10-Q 1 gbim-10q_20140930.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35642

 

GlobeImmune, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-1353925

(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

1450 Infinite Drive, Louisville, CO

80027

(Address of principal executive offices)

(Zip code)

(303) 625-2700
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨  (do not check if a smaller reporting company)

Smaller reporting company

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 1, 2014, the registrant had 5,748,979 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


GLOBEIMMUNE, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

 

PART I. FINANCIAL INFORMATION

  

 

 

Item 1.

 

 

Financial Statements

  

3

 

 

 

Condensed Balance Sheets

  

3

 

 

 

Condensed Statements of Operations and Comprehensive Income and Loss

  

4

 

 

 

Condensed Statements of Cash Flows

  

5

 

 

 

Notes to Condensed Financial Statements

  

6

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

15

Item 3.

 

 

Quantitative and Qualitative Disclosures about Market Risks

  

25

Item 4.

 

 

Controls and Procedures

  

26

 

PART II. OTHER INFORMATION

  

 

 

Item 1.

 

Legal Proceedings

  

27

Item 1A.

 

 

Risk Factors

  

27

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

58

Item 3.

 

 

Defaults Upon Senior Securities

  

58

Item 4.

 

 

Mine Safety Disclosures

  

58

Item 5.

 

 

Other Information

  

58

Item 6.

 

 

Exhibits

  

58

 

SIGNATURES

  

59

 

EXHIBIT INDEX

 

60

 

 

 

2


PART I - FINANCIAL INFORMATION

 

 

ITEM 1 - Financial Statements

GLOBEIMMUNE, INC.

Condensed Balance Sheets

(unaudited)

 

 

September 30,

2014

 

 

December 31,

2013

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

18,893,399

 

 

$

5,924,241

 

Other current assets

 

1,187,148

 

 

 

900,896

 

Total current assets

 

20,080,547

 

 

 

6,825,137

 

Property and equipment, net

 

483,229

 

 

 

492,802

 

Other assets

 

100,000

 

 

 

100,000

 

Total assets

 

20,663,776

 

 

$

7,417,939

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable, Convertible Preferred Stock and Stockholders' (Deficit) Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

780,370

 

 

$

1,736,621

 

Accrued liabilities

 

815,937

 

 

 

920,962

 

Fair value of warrants

 

 

 

 

13

 

Deferred revenue

 

3,378,706

 

 

 

3,756,899

 

Total current liabilities

 

4,975,013

 

 

 

6,414,495

 

Other long-term liabilities

 

139,697

 

 

 

223,029

 

Deferred revenue

 

8,226,504

 

 

 

10,656,976

 

Fair value of warrants, net of current portion

 

 

 

 

1,564,928

 

Convertible promissory note

 

 

 

 

197,955

 

Total liabilities

 

13,341,214

 

 

 

19,057,383

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Redeemable, convertible preferred stock - Series C, $0.001 par value.

   No shares authorized; issued and outstanding 0 and 31,147,071 shares, respectively

   (liquidation preference of $0 and $70,325,906 respectively)

 

 

 

 

67,548,103

 

Redeemable, convertible preferred stock - Series D, $0.001 par value.

   No shares authorized; issued and outstanding 0 and 8,650,519 shares, respectively

   (liquidation preference of $0 and $14,170,303 respectively)

 

 

 

 

12,964,405

 

Redeemable, convertible preferred stock - Series E, $0.001 par value.

   No shares authorized; issued and outstanding 0 and 11,665,019 shares, respectively

   (liquidation preference of $0 and $24,358,901 respectively)

 

 

 

 

23,482,780

 

Redeemable, convertible preferred stock - Series A, $0.001 par value.

   No shares authorized; issued and outstanding 0 and 6,407,998 shares, respectively

   (liquidation preference of $0 and $16,236,311 respectively)

 

 

 

 

15,670,621

 

Redeemable, convertible preferred stock - Series B, $0.001 par value.

   No shares authorized; issued and outstanding 0 and 28,699,551 shares, respectively

   (liquidation preference of $0 and $70,438,623 respectively)

 

 

 

 

68,016,481

 

Stockholders' (deficit) equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value.  Authorized 100,000,000 shares; issued and outstanding

   5,748,979 and 92,812 shares, respectively

 

5,749

 

 

 

93

 

Preferred stock, $0.001 par value.  Authorized 5,000,000 shares; issued and outstanding

   0 shares

 

 

 

 

 

Additional paid-in capital

 

228,280,063

 

 

 

 

Accumulated deficit

 

(220,963,250

)

 

 

(199,321,927

)

Total stockholders' (deficit) equity

 

7,322,562

 

 

 

(199,321,834

)

Total liabilities, redeemable, convertible preferred stock and stockholders' (deficit) equity

 

20,663,776

 

 

$

7,417,939

 

 

See accompanying Notes to Condensed Financial Statements

 

 

 

3


GLOBEIMMUNE, INC.

Condensed Statements of Operations and Comprehensive Income and Loss

(unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration license and services

$

999,222

 

 

 

2,022,496

 

 

 

3,435,761

 

 

 

5,788,260

 

Manufacturing services

 

307,116

 

 

 

308,939

 

 

 

1,019,941

 

 

 

2,897,639

 

Total revenue

 

1,306,338

 

 

 

2,331,435

 

 

 

4,455,702

 

 

 

8,685,899

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of collaboration license and services

 

999,031

 

 

 

1,906,755

 

 

 

2,757,026

 

 

 

4,555,947

 

Costs of manufacturing services

 

307,116

 

 

 

308,939

 

 

 

1,019,941

 

 

 

2,897,639

 

Research and development for proprietary programs

 

453,261

 

 

 

325,701

 

 

 

1,661,427

 

 

 

996,445

 

Total research and development

 

1,759,408

 

 

 

2,541,395

 

 

 

5,438,394

 

 

 

8,450,031

 

General and administrative

 

1,006,744

 

 

 

822,581

 

 

 

2,877,069

 

 

 

2,273,328

 

Depreciation and amortization

 

76,586

 

 

 

214,265

 

 

 

217,867

 

 

 

650,309

 

Total operating expenses

 

2,842,738

 

 

 

3,578,241

 

 

 

8,533,330

 

 

 

11,373,668

 

Loss from operations

 

(1,536,400

)

 

 

(1,246,806

)

 

 

(4,077,628

)

 

 

(2,687,769

)

Change in value of warrants and put and call options,

   income (expense)

 

 

 

 

498,732

 

 

 

(1,903,446

)

 

 

1,468,706

 

Loss on extinguishment of convertible notes

 

(4,687,649

)

 

 

 

 

 

 

(4,687,649

)

 

 

 

Interest expense

 

(176,809

)

 

 

 

 

 

(3,890,662

)

 

 

 

Other income

 

39,949

 

 

 

42,011

 

 

 

39,949

 

 

 

42,136

 

Loss before taxes

 

(6,360,909

)

 

 

(706,063

)

 

 

(14,519,436

)

 

 

(1,176,927

)

Income taxes

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(6,360,909

)

 

 

(706,063

)

 

 

(14,519,436

)

 

 

(1,176,927

)

Preferred stock dividends and accretion of offering

   costs to redemption value

 

(298,793

)

 

 

(3,221,285

)

 

 

(7,173,901

)

 

 

(9,663,855

)

Net loss applicable to common stockholders

$

(6,659,702

)

 

 

(3,927,348

)

 

 

(21,693,337

)

 

 

(10,840,782

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding-basic and diluted

 

5,626,137

 

 

 

92,430

 

 

 

1,959,385

 

 

 

92,430

 

Net loss per share attributable to common stockholders-

   basic and diluted

$

(1.18

)

 

 

(42.49

)

 

 

(11.07

)

 

 

(117.29

)

 

See accompanying Notes to Condensed Financial Statements

 

 

 

4


GLOBEIMMUNE, INC.

