemed an embedded derivative and required us to bifurcate and separately account for the embedded derivative as a liability. The warrants also required fair value accounting and were accounted as a liability. The discount on the debt was amortized through interest expense based on the effective interest method. On August 31, 2017.13 of the Notesnotes to Financial Statementsthe condensed consolidated financial statements included in this Quarterly Report. Compared with Three Months Ended September 30, 2017Total Revenues. Total revenues Three Months Ended
September 30, 2019 2018 (in thousands) Collaboration revenue $ 1,183 $ 3,042 Research and development expenses (3,337 ) (4,135 ) General and administrative expenses (3,901 ) (1,206 ) Total other income (expense), net 1,274 (242 ) Net loss $ (4,781 ) $ (2,541 ) $3.2by $1.9 million, or 98.5%61%, to $47,000 for the three months ended September 30, 2019 from the three months ended September 30, 2018. The decrease is due primarily to the completion of certain research and development activities during the three months ended September 30, 2019 related to the Collaboration Agreement for which Kaken provided funding.$3.2the three months ended September 30, 2018, primarily due to an increase of $1.8 million in professional fees for legal, accounting, and auditing services, including Merger-related costs, an increase of $0.5 million in payroll expenses due to increased headcount, and an increase of $0.2 million for insurance and travel costs.2017. This decrease was primarily due2019, compared to a decrease in Astellas contract revenues due to the terminationtotal other expense, net of the ASP0113 program in January 2018.Research and Development Expenses. Research and development expenses decreased $0.5 million, or 16.7%, to $2.5$0.2 million, for the three months ended September 30, 2018, from $3.0 million for the three months ended September 30, 2017. This decrease was primarily due to higher VL2397 clinical trial costs in 2017 due to start-up of the trial.Manufacturing and Production Expenses. Manufacturing and production expenses decreased to $0 for the three months ended September 30, 2018, from $1.8 million for the three months ended September 30, 2017. This decrease was due to the termination of the ASP0113 program in January 2018. The termination resulted in a decrease in manufacturing activity and a headcount reduction. In February 2018, we discontinued all manufacturing and production activities and, as a result, we do not expect to incur any future manufacturing or production expenses.General and Administrative Expenses. General and administrative expenses were $1.6 million for the three months ended September 30, 2018 and September 30, 2017. Wages and benefits decreased $0.2 million in the three months ended September 30, 2018 due to headcount reduction, offset by an increase of $0.2 million due to the allocation of additional overhead to general and administrative expenses as a result of the closure of our manufacturing facility.Investment and Other Income, Net. Investment and other income, net, increased $2.5 million to $2.6 million for the three months ended September 30, 2018, from $0.1 million for the three months ended September 30, 2017 primarily due to a gain of $2.3 million gain onrelated to conversion of the saleconvertible promissory notes in August 2019 and a decrease of assets$0.8 million in interest expense related to Genopis. Compared with Nine Months Ended September 30, 2017Total Revenues. Total revenues Nine Months Ended
September 30, 2019 2018 (in thousands) Collaboration revenue $ 7,248 $ 8,415 Research and development expenses (13,585 ) (8,571 ) General and administrative expenses (7,290 ) (4,694 ) Total other income (expense), net 612 (716 ) Net loss $ (13,015 ) $ (5,566 ) $8.4by $1.2 million, or 84.8%14%, to $1.5 million for the nine months ended September 30, 2018,2019 from $9.9 millionthe nine months ended September 30, 2018. The revenue recognized for the nine months ended September 30, 2017. This decrease2019 was primarily due to a decrease in Astellas contract revenues dueresearch and development activities related to the termination of the ASP0113 program in January 2018.Research and Development Expenses. Research and development expenses decreased $0.2 million, or 1.7%, to $9.8 millionCollaboration Agreement for the nine months ended September 30, 2018, from $10.0 million for the nine months ended September 30, 2017. This decrease was primarily due to lower HSV-2 clinical trial costs, offset by higher patent expenses as a result of the write-off of capitalized patent costs associated with the terminated ASP0113 program and the recognition of restructuring costs in January 2018.Manufacturing and Production Expenses. Manufacturing and production expenses decreased $3.3 million, or 69.4%, to $1.4 million for the nine months ended September 30, 2018, from $4.7 million for the nine months ended September 30, 2017. This decrease was primarily due to a decrease in salaries and benefits and allocated overhead due to the termination of the ASP0113 program and the closure of our manufacturing facility. These decreases were partially offset by a net decrease in deferred costs capitalized during the nine months ended September 30, 2018 related to materials manufactured under our supply agreement with Astellas. We have discontinued all manufacturing and production activities and, as a result, we do not expect to incur any future manufacturing or production expenses.General and Administrative Expenses. General and administrative expenses increased $1.3 million, or 26.4%, to $6.0 million for the nine months ended September 30, 2018, from $4.7 million for the nine months ended September 30, 2017. This increase was primarily due to the allocation of additional overhead to general and administrative expenses as a result of the closure of our manufacturing facility.Investment and Other Income, Net. Investment and other income, net, increased $2.7 million to $3.0 million for the nine months ended September 30, 2018, from $0.3 million for the nine months ended September 30, 2017 primarily due to a $2.3 million gain on the sale of assets to Genopis.Liquidity and Capital ResourcesSince our inception, we have financed our operations primarily through private placements and public offerings of equity securities, and revenues from our operations. Cash, cash equivalents, marketable securities, and long-term investments, including restricted cash, totaled $52.8 million at September 30, 2018, compared with $62.9 million at December 31, 2017.which Kaken provided funding. The decrease in our cash, cash equivalents and marketable securitiesrevenue recognized for the nine months ended September 30, 2018 was primarily the result of a milestone payment in March 2018 from Kaken in the useamount of cash$5.0 million for the achievement of a certain regulatory milestone and the remainder was due to fund our operations.Net cash used in operatingresearch and development activities was $11.9related to the Collaboration Agreement for which Kaken provided funding.and $6.9 millionor 58%, for the nine months ended September 30, 2019 from the nine months ended September 30, 2018, primarily due to an increase of $5.5 million in clinical studies costs associated with sofpironium bromide, an increase of $0.4 million in supply costs, a decrease of $0.4 million in regulatory and 2017, respectively. The increasecompliance costs, and a $0.1 million decrease in other costs.cash used in operating activitiesincreased by $1.3 million, or 185%, for the nine months ended September 30, 2018, compared with the prior year period, was primarily the result of the payment of employee termination benefits and a decrease in cash receipts2019 from Astellas due to the termination of the ASP0113 program.Net cash (used in) provided by investing activities was $(0.9) million and $7.8 million for the nine months ended September 30, 2018, due to a gain of $2.3 million related to the conversion of the convertible promissory notes in August 2019, which was partially offset by a $1.2 million in interest expense related to issuance of convertible promissory notes in 2019 and 2017,principal borrowings provided by the Loan Agreement.increasefunding will cover 67% of the product development costs up to $25.0 million, however, as of October 2019, additional funding was temporarily suspended. Nine Months Ended
September 30, 2019 2018 (in thousands) Net cash provided by (used in) operating activities $ (21,940 ) $ 7,621 Net cash provided by (used in) investing activities 18,509 (8 ) Net cash provided by (used in) financing activities 2,589 (482 ) Net increase (decrease) in cash and cash equivalents $ (842 ) $ 7,131 investingoperating activities forof $21.9 million during the nine months ended September 30, 2019 increased compared to cash provided by operating activities of $7.6 million during the same period in the prior year primarily due to $20.6 million milestone and research and development funding received from Kaken during the nine months ended September 30, 2018 compared with the prior year period, was primarily the result ofas well as an increase of $10.3 million in net purchasesloss of marketable securities, offset by $1.7$7.4 million, received fora gain on extinguishment of the saleconvertible promissory note of assets to Genopis.financinginvesting activities was $0.0of $18.5 million and $1.1 million for the nine months ended September 30, 2018 and 2017, respectively. The decrease in net cash provided by financing activities for the nine months ended September 30, 2018, compared with the prior year period, was the result of $1.1 million in net proceeds from the sale of our common stock during the nine months ended September 30, 2017.A discussion2019 increased compared to cash used in investing activities of our exposure$8 thousand during the same period in the prior year. The $18.5 million increase was primarily the result of the cash acquired in the Merger and maturities of marketable securities in 2019.auction rate securities is includednet cash used in Part I, Item 3financing activities of this Report under$0.5 million during the heading “Quantitative and Qualitative Disclosures About Market Risk.”In the long-term, we expect to incur substantial additional research and development expenses and general and administrative expenses, including increases in costsprior year. The increase was primarily related to personnel, preclinical and clinical testing, outside services, intellectual property and possible commercialization. Our future capital requirements will depend on many factors, including continued scientific progress in our research and development programs, the scope and results of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting, enforcing and defending patent claims, the impact ofcompeting technological and market developments, the cost of manufacturing scale-up and validation, and possible commercialization activities and arrangements. We may seek additional funding through research and development relationships with suitable potential corporate collaborators. We may also seek additional funding through public or private financings. For example, in November 2017, we sold 9,194,286 shares of our common stock and pre-funded warrants to purchase 7,234,285 shares of our common stock in a public offering for gross proceeds of approximately $28.7 million.We currently have on file an effective shelf registration statement that allows us to raise up to $40.0$7.4 million from the saleissuance of common stock, preferred stock, debt securities and/or warrants, subjectconvertible promissory notes in 2019, partially offset by payments of $4.8 million in 2019 towards the note payable pursuant to limitationsthe Loan Agreement.amount of securities thatliquidity and cash flows in future periods (in thousands):Less than 1 year $ 83 1-3 years 124 3-5 years — More than 5 years — Total $ 207 may sell under the registration statement in any 12-month period. Despite our current shelf registration statement, additional financing through these or other means may not be available on favorable terms or at all. If additional financing is not available, we anticipate that our available cash and existing sources of funding will be adequate to satisfy our cash needs at least through December 31, 2019.Contractual ObligationsWe may be required to make futuremilestone or other payments and pay royalties and other amounts to our licensors based onthird parties, including NovaQuest and Bodor. We have not included any contingent payment obligations, such as milestones or royalties, in the achievementtable above as the amount, timing, and likelihood of milestones set forth in various in-licensing agreements. In most cases, these milestonesuch payments are based onnot known.achievementnormal course of development or regulatory milestones, including the exercise of options to obtain licenses related to specific disease targets, commencement of various phases ofbusiness with CROs for clinical trials, filing of product license applications, approval of product licenses from the FDA or a foreign regulatory agency,preclinical research studies and the first commercial sale of a related product. Paymenttesting, chemistry and manufacturing, and other services and products for the achievement of milestones under our in-license agreements is highly speculativeoperating purposes. These contracts generally provide for termination upon notice, and subject to a number of contingencies.The aggregate amount of additional milestone payments that we could be required to pay under our active in-license agreements in place at September 30, 2018, is approximately $99.0 million. These amounts assume that all remaining milestones associated with the milestone payments are met. In the event that product license approval for any of the related products is obtained, we may be required to make royalty payments in addition to these milestone payments. Althoughtherefore we believe that some of the milestones contained in our in-licensenon-cancelable obligations under these agreements may be achieved, it is highly unlikely that a significant number of them will be achieved. Because the milestones are contingent, we are not material.a position to reasonably estimate how much, if any of the potential milestone payments will ultimately be paid, or when. Additionally, under the in-license agreements, many of the milestone events are related to progress in clinical trials which will take several years to achieve.In addition, under the indemnification agreements with our officers and directors, we have agreed to indemnify those individuals for any expenses and liabilities in the event of a threatened, pending or actual investigation, lawsuit, or criminal or investigative proceeding.We have an employment agreement that contains severancematerial off-balance