Condensed Statements of Cash Flows

(unaudited)

 

 

Nine Months Ended

 

 

September 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(14,519,436

)

 

 

(1,176,927

)

Adjustments to reconcile net loss to net cash provided by

   (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

217,867

 

 

 

650,309

 

Share-based compensation

 

68,734

 

 

 

146,271

 

Stock-based payments for services

 

(30,000

)

 

 

23,103

 

Noncash interest expense from amortization of debt

   discount and amortization of debt issuance costs

 

3,562,946

 

 

 

Noncash interest expense on convertible notes

 

330,664

 

 

 

Noncash expense (income) from change in valuation

   of warrants and put and call options

 

1,903,446

 

 

 

(1,468,706

)

Loss on extinguishment of convertible notes

 

4,687,649

 

 

 

 

 

Gain on sale of property and equipment

 

(91,285

)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Increase in other current assets

 

(286,252

)

 

 

(236,083

)

Increase (decrease) in accounts payable

 

(956,251

)

 

 

59,395

 

Decrease in accrued liabilities

 

(105,025

)

 

 

(956,195

)

Increase (decrease) in deferred revenue

 

(2,808,665

)

 

 

6,806,325

 

Increase in other long-term liabilities

 

17,890

 

 

 

Net cash provided by (used in) operating activities

 

(8,007,718

)

 

 

3,847,492

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

(244,363

)

 

 

(12,233

)

Sale of property and equipment

 

127,354

 

 

 

Net cash used in investing activities

 

(117,009

)

 

 

(12,233

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock from stock option exercises

 

25,513

 

 

 

Proceeds from issuance of convertible promissory notes

 

7,500,000

 

 

 

Convertible promissory notes issuance costs

 

(1,051,487

)

 

 

Proceeds from issuance of common stock

 

17,250,000

 

 

 

Common stock issuance costs

 

(2,630,141

)

 

 

 

 

Net cash provided by financing activities

 

21,093,885

 

 

 

 

Net increase in cash and cash equivalents

 

12,969,158

 

 

 

3,835,259

 

Cash and cash equivalents, beginning of period

 

5,924,241

 

 

 

2,002,948

 

Cash and cash equivalents, end of period

$

18,893,399

 

 

 

5,838,207

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash investing and

   financing activities:

 

 

 

 

 

 

 

Accretion of preferred stock (dividends)

$

6,611,629

 

 

 

9,268,638

 

Accretion of preferred stock (offering costs)

 

263,479

 

 

 

395,217

 

Fair value of warrants and put option issued in

   connection with convertible note payable

 

6,121,533

 

 

 

Fair value of warrants issued for debt issuance costs

 

876,778

 

 

 

Non-cash conversion of convertible promissory

   notes to common stock

 

8,226,658

 

 

 

Non-cash conversion of preferred stock to

   common stock

 

194,856,289

 

 

 

 

See accompanying Notes to Condensed Financial Statements

 

 

 

5


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

 

(1)Organization and Nature of Business

We were incorporated as Ceres Pharmaceuticals, Ltd. in Colorado on February 10, 1995. We changed our name to GlobeImmune, Inc. on May 26, 2001, and reincorporated in Delaware on June 5, 2002. We are a biopharmaceutical company focused on developing therapeutic products for cancer and infectious diseases based on our proprietary Tarmogen ® platform. We have two strategic collaborations with leading biotechnology companies. In October 2011, Gilead Sciences, Inc., or Gilead, exclusively licensed product candidates to treat chronic hepatitis B virus, or HBV, infection. Celgene Corporation, or Celgene, entered into a collaboration and option agreement for certain oncology product candidates in May 2009. Under this agreement, in July 2013 Celgene exercised its option for a worldwide, exclusive license to the GI-6300 program, which is a Tarmogens program targeting the brachyury protein. We have four product candidates in five ongoing clinical trials.

Our operations are subject to certain risks and uncertainties. The risks include negative outcome of clinical trials, inability or delay in completing clinical trials or obtaining regulatory approvals, changing market conditions for products being developed by us, more stringent regulatory environment, the need to retain key personnel and protect intellectual property, product liability, and the availability of additional capital financing on terms acceptable to us. Because of the numerous risks and uncertainties associated with biopharmaceutical product development and commercialization, we are unable to accurately predict the timing or amount of future expenses or when, or if, it will be able to achieve or maintain profitability. Currently, we have no products approved for commercial sale, and to date we have not generated any product revenue. We have financed our operations primarily through the sale of equity securities, upfront payments pursuant to collaboration agreements, government grants and equipment financing. The size of our future net losses will depend, in part, on the rate of growth or contraction of expenses and the level and rate of growth, if any, of revenues. Our ability to achieve profitability is dependent on our ability, alone or with others, to complete the development of our product candidates successfully, obtain the required regulatory approvals, manufacture and market our proposed products successfully or have such products manufactured and marketed by others and gain market acceptance for such products. There can be no assurance as to whether or when we will achieve profitability.

 

(2)

Liquidity Risks

We have incurred operating losses and have an accumulated deficit as a result of ongoing research and development spending. As of September 30, 2014, we had an accumulated deficit of $220,963,250. We had net losses of $6,360,909 and $14,519,436 for the three and nine months ended September 30, 2014, respectively, and net cash used in operating activities of $8,007,718 for the nine months ended September 30, 2014. We anticipate that operating losses and net cash used in operating activities will occur and substantially increase over the next several years as we expand discovery, research and development activities, including clinical development of our Tarmogen product candidates.

We have historically financed our operations primarily through the sale of equity securities, payments pursuant to collaboration agreements, government grants and equipment financing. We will continue to be dependent upon such sources of funds until we are able to generate positive cash flows from our operations. We believe that our existing cash and cash equivalents as of September 30, 2014 will be sufficient to fund operations through 2015.

We will be required to fund future operations through the sale of our equity securities, issuance of convertible debt, potential milestone payments, if achieved, and possible future collaboration. There can be no assurance that sufficient funds will be available to us when needed from equity or convertible debt financings, that milestone payments will be earned or that future collaboration partnerships will be entered into. If we are unable to obtain additional funding from these or other sources when needed, or to the extent needed, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us or our stockholders than we would otherwise choose. These events could prevent us from successfully executing on our operating plan and could raise substantial doubt about our ability to continue as a going concern in future periods.

 

6


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

(3)

Summary of Significant Accounting Policies

(a)

Use of Estimates in the Preparation of Financial Statements

The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, requires our management to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates in the accompanying financial statements relate to the estimated useful lives of property and equipment; the terms of performance under collaboration agreements; the estimated fair values of warrants for redeemable, convertible preferred stock; and the estimated fair values of share-based awards, including the estimated fair value of the underlying common stock.

(b)

Unaudited Interim Financial Data

The accompanying condensed balance sheet as of September 30, 2014, condensed statements of operations and comprehensive income and loss for the three months ended and the nine months ended September 30, 2014 and 2013 and condensed statements of cash flows for the nine months ended September 30, 2014 and 2013 are unaudited. The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary to state fairly our financial position as of September 30, 2014 and the results of operations for the three and nine months ended September 30, 2014 and 2013 and cash flows for the nine months ended September 30, 2014. The financial data and other information disclosed in these notes to the financial statements related to the three and nine months ended September 30, 2014 and 2013 are unaudited. The results for the three months and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other interim period.  These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2013 included in our Prospectus filed on July 2, 2014 with the United States Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4).

(c)

Reverse Stock Split

On April 25, 2014, we affected a 1-for-4.3 reverse stock split of our common stock after approval by our stockholders. In connection with the reverse stock split, we filed a Certificate of Amendment of our Restated Certificate of Incorporation with the Secretary of State of Delaware on April 25, 2014 affecting the reverse stock split. This reverse stock split has been reflected retroactively for all periods presented in the financial statements.

(d)

Accrued Liabilities

We make estimates of our accrued expenses by identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when it has not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. Examples of estimated accrued expenses include:

·

fees owed to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

·

fees owed to investigative sites in connection with clinical trials;

·

fees owed to contract manufacturers in connection with the production of clinical trial materials;

·

fees owed for professional services;

·

property taxes; and

·

unpaid salaries, wages, and benefits.

7


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

Accrued liabilities consisted of the following as of:

 

 

September 30,

2014

 

 

December 31,

2013

 

 

Accrued compensation

 

267,495

 

 

$

278,108

 

 

Accrued clinical trial holdbacks

 

95,827

 

 

 

126,455

 

 

Income taxes

 

 

 

115,765

 

 

Other

 

452,615

 

 

 

400,634

 

 

Total Accrued Liabilities

 

815,937

 

 

$

920,962

 

 

 

As of September 30, 2014 and December 31, 2013, accrued liabilities included $ 95,827 and $126,455  respectively, of holdbacks representing five percent of payments due to entities conducting clinical trials for patient-related fees. The holdbacks will be paid upon completion of the studies and when all data has been received and validated by us.

(e)

Net Loss per Share

Basic net loss per share is computed by dividing net loss applicable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options and warrants. The treasury stock method is used to calculate the potential dilutive effect of these common stock equivalents. Potentially dilutive shares are excluded from the computation of diluted net loss per share when their effect is anti-dilutive. In the periods with net losses, all potentially dilutive securities were anti-dilutive and therefore have been excluded from the computation of diluted net loss per share.

(f)

Recently Issued Accounting Standards

On May 28, 2014, the Financial Accounting Standards Board, or FASB, issued the Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), that will supersede nearly all existing revenue recognition guidance under U.S. GAAP.  This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance when it becomes effective. The standard will be effective for us for annual and interim periods beginning after December 15, 2016, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that this new guidance will have on our financial statements and related disclosures. We have not selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

(g)

Fair Value Measurements

The carrying amounts of financial instruments, including cash and cash equivalents, accrued compensation, accrued clinical holdbacks and accounts payable, approximate fair value due to their short-term maturities. The carrying amount of the convertible note payable approximates its fair value as its terms are comparable to what would be included in similar debt instruments.

We account for our preferred stock warrants pursuant to ASC Topic 480, Distinguishing Liabilities from Equity, and classify warrants for redeemable preferred stock as liabilities. The warrants are reported as short-term or long-term liabilities, depending on their remaining term, at their estimated fair value at September 30, 2014 and December 31, 2013, and any changes in fair value are reflected in changes in value of warrants.

The fair value of all the outstanding warrants at September 30, 2014 and December 31, 2013 was $0 $1,564,941 , respectively.  The fair value at September 30, 2014 was $0 due to the warrants converting to common stock warrants upon the closing of the initial public offering.

In general, asset and liability fair values are determined using the following categories:

Level 1– inputs utilize quoted prices in active markets for identical assets or liabilities.

Level 2– inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

8


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

Level 3– inputs are unobservable inputs and include situations where there is little, if any, market activity for the balance sheet items at period end. Pricing inputs are unobservable for the terms and are based on our own assumptions about the assumptions that a market participant would use.

Our financial instruments, including money market investments, warrants, and put options are measured at fair value on a recurring basis. The carrying amount of money market investments as of September 30, 2014 and December 31, 2013 approximates fair value based on quoted prices in active markets, or Level 1 inputs. The carrying amount of outstanding warrants and put options as of September 30, 2014 and December 31, 2013 approximates fair value based on unobservable inputs, or Level 3 inputs, using assumptions made by us, including pricing, volatility, and expected term. There were no transfers between levels for the three and nine months ended September 30, 2014 and the year ended December 31, 2013.

Assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of December 31, 2013 and September 30, 2014:

 

Description

September 30,

2014

 

 

Quoted

prices in

active

markets for

identical

assets

(Level 1)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

December 31,

2013

 

 

Quoted

prices in

active

markets for

identical

assets

(Level 1)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market investments (included in

   cash and cash equivalents)

 

20,298

 

 

 

20,298

 

 

 

 

 

 

20,672

 

 

 

20,672

 

 

 

 

Liabilities measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants (included in fair value of

   warrants)

 

 

 

 

 

 

 

 

 

 

1,564,941

 

 

 

 

 

 

1,564,941

 

Put and call options (included in fair

   value of put and call options and

   other long-term liabilities)

 

 

 

 

 

 

 

 

 

 

101,222

 

 

 

 

 

 

101,222

 

 

A reconciliation of the beginning and ending balances of our assets and liabilities measured at fair value using significant unobservable, or Level 3, inputs is as follows:

 

 

Warrants

 

 

Put and call options

 

Balance of liability at December 31, 2013

$

(1,564,941

)

 

 

(101,222

)

Issuance of warrants in connection with

   convertible promissory notes

 

(5,331,175

)

 

 

Issuance of put and call options in

   connection with convertible

   promissory notes

 

 

 

(1,667,136

)

Transfer to additional paid-in capital upon

   completion of initial public offering

 

7,118,054

 

 

 

3,449,866

 

Loss included in net loss:

 

 

 

 

 

 

 

Loss due to change in fair value

 

(221,938

)

 

 

(1,681,508

)

Balance of liability at September 30, 2014

$

-

 

 

 

-

 

 

Gains (losses) included in net income and loss for the nine months ended September 30, 2014 are reported in change in value of warrants and put and call options.

 

9


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

(4)

Convertible Notes

2013 Notes

In November 2013, we entered into an unsecured convertible promissory note, or the Note, with a service provider, or the Holder, in settlement of $391,730 of accounts payable. The Note bears an interest rate of 8.0%, has a term of three years and can be prepaid at any time. The Note and unpaid accrued interest converted upon the completion of our initial public offering into common stock at a price per share equal to 80% at which our common stock was first offered to the public. Upon completion of our initial public offering, we issued to the holder of the Note a warrant, equal to 30% of the principal balance of the Note, to purchase common stock for 10 years with an exercise price equal to the initial public offering price.

We recorded the proceeds from the Note based on the fair value of the warrants ($106,087), put option embedded in the Note ($101,222) and the Note and, as such, recorded a debt discount of $207,309 for the allocated value of the warrants and put option. This debt discount is being amortized to interest expense over the term of the Note. Amortization of $1,513 and $35,749 was recorded in the three and nine months ended September 30, 2014, respectively, and the unamortized balance of the debt discount was $198,041 and $0 as of December 31, 2013 and September 30, 2014, respectively. As of December 31, 2013 and September 30, 2014, the Note balance includes accrued interest of $4,266 and $0, respectively.

On July 8, 2014 we completed our initial public offering and the Note converted into 51,556 shares of common stock at $8.00 per share. The carrying amount of the debt for accounting purposes was $352,986, which includes accrued interest of $20,718, through the conversion date. We recorded a loss upon the extinguishment of $162,574, equal to the difference between the carrying value and the fair value of the common stock which extinguished the Note. Upon the conversion of the Note, pursuant to the Note’s terms, we issued to the holder of the Note a warrant exercisable for 12,373 shares of our common stock at an exercise price of $10.00 per share.

The estimated fair value of the Note as of December 31, 2013 approximated its carrying value.

2014 Convertible Notes

In January and February 2014, we entered into unsecured convertible notes, the 2014 Notes, with various holders for a total aggregate principal amount of $7,500,000. The 2014 Notes bore an interest rate of 10.0% and had a maturity date of January 31, 2015. Upon completion of our initial public offering the outstanding principal amount of the 2014 Notes, and any unpaid accrued interest thereon, converted into common stock at a price equal to 70% of the price at which our common stock was first offered to the public.

The holders of the 2014 Notes received warrants, equal to 100% of the principal amount of the 2014 Notes to purchase equity securities of us for a five-year period. As a result of our initial public offering, the warrants are exercisable into common stock with an exercise price equal to the price at which our common stock was first offered to the public.

We recorded the proceeds from the 2014 Notes based on the fair value of the warrants ($4,454,397), the net of the put and call option embedded in the 2014 Notes ($1,667,136) and the 2014 Notes. As such, we recorded a debt discount of $6,121,533 from the allocated value of the warrants and the put and call options. This debt discount is being amortized to interest expense over the term of the 2014 Notes. Amortization of $131,646 and $2,682,285 was recorded in the three and nine month period ended September 30, 2014.

We incurred $1,928,265 of debt issuance costs related to the 2014 Notes. Included in the debt issuance costs were warrants issued to the placement agent that had an estimated value of $876,778 at issuance. These costs are included in debt issuance costs and are being amortized to interest expense over the term of the 2014 Notes. Amortization of $41,468 and $844,912 was recorded in the three and nine month periods ended September 30, 2014, respectively.

On July 8, 2014 we completed an initial public offering and the 2014 Notes converted into 1,116,372 shares of common stock at a conversion price of $7.00 per share.  The carrying amount of the debt for accounting purposes was $6,638,645, which includes accrued interest of $314,210, through the conversion date.  We recorded a loss upon the extinguishment of $4,525,075, equal to the difference between the carrying value and the fair value of the common stock which extinguished the 2014 Notes. Upon the conversion of the 2014 Notes, pursuant to the terms thereof, we issued to the holders of the 2014 Notes warrants exercisable for 750,000 shares of our common stock at an exercise price of $10.00 per share.

 

10


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

(5)

Deferred Revenue

Deferred revenue consisted of the following as of:

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Celgene

 

11,570,888

 

 

$

14,169,164

 

 

 

 

 

 

 

 

 

 

 

Gilead

 

34,322

 

 

 

244,711

 

 

 

 

 

 

 

 

 

 

 

Total deferred revenue

 

11,605,210

 

 

 

14,413,875

 

 

 

 

 

 

 

 

 

 

 

Less:  current portion

 

(3,378,706

)

 

 

(3,756,899

)

 

 

 

 

 

 

 

 

 

 

Deferred revenue, long-term

 

8,226,504

 

 

$

10,656,976

 

 

 

(a)

Celgene Agreements

In May 2009, we entered into a Collaboration and Option Agreement with Celgene for the early development of four oncology products and all future oncology drug candidates (which options to future oncology drug candidates is subject to expiration if Celgene did not license one of the initial four named products). Celgene is also a holder of our common stock. Under the collaboration agreement, Celgene has the option to obtain an exclusive worldwide license to develop and commercialize the product candidates subject to diligence requirements, an up-front development funding fee, milestone payments and royalties. This agreement was amended in June 2011 to replace one of the four named product candidates with another oncology Tarmogen product candidate. The terms of the amendment did not materially modify the agreement as the financial terms and the length of the agreement remained substantially the same. Celgene’s options with respect to the GI-6200 and GI-3000 oncology drug candidate programs will terminate if Celgene does not exercise its options for such programs after we deliver certain reports on predefined clinical trials with respect to such drug programs. In March 2013, Celgene declined to exercise its option to the GI-4000 program and returned all rights and development responsibility to us. In July 2013, Celgene exercised its option to license the GI-6300 program. As a result of the election to license the GI-6300 program, Celgene has an option to license all future oncology drug candidates developed by us on a product by product basis.