sheet arrangements, with our chief executive officer, or CEO, and severance agreements with six of our other employees. Under the agreement with our CEO, we are obligated to pay severance if we terminate the CEO’s employment without “cause,” or if the CEO resigns for “good reason,” as defined in the agreement, withinrules and regulations of the periods set forth therein. The severance for the CEO consists of continued base salary payments at the then-current rate, including the payment of health insurance premiums for 18 months, plus a payment equal to one and one-half times the CEO’s cash bonus in the previous year. In addition, the CEO receives accelerated vesting on all his unvested stock awards as if he had remained employed by us for 18 months from the date of termination. In the event that the termination occurs within 24 months of a “change in control,” as defined in the agreement, the severance for the CEO consists of a lump sum payment equal to 24 months of base salary at the then-current rate, the payment of health insurance premiums for 18 months, plus a payment equal to one and one-half times the CEO’s cash bonus in the previous year. In addition, all outstanding unvested stock awards will vest immediately. Under the agreements with our other six executives, we are obligated to pay severance if we terminate the executive’s employment without “cause,” or if the executive resigns for “good reason,” as defined in the agreements, within the periods set forth therein. The severance for three of these executives consists of a lump-sum payment equal to 12 months of base salary at the then-current rate, including the payment of health insurance premiums for 12 months, plus a payment equal to the executive’s cash bonus in the previous year. In addition, the executive receives accelerated vesting on all his unvested stock awards as if he had remained employed by us for 12 months from the date of termination. In the event that the termination occurs within 12 months of a “change in control,” as defined in the agreements, the severance consists of a lump sum payment equal to 18 months of base salary at the then-current rate, the payment of health insurance premiums for 12 months, plus a payment equal to the executive’s cash bonus in the previous year. In addition, all outstanding unvested stock awards will vest immediately. The severance for the remaining three employees consists of a lump-sum payment equal to six months of base salary at the then-current rate, including the payment of health insurance premiums for six months, plus a bonus payment of $75,000. The maximum payments due under these agreements would have been $4.0 million if each such employee was terminated at September 30, 2018.Off-Balance Sheet ArrangementsAs of September 30, 2018, we did not have any off-balance sheet arrangements.both restricted and non-restricted, marketable securities, including government agency securities and long-term investments.money market funds, and are classified as available-for-sale securities. The average maturity of our investments excluding our auction rate securities, is approximately fourthree months. Our investments are classified as available-for-sale securities.To assess our interest rate risk, we performed a sensitivity analysis projecting an ending fair valueBecause of the short-term nature of our cash equivalents and current marketable securities using the following assumptions:investment portfolio, a four-month average maturity and a 150-basis-pointhypothetical increase of 1% in interest rates. This pro forma fair valuerates would have been $0.2 million lower than the reported fair value of our investments at September 30, 2018.Our investment securities consist of auction rate securities, corporate debt securities and government agency securities. As of September 30, 2018, our long-term investments included a (at par value) $2.5 million auction rate security secured by municipal bonds. At September 30, 2018, the auction rate security we held maintained a Standard and Poor’s credit rating of BBB. Our auction rate security is a debt instrument with a long-term maturity and with an interest rate that is reset in short intervals through auctions. The conditions in the global credit markets have prevented some investors from liquidating their holdings of auction rate securities because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. If there is insufficient demand for the securities at the time of an auction, the auction may not be completed and the interest rates may be reset to predetermined higher rates. When auctions for these securities fail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature.Since February 2008, there has been insufficient demand at auction for our auction rate security held at September 30, 2018. As a result, this security is currently not liquid, and we could be required to hold it until it is redeemed by the issuer or to maturity. As of September 30, 2018, we had recognized $0.4 million of losses related to the auction rate security by adjusting its carrying value. The market value of the security has partially recovered from the lows that created the losses. As of September 30, 2018, we had recorded cumulative unrealized gains of $0.4 million. Any future decline in market value may result in additional losses being recognized.The valuation of our auction rate security is subject to uncertainties that are difficult to predict. The fair value of the security is estimated utilizing a discounted cash flow analysis or other type of valuation model as of September 30, 2018. The key drivers of the valuation model include the expected term, collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, discount rates, and the expected holding period. The security was also compared, when possible, to other observable market data for securities with similar characteristics.In the event we need to access the funds that are not currently liquid, we will not be able to do so without the possible loss of principal, until a future auction for this investment is successful or it is redeemed by the issuer or it matures. If we are unable to sell the security in the market or it is not redeemed, then we may be required to hold it until 2038 when it matures. We do not anticipate a need to access these funds for operational purposes for the foreseeable future. We will continue to monitor and evaluate the investment on an ongoing basis for impairment. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and our other sources of cash, we do not anticipate that the potential illiquidity of this investment will affect our ability to execute our current business plan.2018.2018,2019 before or after the Merger that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. No processes or systems of Vical continued subsequent to the Merger.ITEM 1A.You should consider carefully the risks described below, together with allthe other information included in this Report and in our other filings with the SEC, before decidingfactors, whether to invest in or continue to hold our common stock. The risks described below are all material risks currently known expected or reasonably foreseeable by us. If anyunknown, including but not limited to those described below. Any one or more of such factors could directly or indirectly cause our actual results of operations and financial condition to vary materially from past or anticipated future results of operations and financial condition. Any of these risks actually occur,factors, in whole or in part, could materially and adversely affect our business, financial condition, results of operations, or cash flow couldand stock price. The following information should be seriously harmed. This could causeread in conjunction with Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the trading pricecondensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” of this Quarterly Report.common stockright to decline,continue to develop sofpironium bromide and NovaQuest has suspended product development payments to us as a result.lossdeclaratory judgment that the termination of all or partthe License Agreement by the Plaintiffs was valid and enforceable; (ii) an injunction requiring us to cease and desist use of your investment.The risk factors set forth below with an asterisk (*) nextthe Plaintiffs’ intellectual property; and (iii) damages for breach of contract and breach of the covenant of good faith and fair dealing.title are new risk factorsFunding Agreement, NovaQuest is obligated only to resume Development Payments if the Material Adverse Event is resolved or risk factors containing changes, including material changes, fromcured by us to NovaQuest’s reasonable satisfaction by October 25, 2020. If the risk factors previously disclosedMaterial Adverse Event is not resolved or cured to NovaQuest’s reasonable satisfaction by such date, then NovaQuest may, in Item 1Aits sole discretion, terminate any future payment obligation under the Funding Agreement and we may be obligated to make certain payments to NovaQuest. See “Risks Related to Our Dependence on Third Parties” below for a further discussion of the Funding Agreement and related risks.Annual Report on Form 10-K forbusiness relations. We requested expedited treatment of the year ended December 31, 2017, asarbitration proceeding and concurrent mandatory mediation under the AAA rules. On October 30, 2019, we concurrently filed with the SEC.(*)NoneUnited States District Court for the Southern District of Florida a motion to dismiss the complaint brought against us by Bodor and Nicholas S. Bodor described above.product candidates has beenbusiness, including our prospective ability to finance our operations and generate revenue, primarily depends on the successful development, regulatory approval, and commercialization of sofpironium bromide, at least in the United States. The clinical and commercial success of sofpironium bromide depends on a number of factors, including but not limited to the following:we havedistribution in such countries and territories, whether alone or in collaboration with Kaken or others;number of product candidates in development. to patents and licenses.develop commercially successful products,achieve one or more of these factors, many of which are beyond our reasonable control, in a timely manner or at all, and with adequate financing, we could experience significant delays or an inability to obtain regulatory approvals or commercialize sofpironium bromide. Even if regulatory approvals are obtained, we may never be forcedable to curtailsuccessfullycease operations.All ofany current primary asset, to continue our product candidates are either in research or development. business.must conduct a substantial amount of additional research and development before any U.S. or foreign regulatory authority will approve any of our product candidates. Limited data exist regarding the efficacy of DNA vaccines or therapeutics compared with conventional vaccines or therapeutics. Results of our research and development activities may indicate that our product candidates are unsafe or ineffective. In this case, we may stop development and regulatory authorities will not approve them. For example, earlier this year, development of ASP0113, an investigational CMV therapeutic vaccine developed by us and based on our DNA delivery technology, was terminated following negative results fromhave never conducted a Phase 3 clinical trial ourselves and in June 2018 we terminated further developmentmay be unable to successfully do so for sofpironium bromide. our HSV-2 vaccine candidate following negative results from a Phase 2 trial. We3 clinical trial is a long, expensive, complicated, uncertain, and highly regulated process. Although our employees have an on-goingconducted successful Phase 2 and Phase 3 clinical trial of VL-2397, our novel antifungal candidate, but the results of this trial may not be positive and the favorable results or trends observed in our previously completed clinical trial for this product candidate may not continuetrials in the past across many therapeutic areas while employed at other companies, we as a company have not conducted a Phase 2 clinical trial. Our ongoing Phase 23 pivotal clinical trial, and any future trialas a result we may not demonstrate sufficientrequire more time and incur greater costs than we anticipate. We commenced a Phase 3 long-term safety or efficacy to support further product development. Because we have a limited number of product candidates, if we experience a significant delay, set-back or failurestudy for sofpironium bromide gel in the third quarter of 2018 and intend to initiate two pivotal Phase 3 clinical trials in subjects with primary axillary hyperhidrosis in the United States, subject to resolution of matters currently in dispute with Bodor. Failure to commence or complete, or delays in, our planned clinical trials would prevent us from, or delay us in, obtaining regulatory approval of and commercializing sofpironium bromide and could prevent us from, or delay us in, receiving development- or regulatory-based milestone payments and commercializing sofpironium bromide gel for the treatment of hyperhidrosis, which would impact adversely our financial performance, as well as put us in potential breach of material contracts for the licensing and development of anysofpironium bromide, subjecting us to significant contract liabilities, including but not limited to loss of our product candidates, it could have a material adverse impact on our business prospects.Even if we complete clinicalrights in and to sofpironium bromide.the results of clinical trials may not support approval by the FDA or comparable foreign agencies or, if approved, our products may not be commercially successful, particularly if they do not gain market acceptance among physicians, patients, healthcare payersfor sofpironium bromide is very expensive, time-consuming, and relevant medical communities. If we failuncertain.developdesign and commercialize our product candidates, we may be forced to curtail or cease operations.