In July 2013, Celgene exercised its option to license the GI-6300 program, including GI- 6301, in exchange for an upfront payment of $9,000,000. As part of that exercise, the Collaboration and Option Agreement was amended as it related to the GI-6300 program. The agreement, as amended, includes (1) a license granted to Celgene as of the date of the exercise of the option to develop and commercialize the GI-6300 product candidates using all of our related patents, intellectual property and know-how related to these product candidates that existed at the inception of the Collaboration and Option Agreement or any time during the term, (2) us supplying drug product for the Phase 2 clinical trial and (3) our option to perform Phase 2 clinical trials, subject to Celgene’s right to assume performance of those trials. As part of this exercise, certain milestones were modified and adjustments to the royalty rates on net sales were reduced. The modification to the milestones did not materially impact the deliverables that existed at the time of the modification.

The Collaboration and Option agreement, as amended including the amendment relating to the GI-6300 program contain the following provisions:

·

We received a $30,000,000 upfront payment to perform research and development and for the option to license products based on the GI-4000, GI-6200, GI-6300 and GI-3000 programs. This payment was made by Celgene in May 2009.

·

We received $1,000,000 in October 2011 and $300,000 in April 2012 from Celgene for additional immunology work for the GI-4000 program.

·

We may receive a total of $85,000,000 in development and regulatory milestones for the GI-6200 and GI-3000 programs; activities for which we are not responsible for completing.

·

If Celgene exercises its option to the GI-6200 or GI-3000 program and these products are commercialized, we may also receive up to $60,000,000 in net sales milestones and tiered royalty rates on net sales in the teens on worldwide net sales; activities for which we are not responsible for completing.

11


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

·

We are eligible to receive a total of $85,000,000 in development and regulatory milestone payments for GI-6301; activities for which we are not responsible for completing.

·

If GI-6301 is commercialized by Celgene, we may receive up to $60,000,000 in sales milestone payments for which we are not responsible for completing and tiered royalty rates on net sales ranging from single digits to low double digits.

·

For programs other than GI-6200, GI-3000 and GI-6300, we may be eligible to receive up to $101,000,000 in development and regulatory milestone payments for Celgene’s clinical trials, NDA filing and regulatory approvals, up to $60,000,000 in net sales milestone payments for such programs, and tiered royalty rates on net sales in the teens on worldwide net sales; activities for which we are not responsible for completing.

Upon execution of the May 2009 agreement, we estimated that our obligations to perform research and development under the agreement would continue through September 30, 2016 and accordingly recognized as revenue the upfront fees received of $31,300,000 from the date of receipt through September 30, 2016. We review the term of performance on a quarterly basis and adjust the revenue recognition period if there are any changes. As of December 31, 2013 and September 30, 2014, the unamortized balance was amortized on a straight line basis through March 31, 2018.

We determined that there were two units of accounting under the July 2013 GI-6300 License Agreement with Celgene: the license to further develop and commercialize GI-6300 and undelivered items related to supplying drug product for the Phase 1 clinical trial and the option to perform the Phase 2 clinical trial (subject to Celgene’s right to assume performance of those trials). We determined that the license had standalone value based on the fact that the drug candidate has been developed and is currently in a clinical trial, Celgene possesses the knowledge, technology, skills, experience and background necessary for all further development of the drug through commercialization, we are not required to perform any additional development work related to GI-6300 and Celgene has the right to sublicense the product. We allocated the $9,000,000 of proceeds to the two units of accounting using the relative selling price method. We determined the estimated selling price for the license based upon a third party valuation and vendor specific objective evidence for the undelivered items. The allocation resulted in $8,766,881 being allocated to the license and the remaining amount of $233,119 allocated to the undelivered items. We recognized $8,766,881 in revenue related to the license in the fourth quarter of 2013 upon the delivery of all intellectual property, reports and documentation for the license to Celgene. Revenue related to the undelivered items will be recognized as the services are performed. The current estimated service period for the undelivered items under the GI-6300 License Agreement is through December 2014.

We recognized $819,767, $819,767, $2,487,570 and $2,598,277 in license and service revenue during the three and nine months ended September 30, 2013 and 2014, respectively. Costs incurred under these agreements, included in costs of collaboration licenses and services in our statement of operations and comprehensive income and loss, for the three and nine months ended September 30, 2013 and 2014 were $752,578, $600,661, $2,222,064 and $1,957,518, respectively.

To date, we have not recognized any revenue in connection with milestone payments, other than the license election noted above, or royalties under this agreement.

12


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

(b)

Gilead Agreement

In October 2011, we entered into a License and Collaboration Agreement with Gilead, granting Gilead an exclusive license to all hepatitis B Tarmogen product candidates to be developed and commercialized under the collaboration, which includes a license granted at contract outset to develop and commercialize the HBV Tarmogen product candidate GS-4774 using all of our related patents, intellectual property and know-how related to these product candidates. Under the terms of the agreement, in November 2011 Gilead made a $10,000,000 initial nonrefundable payment to us. We conducted preclinical development, filed the Investigational New Drug application, or IND, and performed the initial Phase 1a trial in healthy volunteers for the selected HBV Tarmogen. Gilead reimbursed us on a periodic basis for the costs and expenses of the Phase 1a clinical trial. Gilead will perform any future clinical development, regulatory and commercialization activities. Gilead activities are subject to commercially reasonable diligence, milestone payments and royalties. Upon satisfaction of certain substantive milestone events for which we were partially responsible for completing, we received $2,000,000 upon filing an IND for HBV in 2012 and $3,000,000 at the point of commencement of the Phase 1b/2a clinical trial in 2013. We are also eligible to receive additional proceeds of up to $130,000,000 in development and regulatory milestones based upon achievement of such milestones by Gilead. If products are commercialized, we are eligible to receive tiered royalty rates in the upper single digit to mid-teens and up to $40,000,000 of sales milestone payments based on net sales of the licensed product candidates. We are not responsible for the sales efforts.

We determined there was one unit of accounting under the agreement with Gilead. The non-contingent deliverables under the agreement include: (i) the license to all intellectual property and know-how related to hepatitis B Tarmogen products, (ii) the services to be performed in preclinical development (including the filing of an IND) and in conducting the Phase 1a clinical trial, (iii) participation on the Joint Research and Development Committee, or JRC, and (iv) the requirement to provide consultation to Gilead after Gilead assumes control of development activities. We have estimated the performance period for these deliverables to be from October 2011 through 2020.

When the agreement was signed, we determined that our obligation to supply drug product to Gilead after Gilead assumed control of the development was a contingent deliverable, as the obligation to supply product was contingent on the successful development of the hepatitis B Tarmogen product candidate and the related approval of the IND among other items. Subsequently, Gilead has assumed control of manufacturing. However, a services agreement between the parties also continues to exist. As a result, the services agreement deliverables and the potential incremental fees to be received by us will be accounted for only if and when delivery takes place. We have determined that the consideration to be received is an appropriate incremental fee and, therefore there is not a significant incremental discount associated with the selling price of the services agreement.

We determined that the license did not have standalone value at the inception of the agreement. This determination is based on the fact that the license is not sold on a standalone basis, nor could it be resold by Gilead on a standalone basis because we have proprietary knowledge, technology, skills, experience and background that no other third party, including Gilead, currently possesses and could not readily obtain at contract inception. Such knowledge, technology, skills, experience and background would be necessary for further development of the hepatitis B Tarmogen product candidate as required under the agreement.

We are recognizing the initial consideration of $10,000,000 and the amounts we received as reimbursement from Gilead of costs to perform the initial Phase 1a trial on a proportional performance basis over the estimated period of performance to complete the preclinical development and Phase 1a trial services, JRC and consultation services, which is estimated to be from October 2011 through 2020. We will measure our progress under the proportional performance method based on hours incurred in proportion to total estimated hours. However, the cumulative revenue recognized under this agreement will be limited to the cumulative cash received to date from Gilead. We incurred substantially all of our hours during the preclinical development and Phase 1a trial period, which ended in February 2014.

The contractual term of the license is on a product and country basis that begins on the effective date of the contract, October 2011, and runs through the expiration of Gilead’s obligation to pay royalties for such product in such country, or until the agreement is terminated. The JRC term is from the effective date of the agreement and terminates at the end of the Research Term, which is the period of time commencing on the date the agreement was signed and ending upon completion of the final clinical study report for the Gilead Phase 1b/2a trial. The consulting term begins upon the conclusion of the Research Term, and we estimate the term would end upon commercialization, currently estimated in 2020.

13


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

We recognized $1,202,729, $1,373, $3,288,791 and $220,019 in license and services revenue under the Gilead arrangement during the three and nine months ended September 30, 2013 and 2014, respectively. We also recognized a milestone payment of $3,000,000 in the second half of 2013. In addition, we recognized revenue of $308,939, $307,116, $2,897,639 and $1,019,941  during the three and nine months ended September 30, 2013 and 2014, respectively, related to manufacturing supply for Phase 2 trials for which Gilead is responsible for performing. Collaboration license and service costs incurred under these agreements, included in costs of collaboration licenses and services in our statement of operations and comprehensive income and loss, for the three and nine months ended September 30, 2013 and 2014 were $1,154,177, $398,370, $2,333,883 and $799,508, respectively. Manufacturing services costs incurred under agreements with Gilead are included in costs of manufacturing services in our statement of operations and comprehensive income and loss, for the three and nine months ended September 30, 2013 and 2014 were $308,939, $307,116, $2,897,639 and $1,019,941, respectively.

 

(6)

Income Taxes  

We maintain a valuation allowance for substantially all of our deferred tax assets, including our net operating losses, and therefore do not expect to incur a current U.S. federal tax expense or benefit against our pretax income (loss) during the year ending December 31, 2014.  

Our ability to realize the benefit of our deferred tax assets in future periods will depend on the generation of future taxable income and tax planning strategies. Due to our history of losses we have recorded a full valuation allowance against substantially all of our deferred tax assets. We do not expect to reduce the valuation allowance against our deferred tax assets to below 100% of our gross amount until we have a sufficient historical trend of taxable income and can predict future income with a higher degree of certainty.

 

 

 

14


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by those sections. Forward-looking statements include statements about our future plans, estimates, beliefs, and anticipated, expected or projected performance. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “seek,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” “enable,” “potential,” and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, clinical trials and U.S. Food and Drug Administration, or FDA, submissions, regulatory or competitive environments, our intellectual property, and product development. You are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Such statements are based on current assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially.  For a description of such risks and uncertainties, which could cause our actual results, performance, or achievements to materially differ from any anticipated results, performance, or achievements, please see the risk factors in our Registration Statement on Form S-1, Registration No. 333-194606, and in this Form 10-Q under the heading “Risk Factors”.  Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the United States Securities and Exchange Commission, or the SEC, that disclose certain risks and factors that may affect our business.  This analysis should be should be read in conjunction with the audited financial statements and footnotes thereto for the year ended December 31, 2013 included in our Registration Statement on Form S-1, Registration No. 333-194606, filed with the SEC.  We disclaim any intention or obligation to update or revise any financial projections or forward-looking statements due to new information or other events.

Overview

We are a biopharmaceutical company focused on developing products for the treatment of cancer and infectious diseases based on our proprietary Tarmogen® platform. Tarmogens activate the immune system by stimulating a subset of white blood cells called T cells that destroy infected or malignant cells, in contrast to traditional vaccines which predominately stimulate antibody production. We believe that our Tarmogen platform has applicability to a number of diseases, and may enable us to develop a broad portfolio of products. We have four Tarmogen product candidates in clinical evaluation for infectious disease and multiple cancer indications.

Our Tarmogen platform technology has characteristics that we believe will enable us, in collaboration with our strategic collaborators and independently, to develop and commercialize a portfolio of products.

Tarmogens cause the T cells of a patient’s immune system to target the molecular profile that distinguishes a diseased cell from a normal cell. We have designed Tarmogens to target specific intracellular and extracellular proteins, or antigens, that play a role in oncology and infectious diseases which represent unmet medical needs. Collaborations with biopharmaceutical companies and research institutions have allowed us to advance the development of a number of our product candidates while managing our own research and development expenses relating to these product candidates.

We have two strategic collaborations with leading biotechnology companies. In October 2011, Gilead Sciences, Inc., or Gilead, exclusively licensed product candidates intended to treat chronic hepatitis B virus, or HBV, infection. Celgene Corporation, or Celgene, entered into a collaboration and option agreement for certain oncology product candidates in May 2009. Under this agreement, in July 2013 Celgene exercised its option for a worldwide, exclusive license to the GI-6300 program, which is a Tarmogen program targeting the brachyury protein. Brachyury plays a role in the metastatic spread of certain cancers and is believed to be fundamental in the formation of chordomas, rare bone tumors of the spine. Through September 30, 2014, we have received over $63 million from these collaborations.

15


 

We have incurred operating losses and have an accumulated deficit as a result of ongoing research and development spending. As of September 30, 2014, we had an accumulated deficit of $221.0 million. We had net losses of $6.4 million and $14.5 million for the three and nine months ended September 30 2014, respectively. Our losses have resulted principally from costs incurred in our discovery and development activities. We anticipate that operating losses will occur and substantially increase over the next several years as we expand discovery, research and development activities, including clinical development of our Tarmogen product candidates. Because of the numerous risks and uncertainties associated with biopharmaceutical product development and commercialization, we are unable to accurately predict the timing or amount of future expenses or when, or if, we will be able to achieve or maintain profitability. We have no products approved for commercial sale, and to date we have not generated any product revenue. We have financed our operations primarily through the sale of equity and convertible debt securities, upfront and milestone payments pursuant to our collaboration agreements, government grants and capital lease and equipment financing. The size of our future net losses will depend, in part, on the magnitude and timing of changes in our expenses, as well as the level and rate of growth, if any, of our revenues. Our ability to achieve profitability is dependent on our ability, alone or with others, to complete the development of our product candidates successfully, obtain required regulatory approvals, manufacture and market our potential products successfully or have such products manufactured and marketed by others, and gain market acceptance for such products. There can be no assurance as to whether or when we will achieve profitability.

We were incorporated as Ceres Pharmaceuticals, Ltd. in Colorado on February 10, 1995. We changed our name to GlobeImmune, Inc. on May 26, 2001, and reincorporated in Delaware on June 5, 2002.

Financial Operations

Revenue

Infectious Disease Programs

Our world-wide collaboration with Gilead is focused on developing a lead product candidate, GS-4774, to target patients chronically infected with HBV who are also on, or are candidates for, oral antiviral suppressive therapy. Under this collaboration, in 2011 we received a $10 million upfront payment. As a result of our activities under this agreement, we have received an additional $5 million in milestone payments. Gilead is responsible for conducting and paying for all ongoing and future clinical, regulatory and commercial activities. We are eligible to receive up to an additional $130 million in development and regulatory milestones under this collaboration. If products are commercialized, we will be entitled to receive tiered royalty rates based on net sales of GS-4774 from the high single digits to the mid-teens, and up to $40 million of sales milestone payments.

Chronic HBV infection affects approximately 400 million people worldwide. While antiviral drugs have been used effectively to control this disease, cure rates are very low, with less than eight percent cured after four years of daily oral antiviral therapy. GS-4774 is being developed as a therapeutic vaccine designed to generate T cell immune responses against cells containing HBV antigens in combination with antiviral therapy with the goal of increasing the cure rate in patients with chronic HBV infection.

In August 2013, we completed a Phase 1 clinical trial of GS-4774 in 60 healthy volunteers. Twenty subjects were enrolled to one of three arms in the study, receiving either 10YU, 40YU, or 80YU of GS-4774 (one YU, or yeast unit, equals 10 million yeast cells). Within each of the three 20 subject arms, ten subjects were randomized to weekly dosing, and ten subjects to monthly-only dosing, each for three months. The Phase 1 results indicated that GS-4774 elicited HBV specific T cell immune responses. Subjects in all three dose groups displayed immune responses, and there was little difference between the weekly versus the monthly-only immunization regimens in the ability to generate T cell immune responses. Eighty-eight percent of subjects across all three dose groups responded to receiving GS-4774 by at least one measure of T cell immune response.

Gilead initiated the first Phase 2 clinical trial in September 2013, GS-US-330-0101, or the 0101 trial, investigating GS-4774 in combination with ongoing oral antiviral treatment in patients with chronic HBV infection. The 0101 trial is a multicenter, multinational trial that enrolled 175 patients in a randomized, open-label design comparing three different doses of GS-4774 (2YU, 10YU or 40YU), administered in combination with oral antiviral therapy versus antiviral treatment alone. The primary endpoint for this trial is decline in serum HBV surface antigen, or HBsAg.  This trial is fully-enrolled, and 48-week results are expected to be available in the first half of 2015. These results may be submitted to an upcoming scientific conference.