(*)Our clinical trials or those of our partners may fail to demonstrate adequately the safety and efficacy of any of our product candidates, which would prevent or delay regulatory approval and commercialization.Before obtaining regulatory approvals for the commercial sale of our product candidates, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that our product candidates are both safe and effective for use in each target indication. Clinical testing is expensive and can take many years to complete,implement, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial clinical trials. We and our licensees have in the past suffered significant setbacks in advanced clinical trials due to lack of efficacy, notwithstanding promising results in earlier trials. For example, in 2013 we ceased development of Allovectin®, an investigational intratumoral cancer immunotherapy, following negative results from a Phase 3 trial. In June 2015 and in June 2018, we announced that our HSV-2 product candidate did not meet the primary endpoint in a Phase 1/2 and a Phase 2 clinical study, respectively. In September 2016, we and Astellas announced that ASP0113 did not meet its primary endpoint in a Phase 2 clinical study in kidney transplant patients and in January 2018, we and Astellas announced that ASP0113 did not meet its primary endpoint in a Phase 3 clinical study in CMV end organ disease, after which Astellas informed us that it was terminating further development. Most product candidates that commence clinical trials are never approved as products.There are a number of factors that could cause a clinical study to fail or be delayed, including:the clinical study may not be designed properly or may produce negative or inconclusive results;regulators, monitoring boards or other entities may not grant permission to start a clinical study or require that we hold, suspend or terminate clinical research for safety, ethical or regulatory reasons, including adverse events, or AEs, reported during the trial;we may encounter delays in reaching agreement with regulators on final clinical study design;we may decide, or regulators may require us, to conduct additional preclinical testing or clinical studies;enrollment in our clinical studies may be slower than we anticipate;we may encounter delays in engaging prospective clinical research organizations and clinical trial sites to conduct our clinical studies or may have disagreements with these entities;the cost of our clinical studies may be greater than we anticipate;we may not be able to raise funding necessary to initiate or complete our on-going or planned clinical studies; andthe supply or quality of our product candidates or other materials necessary to conduct our clinical studies may be insufficient, inadequate or delayed.If initiation or completion of our clinical studies or those of our collaborators are delayed, our development costs may increase, the approval process for our product candidates would be delayed, any periods during which we may have the exclusive right to commercialize our product candidates may be reduced and our competitors may have more time to bring products to market or establish market positions.In addition, even if clinical trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as sufficient to demonstrate that a product is safe and efficacious, and more trials could be required before we submit our product candidates for approval. To the extent that the results of the trials are not satisfactory to the FDA or foreignby regulatory authorities for supportcommercialization and of those that are approved many do not cover their costs of development or ever generate a marketing application,profit. In addition, we, any partner with which we currently or may in the future collaborate, the FDA, a local or central institutional review board, or IRB, or other regulatory authorities, including state and local agencies and counterpart agencies in foreign countries, may suspend, delay, extend, require modifications or add additional requirements to or terminate our clinical trials at any time.product candidatesreasonable 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, notwithstanding that regulators may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in supportaccept PROs as part of potentialthe drug approval of our product candidates.Our product candidatesprocess.theirits regulatory approval, limit the commercial profile of thean approved labeling,label, or result in significant negative consequences following marketing approval,post-approval regulatory action.any.There is risk that ourapproved, after it has been marketed. Undesirable side effects caused by sofpironium bromide could cause us, any partners with which we may collaborate, or regulatory authorities to interrupt, extend, modify, delay, or halt clinical trials and could result in a more restrictive or narrower product candidates may induce AEs, manylabel or the delay or denial of which may be unknown at this time. If an unacceptable frequency and/or severity of AEs are reported in clinical studies for our product candidates, our ability to obtain regulatory approval for mayby the FDA or comparable foreign authorities.negatively impacted. Even if we receive regulatory approval, AEs associated with any approved products could have significant negative consequences, including:may approve the product only with a risk evaluation and mitigation strategy (REMS), potentially with restrictions on distribution and other elementscould order us to assure safe use (ETASU);regulatory authorities may withdraw theircease further development of or deny approval of sofpironium bromide for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in product or impose restrictions on its distribution in a form of a modified REMS;regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;we may be required to change the way the product is administered or to conduct additional clinical studies;we could be sued and held liable for harm caused to patients; andour reputation may suffer.eventsoccurrences may expose us to liability or harm our business, financial condition, operating results, and prospects.regulatory approvals or market acceptance of the affected product candidatesofpironium bromide and could substantially increase the costs of commercializing sofpironium bromide, potentially even leading to recall of the drug.product candidates.best interests. Kaken may be unable to obtain positive approval of the drug in Asian markets.(*)Our revenues have dependedThe license agreement we entered into with Kaken granted Kaken an exclusive Japan license and certain rights to additional Asian countries to develop and commercialize sofpironium bromide. Under the terms of the agreement, as amended, we received an up-front payment, development milestones and research and development payments and are eligible to receive future milestones and a royalty on net sales.productshow best to preserve and extend regulatory approvals in collaboration with othersthese territories for sofpironium bromide, which may delay or prevent achieving regulatory approval for sofpironium bromide in Kaken’s territories, as well as by us in the United States and the other territories where we maintain exclusive rights. Additionally, Kaken is responsible for conducting certain nonclinical and API (chemistry, manufacturing, and controls)-related activities that will be required for FDA approval in the United States, and as a result, we are reliant on Kaken to whomexecute successfully, in a timely and efficient manner, such activities on our behalf. To the extent Kaken experiences delays and/or difficulties in performing its development activities, this could prevent or cause substantial delays in our ability to seek approval for sofpironium bromide gel in the United States and other territories in which we have licensed our technologies. maintain exclusive rights. We will not receive additional milestone or other payments from Kaken if Kaken is not successful in its development activities.additional collaboratorsunacceptably high. Patients may not use sofpironium bromide unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of sofpironium bromide.licensees,lists of medications for which third-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies and there may be time limitations on when a new drug may even be eligible for formulary inclusion. Also, third-party payors may refuse to include sofpironium bromide in their formularies or otherwise restrict patient access to sofpironium bromide when a less costly generic equivalent or other treatment alternative is available in the discretion of the formulary.• • collaboratorsface generic competition for sofpironium bromide, which could expose us to liability or licenseesadversely affect our business, financial condition, operating results, and prospects.successfully develop and commercialize products covered by such arrangements,meet our requirements or otherwise conduct the trials as required, we may not be able to derive collaborationsatisfy our contractual obligations or obtain regulatory approval for, or commercialize, sofpironium bromide.licensing revenues,expect to continue to rely, on third-party CROs to conduct and oversee our sofpironium bromide clinical trials and other aspects of product development. We also rely on various medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinical protocols and all applicable regulatory requirements, including the FDA’s regulations and good clinical practice, or GCP, requirements, which are an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors, and state regulations governing the handling, storage, security and recordkeeping for drug and biologic products. These CROs and other third parties play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials. We rely heavily on these parties for the execution of our clinical trials and preclinical studies, and control only certain aspects of their activities. We and our CROs and other third-party contractors are required to comply with GCP and good laboratory practice, or GLP, requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for sofpironium bromide. Regulatory authorities enforce these GCP and GLP requirements through periodic inspections of trial sponsors, principal investigators, and trial sites. If we or any of these third parties fail to comply with applicable GCP and GLP requirements, or reveal noncompliance from an audit or inspection, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or other regulatory authorities may require us to perform additional clinical trials before approving our or our partners’ marketing applications. We cannot assure that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical or preclinical trials comply with applicable GCP and GLP requirements. In addition, our clinical trials generally must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations and policies may require us to extend or repeat clinical trials, which would delay the regulatory approval process.lose opportunitiesnot be able to validateenter into arrangements with alternative CROs or clinical trial sites, or do so on commercially reasonable terms, and in a satisfactory time frame. In addition, if our DNA delivery technologies, orrelationship with clinical trial sites is terminated, we may experience the loss of follow-up information on patients enrolled in our ongoing clinical trials unless we are able to transfer the care of those patients to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and could receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be forcedquestioned by the FDA.curtailestablish sales and marketing capabilities on our own or through third parties, or are delayed in establishing these capabilities, we will be unable to successfully commercialize our product candidates, if approved, or generate product revenue.commercialization effortsdistribution of pharmaceutical products, and there are significant risks involved in these areas.We have licensed,building and may continuemanaging a sales organization, including our ability to license,hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in thetechnologies to corporate collaboratorsinternal sales, marketing, distribution, and licensees forpricing/reimbursement/access capabilities would impact adversely the research, development and commercialization of specified product candidates. Our revenues have partially depended uponthese products.ability of these collaborators and licensees to successfully develop and commercialize products covered by these arrangements. For example, we previously entered into license agreements with Astellas related to ASP0113, an investigational CMV therapeutic vaccine, and these agreements were subsequently terminated following negative results from a Phase 3 clinical trial. Prior to the termination, the revenue received by us under this collaboration accounted for a significant amountcommercial infrastructure of our revenue generated over the past three years. During the years ended December 31, 2017, 2016partner, Kaken, which will provide us with resources and 2015,expertise in certain areas that are greater than we recognized $0.3 million, $1.5 millioncould initially build ourselves. We may choose to collaborate with additional third parties in various countries that have direct sales forces and $1.8 million, respectively,established distribution systems, either to augment our own sales force and distribution systems or in lieu of revenue related to license fees,our own sales force and $13.5 million, $12.5 million and $14.7 million, respectively, of revenue related to contract services and product supply. During the nine months ended September 30, 2018 and 2017, we recognized $1.2 million and $9.3 million, respectively, of revenue from Astellas.distribution systems. If we are unable to enter into new collaborationsuch arrangements on acceptable terms or licensing arrangementsat all, we may not be able to successfully commercialize our product candidates, especially in other countries where we currently do not have a foreign legal presence. The inability to commercialize successfully our product candidates, either on our own or through collaborations with one or more third parties, would harm our business, financial condition, operating results, and prospects.will not receive additional revenues from these sources and our financial results will be negatively impacted. The development and commercialization effortsmay never obtain regulatory approval to commercialize any of our collaboratorsproduct candidates.licenseescontrol, recordkeeping, labeling, packaging, storage, approval, sale, marketing, distribution, import, export and reporting of safety and other post-market information related to our drug products are subject to extensive regulation by the same risksFDA and uncertainties described aboveother regulatory authorities in the United States and in foreign countries, and such regulations differ from country to country and frequently are revised.independently developedproduct candidates, the FDA may impose significant restrictions on the approved indicated use(s) for which the product may be marketed or on the conditions of approval. A product candidate’s approval may contain requirements for potentially costly post-approval studies and surveillance, including Phase 4 clinical trials, to monitor the safety and efficacy of the product or include in the approved label restrictions on the product and how it may be used or sold. We also will be subject to ongoing FDA obligations and continued regulatory review with respect to, among other things, the manufacturing, processing, labeling, packaging, distribution, pharmacovigilance and adverse event reporting, storage, advertising, promotion, and recordkeeping for our product candidates.Some collaborators These requirements include submissions of safety and other post-marketing information and reports, registration, continued compliance with cGMP requirements and with the FDA’s GCP requirements and GLP requirements, which are regulations and guidelines enforced by the FDA for all of our product candidates in clinical and preclinical development, and for any clinical trials that we conduct post-approval, as well as continued compliance with the FDA’s laws governing commercialization of the approved product, including but not limited to the FDA’s Office of Prescription Drug Promotion, or licenseesOPDP, regulation of promotional activities, fraud and abuse, antikickback, product sampling, debarment, scientific speaker engagements and activities, formulary interactions as well as interactions with healthcare practitioners, including various conflict-of-interest reporting requirements for any healthcare practitioners we may use as consultants, and laws relating to the pricing of drug products, including federal “best price” regulations that if not met can prohibit the company from participating in federal reimbursement programs like Medicare or Medicaid. To the extent that a product candidate is approved for sale in other countries, we may be subject to similar or more onerous (i.e., prohibition on direct-to-consumer advertising that does not exist in the United States) restrictions and requirements imposed by laws and government regulators, and even private institutions, in those countries.succeedbe permitted to commercialize our product candidates, which would adversely affect our ability to generate revenue and achieve or maintain profitability.theirthe future sponsor or support clinical trials for our product development efforts. Itcandidates outside the United States, and the FDA and applicable foreign regulatory authorities may not accept data from such trials.possibleable to validate the data through an on-site inspection or other appropriate means. Many foreign regulatory bodies have similar requirements. In addition, such foreign studies would be subject to the applicable local laws of the foreign jurisdictions where the studies are conducted. There can be no assurance the FDA or applicable foreign regulatory authority will accept data from trials conducted outside of the United States or thecollaboratorsinsurance coverage will be sufficient to cover our liability under any such cases.licenseesothers selling or otherwise coming into contact with our product candidates, among others, and under some circumstances even government agencies. If we cannot successfully defend against product liability or similar claims, we will incur substantial liabilities, reputational harm and possibly injunctions and punitive actions. In addition, regardless of merit or eventual outcome, product liability claims may result in:regulatory approval ofthis increased product candidates using our technologies or successfully market and commercialize any such products for which regulatory approval is obtained. Other collaborators or licensees may not devote sufficient time or resources to the programs covered by these arrangements, and we may have limited or no control over the time or resources allocated by these collaborators or licensees to these programs. The occurrence of any of these events may cause us to derive little or no revenue from these arrangements, lose opportunities to validate our DNA delivery technologies, or force us to curtail or cease our development and commercialization efforts in these areas.Our collaborators and licensees may breach or terminate their agreements with us, including some that may terminate their agreements without cause at any time subject to certain prior written notice requirements, and we may be unsuccessful in entering into and maintaining other collaborative arrangements for the development and commercialization of products using our technologies. If we are unable to maintain existing collaboration arrangements or enter into new ones, our ability to generate licensing, milestone or royalty revenues would be materially impaired.Some of our independent product candidates and some of those under development by our sublicensees incorporate technologies we have licensed from others. If we are unable to retain rights to use these technologies, we or our sublicensees may not be able to market products incorporating these technologiesliability insurance on a commercially feasible basis, if at all.We have licensed certain technologies from corporate collaborators and research institutions, and sublicensed certain of such technologies to others, for use in the research, development and commercialization of product candidates. Our product development efforts and those of our sublicensees partially depend upon continued access to these technologies. For example, we or our licensors may breach or terminate our agreements, or disagree on interpretations of those agreements, which could prevent continued access to these technologies. If we were unable to resolve such matters on satisfactoryreasonable terms or at all and for all geographies in which we wishsublicenseesinsurance coverage, decrease our cash, expose us to liability and harm our business, financial condition, operating results, and prospects.unablesubject to developrisks related to pre-approval promotion or off-label use, or unauthorized direct-to-consumer advertising of our product candidates.commercializepromotion of drug products, and drug products may only be marketed or promoted for their FDA-approved uses, consistent with the product’s approved labeling and to appropriate patient populations. Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, state attorneys general, members of Congress and the public and others. Violations, including promotion of our products for unapproved or off-label uses, are subject to enforcement letters, inquiries, and investigations, and civil, criminal, and/or administrative sanctions by the FDA and other government agencies or tribunals and lawsuits by competitors, healthcare practitioners, consumers, investors, or other plaintiffs. Additionally, advertising and promotion of any product candidate that obtains approval outside of the United States will be scrutinized heavily by relevant foreign regulatory authorities.be forcedbecome subject to curtail or cease operations.We licensed rightssuch litigation and, if we are not successful in defending against such actions, those actions could expose us to patentsliability and know-how for VL-2397 from Astellas pursuant to an in-license agreement that contains obligations to pay Astellas regulatory and sales milestone payments relating to VL-2397, as well as royalties on net sales of VL-2397. If we fail to make a required payment to Astellas or otherwise materially breach our in-license agreement with Astellas and do not cure the failure within the required time period, Astellas may be able to terminate the license to the VL-2397 patents and know-how, which wouldcould have a material adverse effect on our business, financial condition, operating results, and resultsprospects and even result in having an independent compliance monitor assigned to audit our ongoing operations at our cost for a lengthy period of operations.(*)time.have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability.To date, we have not sold, or received approval to sell, any pharmaceutical products. We do not expect to sell any pharmaceutical products for at leastare evaluating the next several years. Our net losses were approximately $13.0 million, $9.0 millionclinical development steps for BBI-3000 and $9.2 millionBBI-6000 as each is in an early stage of clinical (prior to Phase 3) and preclinical development. The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming, costly, and inherently unpredictable, especially for early-stage product candidates. The time required to obtain approval for early-stage product candidates from the FDA and comparable foreign authorities is unpredictable but typically takes many years, ended December 31, 2017, 2016involves significant expenditures, and 2015, respectively. Asdepends upon numerous factors, including the substantial discretion of September 30, 2018, we had incurred cumulative net losses totaling approximately $438.5 million. Moreover, we expect that our net losses will continuethe regulatory authorities. In addition, approval 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 increase for the foreseeable future. We may notvary among jurisdictions. Our early-stage product candidates will require substantial additional preclinical and clinical development beforeachieve projected resultssubmit an application to the FDA, if we generate lower revenues or receive lower investment income than expected, or we incur greater expenses than expected, or all of the above. Over the past several years our revenues have been largely dependent on manufacturing and research services performed under our license agreement with Astellas. In February2018, Astellas exercised its rights to terminate the ASP0113 license agreements, and we will therefore not receive any further payments under these agreements. We may never generate sufficient product revenue to become profitable. We also expect to have quarter-to-quarter fluctuations in revenues, expenses, and losses, some of which could be significant.(*)We may need additional capital in the future. If additional capital is not available, we may have to curtail or cease operations.We may need to raise more money to continue the research and development necessary to bring our products to market and to establish marketing and additional manufacturing capabilities. We may seek additional funds through public and private stock offerings, government contracts and grants, arrangements with corporate collaborators, borrowings under lines of credit or other sources. We currently have on file a shelf registration statement that allows us to raise up to an aggregate of $40.0 million from the sale of common stock, preferred stock, debt securities and/or warrants, subject to limitations on the amount of securities we may sell under the registration statement in any 12-month period. However, we may not be able to raise additional funds on favorable terms, or at all. Conditions in the credit markets and the financial services industry may make equity and debt financing more difficult to obtain, and may negatively impact our ability to complete financing transactions. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants, such as limitations on our ability to incur additional indebtedness and other operating restrictions that could adversely impact our ability to conduct our business.If we are unable to obtain additional funds, we may have to scale back our development of new products, reduce our workforce or license to others products or technologies that we otherwise would seek to commercialize ourselves. The amount of money we may need would depend on many factors, including:The progress of our research and development programs;The scope and results of our preclinical studies and clinical trials;The amount of our legal expenses and any settlement or damages payments associated with litigation; andThe time and costs involved in: obtaining necessary regulatory approvals; filing, prosecuting and enforcing patent claims; scaling up our manufacturing capabilities; and the commercial arrangements we may establish.(*)If we do not realize the expected benefits and successfully manage the transition from the restructuring that we announced in January 2018, our operations and financial condition may be negatively impacted.In January 2018, we implemented a restructuring designed to conserve capital and focus our efforts on our VL-2397 antifungal drug product candidate and VCL-HB01 vaccine candidate. In addition, in July 2018, we entered into an agreement with Genopis, Inc., or Genopis, to sell our idle manufacturing assets and sublease our manufacturing facilities space. If we are unable to realize the expected operational efficiencies and cost savings from our restructuring and sale of our manufacturing assets, our operating results and financial condition would be adversely affected. We cannot guarantee that we will not have to undertake additional restructuring activities or that any of our restructuring efforts will be successful.We will also need to effectively manage our operations and facilities in order to advance our drug development programs and support our collaboration arrangements. Following our January 2018 restructuring and July 2018 sale of our manufacturing assets, it is possible that our infrastructure may be inadequate to support our future efforts and business strategy or to maintain effective operational, financial and management controls and reporting systems and procedures. IfAccordingly, we cannot successfully manage the transition of our restructured operations, we may be unsuccessful in executing our business strategy.