In July 2014, Gilead initiated a second Phase 2, GS-US-330-1401, or the 1401 trial, investigating GS-4774 in patients with chronic HBV infection who are currently not receiving treatment.   The 1401 trial is a multicenter, multinational trial designed to enroll 175 patients in a randomized, open-label design comparing three different doses of GS-4774 (2YU, 10YU, or 40YU), administered in combination with tenofovir disoproxil fumarate, or TDF, versus TDF alone. The primary endpoint for this trial is decline in serum HBV surface antigen. Enrollment in this trial is ongoing.

16


 

We have multiple additional preclinical infectious disease programs in various stages of development. In August 2013, we received a $4 million Research Project Grant from the National Institute of Allergy and Infectious Diseases, or NIAID, of the National Institutes of Health, or NIH, to support the development of Tarmogen immunotherapy product candidates intended to treat or prevent tuberculosis infection, or tuberculosis grant. The work for this grant will be performed and reimbursed over four years.

Oncology Programs

In May 2009, we entered into a worldwide strategic collaboration and option agreement with Celgene focused on the discovery, development and commercialization of certain product candidates intended to treat cancer. Under the terms of this agreement we have received $31.3 million. Celgene also made a $10 million equity investment in us. Under this agreement, the GI-6301 and GI-6207 programs may result in up to $290 million in milestone payments from Celgene to us. For product candidates subject to option by Celgene, we are responsible for initial development under the agreement, and Celgene has the option to license each of them at specific points in the development plan. Upon the achievement of certain development, regulatory and commercial milestones, we would be eligible to receive milestone payments and tiered royalties based on net sales of each licensed product.

Pursuant to the agreement, in July 2013 Celgene exercised its option to obtain an exclusive license to our GI-6300 program, including GI-6301, upon payment of a $9 million option exercise milestone. We are eligible to receive a total of $85 million in additional development and regulatory milestone payments for GI-6301. Additionally, if GI-6301 is commercialized, we may receive up to $60 million in sales milestone payments and tiered royalty rates on net sales ranging from single digits to low double digits. GI-6301 is being developed under an IND filed by us on October 24, 2011.  GI-6301 targets cancers expressing the brachyury protein, which is believed to play a role in the metastatic progression of certain cancers and in the initiation of chordomas. The National Cancer Institute, or NCI, has completed enrollment of 34 patients with metastatic cancers and chordomas who have failed previous therapy or have no further therapeutic options in a dose escalation Phase 1 trial of GI-6301. Of the 34 patients, 11 have chordoma.

Chordoma is a rare cancer of the skull base and spine that is aggressive, locally invasive and has a poor prognosis. Chordomas are generally slow growing and frequently recur after treatment. Because of their proximity to critical structures such as the spinal cord, brainstem, nerves and arteries, they are difficult to treat and require highly specialized care.  In the United States, there are approximately 300 new U.S. cases annually. We estimate the incidence in the European Union is similar to the U.S., resulting in approximately 400 new EU cases annually. With an average overall survival of approximately seven to nine years, we estimate the prevalence of chordoma is approximately 2,400 in the US and 3,600 in the EU. There are no systemic therapies approved to treat chordoma.

Surgery is the mainstay of treatment for chordomas. The goal of surgery is to remove as much of the tumor as possible without causing unacceptable harm. Complete resection, or removing the entire tumor, is attainable in approximately half of sacral chordomas, with much lower rates for spinal and skull base chordomas, but provides the best chances for local control and long-term survival.  It is believed that radiation therapy can reduce the risk of recurrence after surgery and prolong survival for chordoma patients. Even after surgery and/or radiation, chordomas tend to return in the same location or in the areas around the original tumor. Many patients undergo multiple surgeries over several years to treat these local recurrences.  Standard cytotoxic chemotherapy agents that generally kill fast-growing cells are ineffective on chordomas.

·

The National Cancer Institute, or the NCI, is currently conducting a safety, immunology and early efficacy Phase 1 trial of GI-6301 in patients with late-stage cancers known to express the brachyury protein including chordoma.  

·

In four previously published Phase 2 chordoma trials since 2005, 2 of 92 chordoma subjects (2%) had a partial response by the Response Evaluation Criteria In Solid Tumors, or RECIST, defined as at least a 30% reduction in longest dimension of the tumor. In the literature surveyed, the percent of patients with reported stable disease ranged from 22% to 72%, and the objective response rate, or ORR, defined as complete response, or CR, partial response, or PR, and stable disease, or SD, averaged 66%.

·

Updated data for the eleven chordoma patients in the GI-6301-01 Phase 1 trial were presented in October at the 2014 Connective Tissue Oncology Society (CTOS) Annual Meeting in Berlin, Germany included:  

o

One patient had a partial response (9%) by RECIST that has continued past one year

o

Eight patients (73%) had stable disease by RECIST. 75% of these (6/8) had progressive disease at study entry which stabilized during administration of GI-6301.

o

82% (nine of 11 chordoma patients showed PR or SD).

o

GI-6301 was generally well tolerated; the most common adverse events in this trial were mild/moderate injection site reactions.

17


 

We believe that the summary results from the eleven chordoma patients enrolled in this trial, as discussed above, compare favorably with historically published data.  We and our collaborators including the NCI, the Chordoma Foundation and Celgene are now designing a Phase 2 study in chordoma to be run by the NCI.  

A second oncology product candidate, GI-6207, is being evaluated in a 34 subject Phase 2 clinical trial at the NCI. GI-6207 targets carcinoembryonic antigen, or CEA, a protein that is over-expressed in a large number of epithelial cancers, which we estimate represent approximately 500,000 new cancer cases in the United States each year. This Phase 2 trial is being conducted under an IND filed by us on December 27, 2012. The NCI has completed a dose escalation Phase 1 clinical trial of GI-6207 in 25 subjects with Stage IV cancers expressing CEA, and initiated a randomized Phase 2 trial in 34 subjects with medullary thyroid cancer, or MTC, in 2013. Development and commercialization rights to the GI-6200 program, including GI-6207, remain subject to option by Celgene. Celgene’s decision to option GI-6207 will be after the data from the Phase 2 trial in MTC are available.

We have a third, wholly-owned, clinical stage oncology program, GI-4000, that targets tumors with mutations in a protein called Ras. We have Phase 2 survival data in pancreas and non-small cell lung cancer, or NSCLC, for GI-4000. We conducted a multicenter, placebo controlled Phase 2b pancreas cancer study. While we did not see an improvement in survival in the overall study population, we did see a non-statistically significant three month improvement in survival in a pre-specified subgroup. We also performed a retrospective analysis of 90 pre-administration blood samples using an analytic technique called proteomics. The goal of the analysis was to identify a pre-administration companion diagnostic test that could predict which subjects are likely to respond to GI-4000 to assist in subject selection for future clinical trials. BDX-001, the resulting potential proteomic companion diagnostic test, appeared to predict whether a subject administered GI-4000 and the chemotherapy drug gemcitabine in this trial would have improved recurrence free and overall survival compared to gemcitabine alone. We believe BDX-001 differentiates between subject blood samples using the relationship of 100 different proteins and protein fragments. Overall, 21 of the 44 (48%) of studied subjects administered GI-4000 and gemcitabine were classified as BDX-001 positive. In BDX-001 positive subjects administered GI-4000 and gemcitabine, there was an 11.7 month improvement in median recurrence free survival, or RFS, and a 16.6 month improvement in median overall survival, or OS, compared with BDX-001 positive subjects’ samples administered placebo and gemcitabine. There was no difference in RFS or OS in the gemcitabine-alone arm based on BDX-001 selection. The proportion of BDX-001 positive patients may vary in any future studies. This study was not powered for, and these results did not reach, statistical significance. If BDX-001 is prospectively validated in a second pancreas cancer trial, this companion diagnostic could be used to select the patients appropriate for GI-4000 therapy. The BDX-001 test is controlled by Biodesix, Inc. We intend to negotiate a development and commercialization agreement regarding this test with them. However, we may not be able to obtain the rights to use the test on commercially reasonable terms, if at all.

Investigators at Memorial Sloan Kettering Cancer Center, or MSKCC, also conducted a Phase 2a trial in non-small cell lung cancer, or NSCLC, in 24 subjects. Based on the updated survival analysis from December 2013, this study shows a 43% reduction in the risk of mortality for patients administered GI-4000 compared to a matched set of controls (p=0.24 which is not statistically significant). This was an investigator sponsored study that was funded by MSKCC, and we supplied the study drug. We retained all rights to GI-4000 under our agreement with MSKCC for this trial. We also have an ongoing Phase 2a clinical trial studying GI-4000 in colon cancer, which is being conducted at the Lombardi Cancer Center at Georgetown University. This is an investigator sponsored study that was funded by the Lombardi Cancer Center, and we supplied the study drug. We retained all rights to GI-4000 under our agreement with the Lombardi Cancer Center for this trial.

Research and Development Expense

Research and development expenses, which include costs of collaboration license and services, cost of manufacturing services and research and development for proprietary programs, in our statement of operations and comprehensive income and loss, consists of:

·

personnel related expenses, including salaries, benefits, stock-based compensation, travel, and related costs for the personnel involved in drug discovery and development;

·

payments we make to third-party contract research organizations, contract manufacturers, investigative sites, consultants and other clinical trial costs;

·

technology and intellectual property license costs;

·

manufacturing costs;

·

activities relating to regulatory filings and the advancement of our product candidates through preclinical studies and clinical trials; and

·

facilities and other allocated expenses, which include direct and allocated expenses for rent and facility maintenance, as well as laboratory and other supplies.

18


 

We have multiple research and development projects ongoing at any one time. We utilize our internal resources, employees and infrastructure across multiple projects. We do not believe that allocating internal costs on the basis of estimates of time spent by our employees accurately reflects the actual costs of a project. We record and maintain information regarding hours spent on specific projects when needed for our collaboration agreements and for external, out-of-pocket research and development expenses on a project-specific basis.

We expense research and development costs as incurred, including payments made to date under our in-licensing agreements. We believe that significant investment in product development is a competitive necessity and plan to continue these investments in order to realize the potential of our product candidates; therefore, we expect our research and development expense to increase as we continue to develop our product candidates.

The successful development of our product candidates is uncertain. We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from any of our clinical or preclinical product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials which vary significantly over the life of a project as a result of differences arising during clinical development, including:

·

the number of clinical sites included in the trials;

·

the length of time required to enroll suitable patients;

·

the number of patients that ultimately participate in the trials; and

·

the results of our clinical trials.

Our expenditures are subject to additional uncertainties, including the terms and timing of collaboration agreements, clinical trial expenses, regulatory approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of the variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those which we anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expense

General and administrative expense primarily consists of salaries and other related costs, including stock-based compensation expense, for employees and consultants in our executive, finance, accounting, legal, information technology and human resource departments. Other general and administrative expenses include facility-related costs not otherwise included in research and development expense, promotional expenses, costs associated with industry and trade shows, and professional fees for legal services, including patent-related expense, insurance and accounting services.

We anticipate that our general and administrative expense will increase over the next several years for the following reasons, among others:

·

increased payroll, expanded infrastructure and higher consulting, legal, auditing and tax services and investor relations costs, and director and officer insurance premiums associated with being a public company;

·

increased expenses to support our research and development activities, which we expect to expand as we continue to advance the clinical development of our product candidates; and

·

we may also begin to incur expenses related to the planned sales and marketing of our product candidates in anticipation of commercial launch before we receive regulatory approval, if any, of a product candidate.

19


 

Results of Operations

Comparison of the Three Months Ended September 30, 2013 and 2014

The following table sets forth our results for the periods shown.

 

 

Three months ended September 30,

 

 

 

 

 

 

%

 

 

2014

 

 

2013

 

 

Increase

(Decrease)

 

 

Increase

(Decrease)

 

 

(in thousands, except percentages)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration license and services

 

999

 

 

$

2,022

 

 

 

(1,023

)

 

 

(51

%)

Manufacturing services

 

307

 

 

 

309

 

 

 

(2

)

 

 

(1

%)

Total revenue

 

1,306

 

 

 

2,331

 

 

 

(1,025

)

 

 

(44

%)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of collaboration license and services

 

999

 

 

 

1,907

 

 

 

(908

)

 

 

(48

%)

Costs of manufacturing services

 

307

 

 

 

309

 

 

 

(2

)

 

 

(1

%)

Research and development for proprietary programs

 

453

 

 

 

325

 

 

 

128

 

 

 

39

%

Total research and development

 

1,759

 

 

 

2,541

 

 

 

(782

)

 

 

(31

%)

General and administrative

 

1,007

 

 

 

823

 

 

 

184

 

 

 

22

%

Depreciation and amortization

 

76

 

 

 

214

 

 

 

(138

)

 

 

(64

%)

Total operating expenses

 

2,842

 

 

 

3,578

 

 

 

(736

)

 

 

(21

%)

Income (loss) from operations

 

(1,536

)

 

 

(1,247

)

 

 

(289

)

 

 

23

%

Change in value of warrants, income (expense)

 

 

 

 

499

 

 

 

(499

)

 

 

(100

%)

Loss on extinguishment of convertible notes

 

(4,688

)

 

 

 

 

 

(4,688

)

 

 

100

%

Interest expense

 

(177

)

 

 

 

 

 

(177

)

 

 

100

%

Other income

 

40

 

 

 

42

 

 

 

(2

)

 

 

100

%

Income (loss) before taxes

 

(6,361

)

 

$

(706

)

 

 

(5,655

)

 

 

801

%

 

Collaboration license and services revenues. Collaboration license and services revenues for the three months ended September 30, 2014 were $1.0 million compared to $2.0 million for the three months ended September 30, 2013, a decrease of $1.0 million. The decrease was due to a decrease of revenue recognized under the collaboration agreement with Gilead for the Phase 1 clinical trial work for GS-4774 of $1.2 million offset by a $0.2 million increase in reimbursement for the tuberculosis grant.

Manufacturing services revenues. Manufacturing services revenues for the three months ended September 30, 2014 were $0.3 million compared to $0.3 million for the three months ended September 30, 2013.

Costs of Collaboration License and Services. Costs of collaboration license and services expense for the three months ended September 30, 2014 was $1.0 million compared to $1.9 million for the three months ended September 30, 2013, a decrease of $0.9 million. The decrease was primarily due to a decrease in the expenses related to Phase 1 clinical trial for GS-4774.

Costs of Manufacturing Services. Costs of manufacturing services for the three months ended September 30, 2014 were $0.3 million compared to $0.3 million for the three months ended September 30, 2013.

Research and Development for Proprietary Programs Expense. Research and development for proprietary programs expense for the three months ended September 30, 2014 was $0.5 million compared to $0.3 million for the three months ended September 30, 2013, an increase of $0.2 million.  The increase was primarily due to expenses related to the tuberculosis grant.

General and Administrative Expense. General and administrative expense for the three months ended September 30, 2014 was $1.0 million compared to $0.8 million for the three months ended September 30, 2013, an increase of $0.2 million. The increase was related to the increased expense associated with being a public company, including, but not limited to, the costs associated with D&O insurance, board fees, and recurring SEC filing fees.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended September 30, 2014 was $0.1 million compared to $0.2 million for the three months ended September 30, 2013, a decrease of $0.1 million. This decrease was primarily due to leasehold improvements becoming fully depreciated in October 2013 as a result of the lease term at our principal executive offices ending. In April 2014, we amended our lease extending the term for five years.

20


 

Change in Value of Warrants and Put and Call Options. Change in value of warrants and put and call options for the three months ended September 30, 2014 was $0 compared to $0.5 million for the three months ended September 30, 2013.  In the three months ended September 30, 2014, we recorded $0 as the warrants were converted to common stock warrants and the put and call options were extinguished when the convertible notes converted into common stock.  In the three months ended September 30, 2013, we recorded $0.5 million of income related to the decrease in the estimated fair value of the outstanding warrants.

Loss on Extinguishment of Convertible Notes. Loss on extinguishment of convertible notes for the three months ended September 30, 2014 was $4.7 million compared to $0 for the three months ended September 30, 2013. Loss on extinguishment of convertible notes in the three months ended September 30, 2014 was due to our then outstanding convertible notes converting to common stock upon the closing of our initial public offering.

Interest Expense. Interest expense for the three months ended September 30, 2014 was $0.2 million compared to $0 for the three months ended September 30, 2013. Interest expense in the three months ended September 30, 2014 was due to the $7.5 million of the 2014 Notes and the related amortization of debt discount and debt issuance costs through July 2, 2014 when the 2014 Notes converted into common stock upon the closing of our initial public offering.

 

Comparison of the Nine Months Ended September 30, 2013 and 2014

The following table sets forth our results for the periods shown.