(*)We are reviewing strategic alternatives and there can be no assuranceassure you that we will be successful in identifyingable to seek or completing any strategic transaction, that any such strategic transaction will result in additional value for our stockholders or that the process will not have an adverse impact on our business. We recently announced that our board of directors is conducting a review of strategic alternatives and that we had retained MTS Health Partners, L.P. as our financial advisor to assist in the review process. These alternatives could include, but are not limited to, merger or acquisition transactions, issuing or transferring shares of our common stock, or the license, purchase or sale of specific assets, in addition to other potential actions aimed at increasing stockholder value. There can be no assurance that the review of strategic alternatives will result in the identification or consummation of any transaction. Our board of directors may also determine that our most effective strategy is to continue to execute on our current development strategy. The process of reviewing strategic alternatives may be time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We could incur substantial expenses associated with identifying, evaluating and negotiating potential strategic alternatives. There can be no assurance that any potential transaction orother strategic alternative, if consummated, will provide greater value to our stockholders than that reflected in the current price of our common stock. Until the review process is concluded, perceived uncertainties related to our future may result in the loss of potential business opportunities and volatility in the market price of our common stock and may make it more difficult for us to attract and retain qualified personnel and business partners.Theobtain regulatory approval process is expensive, time consuming and uncertain, which may prevent us and our collaborators and licensees from obtaining required approvals for the commercialization of our products.Our product candidates under development and those of our collaborators and licensees are subject to extensive and rigorous regulations by numerous governmental authorities in the United States and other countries. The regulatory approval process takes many years and will require us to expend substantial resources.U.S. or foreign regulations evolve and could prevent or delay regulatory approval of our products or limit our and our collaborators and licensees’ ability to develop and commercialize our products. Delays could:Impose costly procedures on our activities and those of our collaborators and licensees;Delay or prevent our receipt of developmental or commercial milestones from our collaborators and licensees;Diminish any competitive advantages that we or our products attain; orOtherwise negatively affect our results of operations and cash flows.We have no experience in submitting a BLA or an NDA to the FDA. Because these applications must be submitted to and approved by the FDA before any of our early-stage product candidatescandidates.be commercialized, our lack of experience may impede our ability to obtain FDA approval in a timely manner, if at all, which in turn would delay or prevent us from commercializing those products. Similarly, our lack of experience with respect to obtaining regulatory approvals in countries other than the United States may impede our ability to commercialize our products in those countries.The FDA and comparable foreign regulatory bodies will regulate separately each DNA product containing a particular gene depending on its intended use. Presently, to commercialize any product we and our collaborators and licensees must file a regulatory application for each proposed use. We and our collaborators and licensees must conduct clinical studiesfail to demonstrate the safety and efficacy of our other investigational agents BBI-3000 or BBI-6000, or serious adverse or unacceptable side effects may be identified during their development, which could prevent or delay marketing approval and commercialization, increase our costs or necessitate the product necessaryabandonment or limitation of the development of BBI-3000 or BBI-6000.obtaindemonstrate safety and are associated with side effects or have characteristics that are unexpected. Based on the safety profile seen in clinical testing, we may need to abandon development or limit development to more narrow uses in which the side effects or other characteristics are less prevalent, less severe, or more tolerable from a risk-benefit perspective. The FDA or foreign regulatory authority approval. The results obtained so far in ouran IRB also may require that we suspend, discontinue, or limit clinical trials based on safety information. Such findings could further result in regulatory authorities failing to provide marketing authorization for BBI-3000 or BBI-6000. Many drug candidates that initially showed promise in early-stage testing and thosewhich were efficacious have later been found to cause side effects that prevented further development of the drug candidate and, in extreme cases, the side effects were not seen until after the drug was marketed and exposed to large populations, causing regulators to remove the drug from the market post-approval.collaboratorsearly-stage product candidates at any time during development or after approval, which would reduce or eliminate our potential return on investment for those product candidates.licenseeswe will have missed the opportunity to have allocated those resources to potentially more productive uses.replicatedadopted in ongoingthe future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates if approved or future trials,additional pricing pressures.resultspotential reach of a marketing campaign.varying interpretation on whether they are sufficient to support approval for commercialization. This may prevent any of our product candidates from receiving approval for commercial sale.If any of our product candidates receive regulatory approval, the FDA or other foreign regulatory agencies may still impose significant restrictions on the indicated uses or marketing of our product candidates or impose ongoing requirements for potentially costly post-approval studies. In addition, regulatory agencies subject a product, its manufacturerstricter healthcare laws, regulation and the manufacturer’s facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product or a product class, including AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or product class, our collaborators and licensees or us, including requiring withdrawal of a product from the market. Our product candidates will also be subject to ongoing FDA and other foreign regulatory agency requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the product. If we or our collaborators and licensees fail to maintain regulatory compliance after receiving marketing approval, we or our collaborators and licensees may be unable to market our productsenforcement, and our businessfailure to comply with those laws could suffer.Adverse eventsexpose us to liability or the perception of adverse events in the field of gene therapy, or with respect to our product candidates, may negatively impact regulatory approval or public perception of our products.The commercial success of some of our product candidates will depend in part on public acceptance of the use of gene therapy for preventing or treating human diseases. Serious AEs, including patient deaths, have occurred in clinical trials utilizing viral delivery systems to deliver therapeutic genes to the patient’s targeted cells. Although none of our current products or studies utilize viral delivery systems, these AEs, as well as any other AEs in the field of gene therapy that may occur in the future, may negatively influence public perception of gene therapy in general. If public perception is influenced by claims that gene therapy is unsafe, our product candidates may not be accepted by the general public or the medical community.Future AEs in gene therapy or the biotechnology industry could also result in greater governmental regulation, stricter labeling requirements and potential regulatory delays in the testing or approval of our potential products. Any increased scrutiny could delay or increase the costs of our product development efforts or clinical trials. In addition, any AEs that may occur in our clinical trials and any resulting publicity may cause regulatory delays or otherwise affect our product development efforts or clinical trials.Some of our potential products may be administered to patients who are suffering from, or are vulnerable to, serious diseases or other conditions which can themselves be life-threatening and often result in the death of the patient. Patient deaths in our clinical trials, even if caused by pre-existing diseases or conditions, could negatively affect the perception of our product candidates. In addition, although we do not believe our vaccine candidates could cause the diseases they are designed to protect against, a temporal relationship between vaccination and disease onset could be perceived as causal. Some of our products are designed to stimulate immune responses, and those responses, if particularly strong or uncontrolled, could result in local or systemic AEs, including latent AEs.(*)Our patents and proprietary rights may not provide us with any benefit and the patents of others may prevent us from commercializing our products.As of September 30, 2018, we were the assignee or co-assignee of 34 issued U.S. and foreign patents. We maintain our issued patents by paying maintenance fees to the patent office in each country when due. Where appropriate, we participate in legal proceedings to vigorously defend against the revocation or withdrawal of our patents. The scope and nature of these proceedings generally differ depending on the country in which they are initiated. If we are not successful in defending our patents, we may lose all or part of our proprietary rights related to those patents in these geographic regions.As of September 30, 2018, we were also prosecuting one pending patent application in the United States, not including patent applications for which we are a co-assignee and that are being prosecuted by our partners.We may not receive any patents from our current patent applications. Issued patents provide exclusivity for only a limited time period, after which they no longer serve to protect proprietary technologies or to provide any commercial advantage. Moreover, if patents are issued to us, governmental authorities may not allow claims sufficient to protect our technologies and products. Others may also challenge or seek to circumvent or invalidate our patents. In that event, the rights granted under our patents may be inadequate to protect our proprietary technologies or to provide any commercial advantage.An inability to obtain, enforce, and defend patents covering our proprietary technologies would materially and adversely affect our business, prospectsfinancial condition, operating results, and financial condition.Some components of our gene-based product candidates are, or may become, patented by others. As a result, we may be required to obtain licenses to conduct research, to manufacture, or to market such products. Licenses may not be available on commercially reasonable terms, or at all, which may impede our ability to commercialize our products.The legal proceedings to obtain and defend patents, and litigation of third-party claims of intellectual property infringement, could require us to spend money and could impair our operations.Our and our collaborators’ success will depend in part on our, or our collaborators’, ability to obtain patent protection for our products and processes, both in the United States and in other countries. The patent positions of biotechnology and pharmaceutical companies, however, can be highly uncertain and involve complex legal and factual questions. Therefore, it is difficult to predict the breadth of claims allowed in the biotechnology and pharmaceutical fields.We also rely on confidentiality agreements with our corporate collaborators, employees, consultants and certain contractors to protect our proprietary technologies. However, these agreements may be breached and we may not have adequate remedies for such breaches. In addition, our trade secrets may otherwise become known or independently discovered by our competitors.Protecting intellectual property rights can be very expensive. Litigation may be necessary to enforce patents issued to us or to determine the scope and validity of third-party proprietary rights. If we or, as applicable, our commercialization partners, including Astellas pursuant to its first right to enforce patents licensed to it under our license agreements, choose to go to court to stop someone else from using our inventions, that individual or company has the right to ask the court to rule that the underlying patents are invalid and/or should not be enforced against that third party. Moreover, if a competitor were to file a patent application claiming technology also invented by us or our collaborators or licensees, we would have to participate in an interference proceeding before the U.S. Patent and Trademark Office to determine the priority of the invention. We or our collaborators or licensees may be drawn into interferences with third parties or may have to provoke interferences ourselves to unblock third-party patent rights to allow us or our collaborators or licensees to commercialize products based on our technologies. Litigation could result in substantial costs and the diversion of management’s efforts regardless of the results of the litigation. An unfavorable result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed or require us to cease using some technologies.Our products and processes may infringe, or be found to infringe, patents not owned or controlled by us. Patents held by others may require us to alter our products or processes, obtain licenses, or stop activities. If relevant claims of third-party patents are upheld as valid and enforceable, we or our collaborators or licensees could be prevented from practicing the subject matter claimed in the patents, or may be required to obtain licenses or redesign our products or processes to avoid infringement. In addition, we or our collaborators or licensees could be required to pay money damages. A number of genetic sequences or proteins encoded by genetic sequences that we are investigating are, or may become, patented by others. As a result, we or our collaborators or licensees may have to obtain licenses to test, use or market these products. Our business will suffer if we or our collaborators or licensees are not able to obtain licenses at all or on terms commercially reasonable to us or them and we or they are not able to redesign our products or processes to avoid infringement.We have incurred costs in several legal proceedings involving our intellectual property rights in Europe, Japan and Canada. We may continue to incur costs to defend and prosecute patents and patent applications in these and other regions.Competition and technological change may make our product candidates and technologies less attractive or obsolete.We compete with companies, including major pharmaceutical and biotechnology firms that are pursuing other forms of treatment or prevention for diseases that we target. We also may experience competition from companies that have acquired or may acquire technologies from universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions which may prevent us from successfully commercializing products.Some of our competitors are established companies with greater financial and other resources than we have. Other companies may succeed in developing products and obtaining regulatory approval from the FDA or comparable foreign agencies faster than we do, or in developing products that are more effective than ours. Research and development by others may seek to render our technologies or products obsolete or noncompetitive or result in treatments or cures superior to any therapeutics developed by us.The internet site ClinicalTrials.gov provides public access to information on clinical trials and their results for a wide range of diseases and conditions. Future disclosures of such confidential commercial information may result in loss of advantage of competitive secrets.If we lose our key personnel or are unable to attract and retain additional personnel, we may not be able to achieve our business objectives.We are highly dependent on our principal scientific, clinical, regulatory and management personnel, including Vijay B. Samant, our President and Chief Executive Officer. The loss of the services of these individuals might significantly delay or prevent the achievement of our objectives. For example, due to the loss of various scientific personnel as a result of our January 2018 restructuring, we may be less effective in advancing our product candidates. We do not maintain “key person” life insurance on any of our personnel. We depend on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We face competition for qualified individuals from other companies, academic institutions, government entities and other organizations in attracting and retaining personnel. To pursue our product development plans, we may need to hire additional management personnel and additional scientific personnel to perform research and development, as well as additional personnel with expertise in clinical trials, government regulation and manufacturing. However, due to the reasons noted above, we may not be successful in hiring or retaining qualified personnel and therefore we may not be able to achieve our business objectives.