 

 

Nine months ended September 30,

 

 

 

 

 

 

%

 

 

2014

 

 

2013

 

 

Increase

(Decrease)

 

 

Increase

(Decrease)

 

 

 

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration license and services

 

3,436

 

 

$

5,788

 

 

 

(2,352

)

 

 

(41

%)

Manufacturing services

 

1,020

 

 

 

2,898

 

 

 

(1,878

)

 

 

(65

%)

Total revenue

 

4,456

 

 

 

8,686

 

 

 

(4,230

)

 

 

(49

%)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of collaboration license and services

 

2,757

 

 

 

4,556

 

 

 

(1,799

)

 

 

(39

%)

Costs of manufacturing services

 

1,020

 

 

 

2,898

 

 

 

(1,878

)

 

 

(65

%)

Research and development for proprietary programs

 

1,661

 

 

 

996

 

 

 

665

 

 

 

67

%

Total research and development

 

5,438

 

 

 

8,450

 

 

 

(3,012

)

 

 

(36

%)

General and administrative

 

2,877

 

 

 

2,274

 

 

 

603

 

 

 

27

%

Depreciation and amortization

 

218

 

 

 

650

 

 

 

(432

)

 

 

(66

%)

Total operating expenses

 

8,533

 

 

 

11,374

 

 

 

(2,841

)

 

 

(25

%)

Loss from operations

 

(4,077

)

 

 

(2,688

)

 

 

(1,389

)

 

 

52

%

Change in value of warrants, income (expense)

 

(1,903

)

 

 

1,469

 

 

 

(3,372

)

 

 

(230

%)

Loss on extinguishment of convertible notes

 

(4,688

)

 

 

 

 

 

(4,688

)

 

 

100

%

Interest expense

 

(3,891

)

 

 

 

 

 

(3,891

)

 

 

100

%

Other income

 

40

 

 

 

42

 

 

 

(2

)

 

 

100

%

Loss before taxes

 

(14,519

)

 

$

(1,177

)

 

 

(13,342

)

 

 

1134

%

 

Collaboration license and services revenues. Collaboration license and services revenues for the nine months ended September 30, 2014 were $3.4 million compared to $5.8 million for the nine months ended September 30, 2013, a decrease of $2.4 million. The decrease was due to a decrease of revenue recognized under the collaboration agreement with Gilead for the Phase 1 clinical trial work for GS-4774 of $3.0 million offset by a $0.6 million increase in reimbursement for the tuberculosis grant.

Manufacturing services revenues. Manufacturing services revenues for the nine months ended September 30, 2014 were $1.0 million compared to $2.9 million for the nine months ended September 30, 2013, a decrease of $1.9 million. The decrease was due to a decrease in revenue relating to manufacturing services for Gilead for the Phase 2 HBV trial of $1.9 million.

21


 

Costs of Collaboration License and Services. Costs of collaboration license and services expense for the nine months ended September 30, 2014 was $2.8 million compared to $4.6 million for the nine months ended September 30, 2013, a decrease of $1.8 million. The decrease was due to a $1.0 million decrease in the expenses related to Phase 1 clinical trial for GS-4774, a reclassification of $0.6 million of expenses to research and development for proprietary programs related to GI-4000 due to Celgene returning the product rights to us and other decrease of $0.2 million.

Manufacturing Services. Manufacturing services for the nine months ended September 30, 2014 were $1.0 million compared to $2.9 million for the nine months ended September 30, 2013, a decrease of $1.9 million. The decrease was due to a decrease in expenses relating to manufacturing services for Gilead for the Phase 2 HBV trial of $1.9 million.

Research and Development for Proprietary Programs Expense. Research and development for proprietary programs expense for the nine months ended September 30, 2014 was $1.7 million compared to $1.0 million for the nine months ended September 30, 2013, an increase of $0.7 million. The increase was primarily due to $0.6 million of costs related to GI-4000 in the nine months ended September 30, 2014 due to Celgene declining their option on GI-4000 in March 2013 and returning all rights and development responsibility to us and other miscellaneous expense increase of $0.1 million.

General and Administrative Expense. General and administrative expense for the nine months ended September 30, 2014 was $2.9 million compared to $2.3 million for the nine months ended September 30, 2013, an increase of $0.6 million. The increase was due to a $0.2 million increase related to the increased expense associated with being a public company, including, but not limited to, the costs associated with D&O insurance, board fees, and recurring SEC filing fees, a $0.2 million increase in patent costs related to our intellectual property and a $0.2 million increase in accounting and auditing fees due to valuation and audit work performed in preparation for our initial public offering.

Depreciation and Amortization Expense. Depreciation and amortization expense for the nine months ended September 30, 2014 was $0.2 million compared to $0.7 million for the nine months ended September 30, 2013, a decrease of $0.5 million. This decrease was primarily due to leasehold improvements becoming fully depreciated in October 2013 as a result of the lease term at our principal executive offices ending. Beginning in November 2013, we leased our existing facility on a month to month basis. In April 2014, we amended our lease extending the term for five years.

Change in Value of Warrants.  Change in value of warrants for the nine months ended September 30, 2014 was $1.9 million compared to $1.5 million for the nine months ended September 30, 2013. In the nine months ended September 30, 2014, we recorded $1.9 million of expense related to the increase in the estimated fair value of the outstanding warrants and put and call options.  In the nine months ended September 30, 2013, we recorded $1.5 million of income related to the decrease in the estimated fair value of the outstanding warrants.

Loss on Extinguishment of Convertible Notes. Loss on extinguishment of convertible notes for the nine months ended September 30, 2014 was $4.7 million compared to $0 for the nine months ended September 30, 2013. Loss on extinguishment of convertible notes in the nine months ended September 30, 2014 was due to our then outstanding convertible notes converting to common stock upon the closing of our initial public offering.

Interest Expense. Interest expense for the nine months ended September 30, 2014 was $3.7 million compared to $0 for the nine months ended September 30, 2013. Interest expense in the nine months ended September 30, 2014 was due to the $7.5 million of the 2014 Notes and the related amortization of debt discount and debt issuance costs.

22


 

Liquidity and Capital Resources

Since our inception through September 30, 2014, we have funded our operations principally through the receipt of $206.8 million, in proceeds, consisting of: $108.2 million of net proceeds from the private placement of preferred equity securities; $14.6 million from the sale of common stock in our initial public offering; $0.5 million from the sale of common stock through stock option exercises; $13.4 million of net proceeds from the private placement of convertible notes; $40.4 million received under the Celgene collaboration and license agreements; $23.5 million received under the Gilead collaboration agreement and additional supply services to Gilead; and receipt of $6.2 million from research grants. We had cash and cash equivalents of $18.9 million as of September 30, 2014. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Our funds are currently held in cash and money market funds that are invested in securities issued by the U.S. Treasury. We completed an initial public offering on July 8, 2014.  In the offering we sold 1,725,000 shares of our common stock, including the shares sold pursuant to the underwriter’s over-allotment option, at $10.00 per share and raised $17,250,000 in proceeds before fees and expenses.  Upon completion of the offering, all of our then outstanding preferred stock converted into 2,757,825 shares of common stock in accordance with the terms of the preferred stock. Additionally, all our, outstanding preferred stock warrants were reclassified into additional paid-in capital as all of the preferred stock warrants converted into common stock warrants, the Note and the 2014 Notes, described in Note 4, converted into 51,556 and 1,116,372 shares of common stock, respectively, and the warrant issued to the holder of the Note the warrants issued to the holders of the 2014 Notes become exercisable for 12,373 and 750,000 shares of common stock, respectively.  

Based on our current level of operations, we believe that the net proceeds from our initial public offering completed on July 8, 2014 in which we raised $17,250,000 in proceeds including those proceeds resulting from shares sold pursuant to the underwriter’s exercise of its over-allotment option before fees and expenses, together with our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements through 2015. Successful completion of our research and development programs, and ultimately, the attainment of profitable operations are dependent upon future events, including completion of our development activities resulting in commercial products and/or technology, obtaining adequate financing to complete our development activities, progress of collaboration arrangements, market acceptance and demand for our products, and attracting and retaining qualified personnel. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate or to alter our operations. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available financial resources sooner than we currently expect.

We have incurred operating losses and have an accumulated deficit as a result of ongoing research and development spending. As of September 30, 2014, we have an accumulated deficit of approximately $221.0 million. We have net losses of $6.4 million and $14.5 million for the three and nine months ended September 30, 2014, respectively, and net cash used in operating activities of $8.0 million for the nine months ended September 30, 2014. Our losses and net cash used in operating activities have resulted principally from costs incurred in our discovery and development activities. We anticipate that operating losses and net cash used in operating activities will occur and substantially increase over the next several years as we expand discovery, research and development activities, including clinical development of our Tarmogen product candidates.

We have historically financed our operations primarily through the sale of equity and convertible debt securities, payments pursuant to collaboration agreements, government grants and capital lease and equipment financing. We will continue to be dependent upon such sources of funds until we are able to generate positive cash flows from our operations.

We will be required to fund future operations through the sale of our equity securities, issuance of convertible debt, potential milestone payments if achieved and possible future collaboration partnerships. There can be no assurance that sufficient funds will be available to us when needed from equity or convertible debt financings, that milestone payments will be earned or that future collaboration partnerships will be entered into. If we are unable to obtain additional funding from these or other sources when needed, or to the extent needed, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to it or its stockholders than we would otherwise choose. These events could prevent us from successfully executing on our operating plan and could raise substantial doubt about our ability to continue as a going concern in future periods.

23


 

The following table sets forth the primary sources and uses of cash for each of the periods set forth below.

 

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

Net cash provided by (used in) operating activities

$

(8,008

)

 

 

3,847

 

Net cash used in investing activities

 

(117

)