(*)We currently depend on third parties to conduct our clinical trials and manufacture our product candidates.We rely on third parties, including clinical research organizations, medical institutions and contract laboratories, to perform critical services for us in connection with our clinical trials. These third parties are responsible for many aspects of the trials, including finding and enrolling subjects for testing and administering the trials. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its protocol and applicable regulations, including good clinical practices established by the FDA and foreign regulatory authorities, which govern the conduct, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that trial subjects are adequately informed of the potential risks associated with participating in clinical trials. Our reliance on third parties does not relieve us of the responsibility to ensure these requirements are met. These third parties may not comply with all regulatory and contractual requirements or may not otherwise perform their services in a timely or acceptable manner, and we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. In addition, if such third parties fail to perform their obligations in compliance with our clinical trial protocols or applicable good clinical practice regulations, our clinical trials may not meet regulatory requirements or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials. These risks also apply to the development activities of our collaborators and licensees, and we do not control our collaborators’ and licensees’ research and development, clinical trials or regulatory activities.We also depend on collaborators, licensees or other third parties to manufacture our product candidates, and this reliance has increased following the sale of our manufacturing assets in July 2018. There are a limited number of third parties that could manufacture our product candidates. We may be unable to enter into any arrangement for the manufacture of our product candidates, and any arrangement we secure may not meet our requirements for manufacturing quality or quantity. Our dependence on third parties for the manufacture of our product candidates may also reduce our profit margins and our ability to develop and deliver products in a timely manner.We have no marketing or sales experience, and if we are unable to develop our own sales and marketing capability, we may not be successful in commercializing our products.Our current strategy is to market our proprietary products directly in the United States, but we currently do not possess pharmaceutical marketing or sales capabilities. To market and sell our proprietary products, we will need to develop a sales force and a marketing group with relevant pharmaceutical industry experience, or make appropriate arrangements with strategic partners to market and sell these products. Developing a marketing and sales force is expensive and time-consuming and could delay any product launch. If we are unable to successfully employ qualified marketing and sales personnel or develop other sales and marketing capabilities, we may not be able to generate sufficient product revenue to become profitable.If we fail to comply withCertain federal and state healthcare laws including fraud and abuse, transparency, and health information privacy and security laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.Our business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors and customers may expose usregulations pertaining to broadly applicable fraud and abuse and otherpatients’ rights are and will be applicable to our business. We are subject to regulation by both the federal government and the states in which we or our partners conduct business. The healthcare laws and regulations. These lawsregulations that may constrainaffect our ability to operate include: the business or financial arrangementsFederal Food, Drug and relationships through which we conduct our operations, including how we research, market, sell and distribute any product for which we obtain marketing approval. Such laws include:Statute, which prohibits, among other things, personsStatute; federal civil and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under a federal healthcare program, such as Medicare or Medicaid;the federalcriminal false claims laws and civil monetary penalties laws, including the civil False Claims Act and its qui tam or whistleblower provisions, which impose criminal and civil penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, 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; or HIPAA, which imposes criminal and civil liability for, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act; the Prescription Drug Marketing Act or HITECH, and its implementing regulations, which imposes obligations, including mandatory contractual terms, on certain types(for sampling of individuals and entities and their respective business associates with respect to safeguarding the privacy, security and transmission of individually identifiable health information;Physician Payments SunshineBest Price Act which requires certain manufacturersand Medicaid drug rebate program; the federal physician sunshine reporting requirements under the Affordable Care Act and state disclosure laws; the Foreign Corrupt Practices Act as it applies to activities both inside and outside of drugs, devices, biologicsthe United States; the new federal Right-to-Try legislation; and medical supplies for which payment is available under Medicare, Medicaid orstate law equivalents of many of the Children’s Health Insurance Program, with specific exceptions, to report annually toabove federal laws.Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfersbreadth of value made to physicians and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by the physicians and their immediate family members; andanalogous state and foreignthese laws and regulations,the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such as state anti-kickbacklaws. In addition, recent healthcare reform legislation has strengthened these laws. For example, the Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and false claims laws, whichcertain criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may apply to sales or marketing arrangements and claims involving healthcareassert that a claim including items or services reimbursed by third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated byresulting from a violation of the federal government; stateAnti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.that require drug manufacturersmay prove costly. In addition, any action against us for violation of these laws, even if we successfully defend against it, could cause us to report information related to paymentsincur significant legal expenses and other transfersdivert our management’s attention from the operation of value to physicians, other healthcare providers, and healthcare entities, or marketing expenditures; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.Efforts to ensure that our current and future business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable healthcare laws.and result in reputational damage. If our operations are found to be in violation of any of thesethe laws described above or any other health regulatorygovernmental laws or regulations that may apply to us, we may be subject to significant penalties, including the imposition of significantadministrative, civil criminal and administrativecriminal penalties, damages, monetaryincluding punitive damages, fines, disgorgement, individual imprisonment, possiblethe exclusion from participation in Medicare, Medicaidfederal and other federalstate healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional integrity obligations, such as additional reporting and/individual imprisonment or oversight requirements if we become subject to a corporate integrity agreementcriminal liability, or similar agreement with a governmental authority, andthe curtailment or restructuring of our operations, and injunctions, any of which could expose us to liability and could adversely affect our business, financial condition, operating results, and prospects.ability to operate our businessoperations and our results of operations. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.Healthcare reform and restrictions on reimbursement may limit our returns on potential products.Our ability to earn sufficient returns on our products will depend in part on how much, if any, reimbursement for our products and related treatments will be available from:Government health administration authorities;Government agencies procuring biodefense products for military or public use, including some for which we may become a sole-source vendor;Private health coverage insurers;Managed care organizations; andOther organizations.Such third-party payers decide which drugs and treatments they will cover and the amount of reimbursement, and no uniform policy exists. Therefore, coverage and reimbursement for products can differ significantly from payer to payer. Further, the coverage determination process is a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payer separately. Patients rely on third-party payers to reimburse all or part of the cost associated with treatment. If we fail to obtain adequate reimbursement, we could be prevented from successfully commercializing our potential products.There are ongoing efforts by governmental and third-party payers to contain or reduce the costs of healthcare through various reform measures. For example, in the United States, the Federal government passed comprehensive healthcare reform legislation, the ACA, in 2010. With respect to pharmaceutical products, the ACA, among other things, expanded and increased industry rebates for drugs covered by Medicaid and made changes to the coverage requirements under Medicare Part D, Medicare’s prescription drug benefits program. Since its enactment there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of any certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA have been signed into law, including the repeal, effective January 1, 2019, of the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain fees mandated by the ACA, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Moreover, the Bipartisan Budget Act of 2018, among other things, amends the ACA, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. Congress may consider other legislation to repeal or repeal and replace elements of the ACA. We continue to evaluate the effect that the ACA and its possible repeal and replacement has on our business.In addition, drug pricing by pharmaceutical companies has recently come under increased scrutiny. Specifically, there have been several recent U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the out-of-pocket cost of prescription drugs, review the relationship between pricing and manufacturer patient programs, reduce the cost of drugs under Medicare, and reform government program reimbursement methodologies. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains additional drug pricecontrol measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our current product candidates and those for which we may receive regulatory approval in the future.Further, third-party payers are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using our products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, and whether adequate third-party coverage will be available.(*)Our internal computer systems, or those used by our contractors or consultants, may fail or suffer security breaches.We are dependent upon our own or third-party information technology systems, infrastructure and data, including mobile technologies, to operate our business. The multitude and complexity of our computer systems may make them vulnerable to service interruption or destruction, malicious intrusion, or random attack. Likewise, data privacy or security breaches by employees or others may pose a risk that sensitive data, including our clinical trial data, intellectual property, trade secrets or personal information of our employees, patients, customers or other business partners may be exposed to unauthorized persons or to the public. Cyber-attacks are increasing in their frequency, sophistication and intensity. Cyber-attacks could include the deployment of harmful malware, denial-of-service, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability. Third party sites that take part in clinical trials we or our collaborators sponsor face similar risks and any security breach of their systems could adversely affect us. A security breach or privacy violation that leads to disclosure or modification of or prevents access to patient information, including personally identifiable information or protected health information, could harm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to litigation or other liability under laws and regulations that protect personal data, any of which could disrupt our business and/or result in increased costs or loss of revenue. Moreover, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information, trade secrets or other intellectual property. While we have invested, and continue to invest, in the protection of our data and information technology infrastructure,results. Accordingly, there can be no assurance that our effortswe will prevent service interruptions,undertake or identify breaches in our systems,successfully complete any transactions of the nature described above, and any transaction that we do complete could adversely affectexpose us to liability and could harm our business, financial condition, operating results, and operations and/prospects. We have no current plan, commitment, or result in the loss of criticalobligation to enter into any transaction described above other than ones to which we are already committed.sensitive information, which could result in financial, legal, businessapproved products would impair our ability to grow our business.reputational harmother companies, investment groups or funds, academic or government scientists and other researchers to sell or license products or technology to us. In addition,The success of this strategy depends partly on our liability insuranceability to identify and select promising pharmaceutical product candidates and products, negotiate licensing or acquisition agreements with their current owners, and finance these arrangements.sufficient in typeable to acquire the rights to additional product candidates on terms that we find acceptable or amountat all.cover us against claims relatedcommercial sale, including preclinical or clinical testing and approval by the FDA and applicable foreign regulatory authorities for the targeted use(s). All product candidates are prone to security breaches, cyber-attackssignificant risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any approved products that we acquire will be manufactured or sold profitably, obtain reimbursement, be subject to patents and other related breaches.We use hazardous materialsintellectual property rights that provide any form of market or regulatory exclusivity, or achieve market acceptance.business. Any claimsexpenses relating to improper handling, storage or disposalproduct development activities in respect of these materials could be time consuming and costly.Our research and development processes involve the controlled storage, use and disposal of hazardous materials and biological materials. Our hazardous materials include certain compressed gases, flammable liquids, acids and bases, and other toxic compounds. We aresofpironium bromide, subject to federal, statethe terms and local regulations governingconditions contained in the use, manufacture, storage, handlingFunding Agreement. NovaQuest may suspend its payments under the Funding Agreement in certain limited circumstances, including: (i) adverse regulatory events relating to sofpironium bromide; (ii) termination of any material clinical study in respect of sofpironium bromide; (iii) an event reasonably expected to delay U.S. approval or launch of sofpironium bromide by 12 months or more; (iv) a material amendment of the study protocol for our U.S. Phase 3 clinical trials in respect of our sofpironium bromide product candidate without NovaQuest’s consent; (v) if we determine that sofpironium bromide is unsafe; (vi) the failure of sofpironium bromide to achieve the primary endpoints for our Phase 3 clinical trials; (vii) sofpironium bromide receiving a final non-approval letter from the FDA or European Medicines Agency; and/or (viii) if certain of our senior executives cease to work for us and disposal of materials and waste products. Although we believedo not hire replacements reasonably acceptable to NovaQuest in a reasonable time. NovaQuest’s obligation to make the payments will resume upon NovaQuest’s notice to us that our safety procedures for handling and disposing ofthe condition allowing NovaQuest to suspend payments has been resolved or cured. NovaQuest may terminate its obligation to pay any further payments if such condition is not resolved or cured within 12 months. If NovaQuest’s payment obligations terminate in these hazardous materials comply withcircumstances, we will remain obligated to make the standards prescribed by law and regulation,milestone payments contemplated in the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. InFunding Agreement to NovaQuest in the event we nonetheless receive FDA approval for sofpironium bromide, and we will remain obligated to make revenue sharing payments in the territory covered by the Funding Agreement in the event we launch sofpironium bromide anywhere in that territory.accident,additional study or additional, unexpected development work, and we couldreasonably determine that the additional study or work would take longer than 18 months to complete or cost more than an established threshold, we are entitled to terminate the development program. In that case, we would be held liable for any damages that result. We could incur significant costsobligated to comply with current or future environmental laws and regulations.We may have significant product liability exposure.We face an inherent business riskpay NovaQuest $25 million plus interest from the date of exposure to product liability and other claimsthe Funding Agreement until the date on which the payment is made (however, in the event that we terminate our technologiesdevelopment program for sofpironium bromide for certain reasons, including serious safety issues, a failure of the product’s U.S. Phase 3 studies, or the failure of the FDA to approve the product, we will not be obligated to make any payments to NovaQuest). If we subsequently resume development of sofpironium bromide, we will remain obligated to make the milestone payments contemplated in the Funding Agreement to NovaQuest in the event we nonetheless receive FDA approval for sofpironium bromide, and we will remain obligated to make revenue sharing payments in the territory covered by the Funding Agreement in the event we launch sofpironium bromide anywhere in that territory, with any such payment made upon termination of the program credited against the milestone payment or revenue sharing payments.are allegedcommercially will depend, in part, on our ability to obtain the APIs and other substances and materials used in our product candidates successfully from third parties and to have caused harm. We also have potential liability forfinished products manufactured by third parties in accordance with regulatory requirements and in sufficient quantities for preclinical and clinical testing and commercialization. If we fail to develop and maintain supply and other technical relationships with these third parties, we may be unable to continue to develop or commercialize our products and product candidates.contract basisfailure to adhere to applicable laws or for third parties. Although we currently maintain product liability insurance in the amount of $10 million in the aggregate plus additional coverage specific to the foreign countries where our clinical trials are being conducted, this insurance coverage may not be sufficient, andother reasons, we may not be able to commercialize or obtain regulatory approval for the affected product or product candidate successfully, and we may be held liable for injuries sustained as a result.coveragecommercial quantities of the resulting drug product and its components, if that product candidate is approved for sale, our contract manufacturers and suppliers will need to produce our drug substances and product candidates in larger quantities, more cost-effectively and, in certain cases, at higher yields than they currently achieve. If our third-party contractors are unable to scale up the manufacture of any of our product candidates successfully in sufficient quality and quantity and at commercially reasonable prices, or are shut down or put on clinical hold by government regulators, and we are unable to find one or more replacement suppliers or manufacturers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and we are unable to transfer the processes successfully on a timely basis, the development of that product candidate and regulatory approval or commercial launch for any resulting products may be delayed, or there may be a shortage in supply, either of which could significantly harm our business, financial condition, operating results, and prospects.reasonable cost. Our inabilitynumber of factors, including but not limited to: the number and timing of future product candidates in the pipeline; progress with and results from preclinical testing and clinical trials; the ability to manufacture sufficient drug supplies to complete preclinical and clinical trials; the costs involved in preparing, filing, acquiring, prosecuting, maintaining and enforcing patent and other intellectual property claims; compliance with our material contracts including the licensing agreement for sofpironium bromide and resolution of the Bodor Complaint; the time and costs involved in obtaining regulatory approvals and favorable reimbursement or formulary acceptance for such product candidates; and overall stock market conditions and trends. Raising additional capital may be costly or difficult to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claimsand could preventsignificantly dilute stockholders’ ownership interests or inhibit our ability to achieve our business objectives. If we raise additional funds through public or private equity offerings, the commercializationterms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, our stockholders’ ownership interests in our company will be diluted. In addition, any products developed bydebt financing may subject us to fixed payment obligations and covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable intellectual property or other rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us in one or more countries. Even if we were to obtain sufficient funding, there can be no assurance that it will be available on terms acceptable to us or our collaborators, or our ability to manufacture products for third parties. If we are sued for any injury causedstockholders.our technologies or products, orglobal market fluctuations and economic downturn.third-party products that we manufacture, our liability could exceed our insurance coverage and total assets.The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reductionglobal economic conditions generally, both in the corporate income tax rate,United States and elsewhere around the overall impactworld. The market for discretionary pharmaceutical products, medical devices and procedures may be particularly vulnerable to unfavorable economic conditions. Some patients may consider sofpironium bromide as discretionary, and if full reimbursement for the product is not available, demand for the product may be tied to the discretionary, out-of-pocket cash-spending levels of our targeted patient populations. Domestic and international equity and debt markets have experienced and may continue to experience heightened volatility and turmoil based on domestic and international economic conditions and concerns. In the new federal tax lawevent these economic conditions and concerns continue or worsen and the markets continue to remain volatile, or a bear market ensues in the U.S. stock market given the current bull market is uncertainthe longest on record, our operating results and liquidity could be affected adversely by those factors in many ways, including weakening demand for sofpironium bromide, making it more difficult for us to raise funds if necessary, and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.(*)price may decline.couldhas been and may continue to be highly volatile and you may not be able to resell your shares at or above the price you pay for them.like thatfollowing the Merger has been subject to significant fluctuations. Market prices for securities of manybiotechnology and other life sciences companies historically have been particularly volatile subject even to large daily price swings. In addition, there has been and is likely to continue to be highly volatile. From January 1, 2015, to September 30, 2018,limited liquidity in the trading market for our stock price has ranged from $1.02 to $15.50. The followingsecurities, which may adversely affect stockholders. Some of the factors among others, could have a significant impact onthat may cause the market price of our common stock:stock to continue to fluctuate include, but are not limited to:The results of our preclinical studies and clinical trials or announcements regarding our plans for future studies or trials, or those of our collaborators, licensees or competitors;Evidencematerial developments in, or lack of evidence of the safety or efficacy of our potential products or those of our collaborators, licensees or competitors;Our ability to enter into new collaboration and licensing agreements and the successconclusion of, any collaborators and licensees inlitigation to enforce or defend any intellectual property rights or defend against the developmentintellectual property rights of others;commercializationtermination of, our product candidates;The announcementor breach by us or our collaborators, licenseespartners of material agreements, including key commercial partner or licensing agreements, including the License Agreement;products;Developments concerning our patentlack of commercial success of competitive products or other proprietary rightsproducts treating the same or thosesimilar indications;collaborators, licensees stock by analysts; and/or competitors, including litigation and challenges to our proprietary rights;Other developments with our collaborators or licensees, including our entry into new collaborative or licensing arrangements;Geopolitical developments, natural or man-made disease threats, or other events beyond our control;U.S. and foreign governmental regulatory actions;Changes or announcementsMoreover, the stock markets in reimbursement policies;Period-to-period fluctuationsgeneral have experienced substantial volatility in our industry that has often been unrelated to the operating results;Market conditions for life science stocks in general;Changes inperformance of individual companies or a certain industry segment. These broad market fluctuations may also adversely affect the collective short interest in our stock;Changes in estimatestrading price of our performance by securities analysts; andOur cash balances, need for additional capital, and access to capital.We are at risk of future securities class action litigation due to our past and expected stock price volatility.stockholders have brought securities class action litigation against a company following a declineperiods of volatility in the market price of its securities. This risk is especially acute for us because life science companiesa company’s securities, shareholders have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securitiesoften instituted class action claims than companies in other industries. Evensecurities litigation against those companies. Such litigation, if such claims are not successful, any litigationinstituted, could result in substantial costs and divert our management’sdiversion of management attention and resources, which could havesignificantly harm our profitability and reputation. In addition, such securities litigation often has ensued after a material adverse effect onreverse merger or other merger and acquisition activity of the type we recently completed. Such litigation if brought could expose us to liability or impact negatively our business, financial condition, operating results, and prospects.financial condition.Anti-takeover provisionswe make about our future success or viability may not be as accurate as they could be if we had a longer operating history or approved products on the market. Our revenue and profitability will depend on development funding and the achievement of development and clinical milestones under an agreement with Kaken, as well as any potential future collaboration and license agreements and sales of sofpironium bromide or future products, if approved, and our ability to maintain the related license as part of the Bodor Complaint. These up-front and milestone payments may vary significantly from period to period, and country to country, and any such variance could cause a significant fluctuation in our charter documentsoperating results from one period to the next. In addition, we will measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award as determined by our board of directors and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price and stock price volatility, thecould make an acquisitionand our amended certificate of us, whichincorporation and amended and restated bylaws may be beneficial to our stockholders, more difficultdiscourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.Ourinclude anti-takeover provisions, such as a classified board of directors, a prohibition on stockholder actions by written consent, the authority of our board of directors to issue preferred stock without stockholder approval, and supermajority voting requirements for specified actions. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years. These provisions may discourage, delay, or prevent ana merger or acquisition of us, even if the acquisitionthat our stockholders may be considered beneficial by some stockholders.consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, theythese provisions may discouragefrustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include, but are not limited to:In addition, in August 2016,completed a private placement of 1,841,420have (i) warrants issued and outstanding to purchase 891,582 shares of our common stock at an exercise price of $0.07 per share, 731,908 shares of our common stock at an exercise price of $10.36 and 9,005 shares of our common stock at an exercise price of $33.31; and (ii) we have 1,802,895 options issued and outstanding to AnGes. Inpurchase our common stock at a weighted average exercise price of $14.99 per share. If the holders of our outstanding stock options and warrants exercise their rights to acquire our common stock, the percentage ownership of our stockholders existing prior to the exercise of rights will be diluted.private placement, AnGes agreedMerger. In addition, we may experience ownership changes in the future as a result of offerings of our stock or subsequent shifts in our stock ownership, some of which are outside of our control. In that case, the ability to voteuse net operating loss carryforwards to offset future taxable income will be limited following any such ownership change.its sharesthe recent developments in accordanceour technology and are unsure of the patent protection that we will be successful in obtaining, if any. Even if the patents do issue successfully,the recommendationsrespect to our product candidates is challenged, regardless of our boardfuture success, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize or finance, our product candidates.any matter brought before our stockholdersproduct candidates does not guarantee exclusivity. The requirements for patentability differ in certain countries, particularly developing countries, and can change over time in the same country. In addition, the laws of some other countries do not protect intellectual property rights to the same extent as laws in the United States, especially when it comes to granting use and other kinds of patents and what kind of enforcement rights will be allowed, especially injunctive relief in a vote, subjectcivil infringement proceeding. Consequently, we may not be able to certain limitations. This voting provision may also discourage or prevent attempts by other stockholders to replace membersthird parties from practicing our inventions in countries outside the United States and even in launching an identical version of our boardproduct notwithstanding us having a valid patent or other intellectual property rights in that country. Competitors may use our technologies in jurisdictions where we or our licensors have not obtained patent or other protections to develop their own products, or produce copy products, and, further, may export otherwise infringing products to territories where we have patent and other protections but enforcement against infringing activities is inadequate or where we have no patents or other intellectual property rights. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from commercialization or other uses.directorscertain countries, particularly in developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, and the judicial and government systems are often corrupt, apathetic or engageineffective, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in acquisition activitiesviolation of our intellectual property rights generally. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our global patents and other rights at risk of being invalidated or interpreted narrowly and our global patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuit that our board of directorswe initiate or infringement action brought against us, and the damages or other remedies awarded, if any, may not be commercially meaningful when we are the plaintiff. When we are the defendant, we may be required to post large bonds to stay in the market while we defend ourselves from an infringement action.determine to beenforce or use its patents over a protracted period of time. In some cases, the courts will force compulsory licenses on the patent holder even when finding the patentholder’s patents are valid if the court believes it is in the best interests of the country to have widespread access to an essential product covered by the patent. Further, there is no guarantee that any country will not adopt or impose compulsory licensing in the future. In these situations the royalty the court requires to be paid by the licenseholder receiving the compulsory license may not be calculated at fair market value and can be inconsequential, thereby disaffecting the patentholder’s business. In these countries, we may have limited remedies if our stockholders.(*)patents are infringed or if we are compelled to grant a license to our patents to a third party, which could also materially diminish the value of those patents. This would limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license, especially in comparison to what we enjoy from enforcing our intellectual property rights in the United States. Finally, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in both U.S. and foreign intellectual property laws, or changes to the policies in various government agencies in these countries, including but not limited to the patent office issuing patents and the health agency issuing pharmaceutical product approvals. For example, in Brazil, pharmaceutical patents require prior initial approval of the Brazilian health agency (ANVISA). Finally, many countries have large backlogs in patent prosecution, and in some countries in Latin America it can take years, even decades, just to get a pharmaceutical patent application reviewed notwithstanding the merits of the application.issuanceUSPTO and various foreign governmental patent agencies require compliance with a number of preferred stockprocedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can, in many cases, be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction just for failure to know about and/or timely pay such fee. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees in prescribed time periods, and failure to properly legalize and submit formal documents in the format and style the country requires. If we or our licensors fail to maintain the patents and patent applications covering our product candidates for any reason, our competitors might be able to otherwise enter the market, which would have an adverse effect on our business, financial condition, operating results, and prospects.common stockholders.We currently have on fileoperating results and divert the attention of managerial and technical personnel, even if we do not infringe such patents or the patents asserted against us are ultimately established as invalid. There is a shelf registration statementrisk that allowsa court or other legal authority would decide that we are infringing the third party’s patents and would order us to raise upstop the activities covered by the patents. In addition, there is a risk that a court or other legal authority will order us to an aggregatepay the other party significant damages for having violated the other party’s patents or intellectual property rights.$40.0 million fromour licensors or partners is sued for infringing a third party’s intellectual property rights, this could expose us to liability and our business, financial condition, operating results, and prospects could suffer in the salesame manner as if we were sued directly. In addition to facing litigation risks, we have agreed to indemnify certain third-party licensors and partners against claims of common stock, preferred stock, debt securities and/infringement caused by our proprietary technologies, and we have entered or warrants (subjectmay enter into cost-sharing agreements with some of our licensors and partners that could require us to limitationspay some of the costs of patent or other intellectual property rights litigation brought against those third parties whether or not the alleged infringement is caused by our proprietary technologies. In certain instances, these cost-sharing agreements could also require us to assume greater responsibility for infringement damages than would be assumed just on the amountbasis of securities that we may sell underour technology.registration statement in any 12-month period) and our restated certificate of incorporation authorizesforegoing could expose us to issue up to 5,000,000 shares of preferred stock. The issuance of preferred stock couldliability or adversely affect our business, financial condition, operating results, and prospects at any time.voting power of holdersbiotechnology and pharmaceutical industries, certain of our common stock, and reduceemployees were formerly employed by other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Moreover, we engage the likelihood that our common stockholders will receive dividend payments and payments upon liquidation. The issuanceservices of preferred stock could also decreaseconsultants to assist us in the market pricedevelopment of our common stock,products and product candidates, many of whom were previously employed at, or may have termspreviously been or are currently providing consulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees and conditions that could discourage a takeoverconsultants or we have inadvertently or otherwise used or disclosed trade secrets or other transaction that might involveproprietary confidential information of their former employers or their former or current customers. Although we have no knowledge of any such claims being alleged to date, if such claims were to arise, litigation may be necessary to defend against any such claims. Even if we are successful in defending against any such claims, any litigation like this could be protracted, expensive, a premium price fordistraction to our shares or that our stockholders might believe to bemanagement team, not viewed favorably by investors and other third parties, and may potentially result in their best interests.
an unfavorable outcome.ITEM 6.ExhibitNumberDescription of DocumentExhibitFiled Herewith 3.1(1)Incorporation. (P)3.2(2)Bylaws (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the Commission on September 3, 2019). 3.3(3)AmendmentMerger (incorporated by reference to Restated Certificate of Incorporation.3.4(4)Certificate of Amendment to Restated Certificate of Incorporation.3.5(5)Certificate of Amendment to Restated Certificate of Incorporation.3.6(6)Certificate of Amendment to Restated Certificate of Incorporation.4.1(1)Certificate. (P)10.1(7)Amended and Restated Stock Incentive Plan of Vical Incorporated.31.1amended. • amended. • 32.1• 32.2Certification of Anthony A. Ramos, Chief Financial Officer,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 Document • 101.LAB** XBRL Taxonomy Extension Label Linkbase Document • 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document • * as adopted pursuant toand is not being filed for purposes of Section 90618 of the Sarbanes-OxleySecurities Exchange Act of 2002.1934, as amended, and is not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof.101.INSXBRL Instance Document.101.SCHXBRL Taxonomy Extension Schema Document.101.CALXBRL Taxonomy Extension Calculation Linkbase Document.101.DEFXBRL Taxonomy Extension Definition Linkbase.101.LABXBRL Taxonomy Extension Label Linkbase Document.101.PREXBRL Taxonomy Extension Presentation Linkbase Document.(P)Paper exhibit(1)Incorporated by reference to the exhibit of the same number filed with the Company’s Registration Statement on Form S-3 (No. 333-95812) filed on August 15, 1995.(2)Incorporated by reference to the exhibit of the same number filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (No. 000-21088) filed on August 6, 2010.(3)Incorporated by reference to exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 1, 2017.(4)Incorporated by reference to exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 25, 2016.
SIGNATURES(5)Incorporated by reference to exhibit 3.3 filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (No. 000-21088) filed on August 6, 2010.(6)Incorporated by reference to exhibit 4.2 filed with the Company’s Registration Statement on Form S-8 (No. 333-135266) filed on June 23, 2006.(7)Incorporated by reference to exhibit 99.1 filed with the Company’s Current Report on Form 8-K filed on June 7, 2018.Vical IncorporatedDate: October 29, 2018By:/s/ ANTHONY A. RAMOSAnthony A. RamosDate: November 14, 2019 By: Vice President, /s/ Robert. B. BrownRobert B. Brown By: /s/ R. Michael Carruthers R. Michael Carruthers (on behalf of the registrant and as the registrant’s andOfficer; Principal Accounting Officer)33