10-Q 1 gbim-10q_20150630.htm 10-Q gbim-10q_20150630.htm

 

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 June 30, 2015

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 August 6, 2015, the registrant had 5,751,574 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


GLOBEIMMUNE, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2015

 

PART I. FINANCIAL INFORMATION

  

 

 

Item 1.

 

 

Financial Statements

  

3

 

 

 

Condensed Balance Sheets

  

3

 

 

 

Condensed Statements of Operations

  

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

  

55

Item 3.

 

 

Defaults Upon Senior Securities

  

56

Item 4.

 

 

Mine Safety Disclosures

  

56

Item 5.

 

 

Other Information

  

56

Item 6.

 

 

Exhibits

  

56

 

SIGNATURES

  

57

 

EXHIBIT INDEX

 

58

 

 

 

2


PART I - FINANCIAL INFORMATION

 

 

ITEM 1 - Financial Statements

GLOBEIMMUNE, INC.

Condensed Balance Sheets

(unaudited)

 

 

June 30,

2015

 

 

December 31,

2014

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

12,365,287

 

 

$

16,812,459

 

Other current assets

 

727,174

 

 

 

999,892

 

Total current assets

 

13,092,461

 

 

 

17,812,351

 

Property and equipment, net

 

342,667

 

 

 

455,768

 

Other assets

 

100,000

 

 

 

100,000

 

Total assets

 

13,535,128

 

 

$

18,368,119

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable, Convertible Preferred Stock and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

703,929

 

 

$

572,586

 

Accrued liabilities

 

691,846

 

 

 

1,259,332

 

Deferred revenue

 

3,340,571

 

 

 

3,340,571

 

Total current liabilities

 

4,736,346

 

 

 

5,172,489

 

Other long-term liabilities

 

162,224

 

 

 

148,641

 

Deferred revenue

 

5,801,217

 

 

 

7,443,498

 

Total liabilities

 

10,699,787

 

 

 

12,764,628

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

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

   5,751,574 shares

 

5,752

 

 

 

5,752

 

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

   0 shares

 

 

 

 

 

Additional paid-in capital

 

228,399,804

 

 

 

228,302,479

 

Accumulated deficit

 

(225,570,215

)

 

 

(222,704,740

)

Total stockholders' equity

 

2,835,341

 

 

 

5,603,491

 

Total liabilities, redeemable, convertible preferred stock and stockholders' equity

 

13,535,128

 

 

$

18,368,119

 

 

See accompanying Notes to Condensed Financial Statements

 

 

 

3


GLOBEIMMUNE, INC.

Condensed Statements of Operations

(unaudited)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration license and services

$

1,170,707

 

 

 

1,153,018

 

 

 

2,197,606

 

 

 

2,436,539

 

Manufacturing services

 

106,340

 

 

 

578,000

 

 

 

267,266

 

 

 

712,825

 

Total revenue

 

1,277,047

 

 

 

1,731,018

 

 

 

2,464,872

 

 

 

3,149,364

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of collaboration license and services

 

646,190

 

 

 

925,141

 

 

 

1,568,079

 

 

 

1,757,995

 

Costs of manufacturing services

 

106,340

 

 

 

578,000

 

 

 

267,266

 

 

 

712,825

 

Research and development for proprietary programs

 

580,173

 

 

 

637,066

 

 

 

973,234

 

 

 

1,208,166

 

Total research and development

 

1,332,703

 

 

 

2,140,207

 

 

 

2,808,579

 

 

 

3,678,986

 

General and administrative

 

1,181,072

 

 

 

855,693

 

 

 

2,374,519

 

 

 

1,870,325

 

Depreciation and amortization

 

68,219

 

 

 

71,415

 

 

 

147,249

 

 

 

141,281

 

Total operating expenses

 

2,581,994

 

 

 

3,067,315

 

 

 

5,330,347

 

 

 

5,690,592

 

Loss from operations

 

(1,304,947

)

 

 

(1,336,297

)

 

 

(2,865,475

)

 

 

(2,541,228

)

Change in value of warrants and put and call options,

   income (expense)

 

 

 

 

(2,150,491

)

 

 

 

 

 

(1,903,446

)

Interest expense

 

 

 

 

(2,227,167

)

 

 

 

 

 

(3,713,853

)

Net loss

 

(1,304,947

)

 

 

(5,713,955

)

 

 

(2,865,475

)

 

 

(8,158,527

)

Preferred stock dividends and accretion of offering

   costs to redemption value

 

-

 

 

 

(3,437,556

)

 

 

-

 

 

 

(6,875,108

)

Net loss applicable to common stockholders

$

(1,304,947

)

 

 

(9,151,511

)

 

 

(2,865,475

)

 

 

(15,033,635

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding-basic and diluted

 

5,751,574

 

 

 

98,067

 

 

 

5,751,574

 

 

 

95,622

 

Net loss per share attributable to common stockholders-

   basic and diluted

$

(0.23

)

 

 

(93.32

)

 

 

(0.50

)

 

 

(157.22

)

 

See accompanying Notes to Condensed Financial Statements

 

 

 

4


GLOBEIMMUNE, INC.

Condensed Statements of Cash Flows

(unaudited)

 

 

Six Months Ended

 

 

June 30,

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(2,865,475

)

 

 

(8,158,527

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

147,249

 

 

 

141,281

 

Share-based compensation

 

85,512

 

 

 

46,506

 

Stock-based payments for services

 

11,813

 

 

 

(20,000

)

Noncash interest expense from amortization of debt

   discount and amortization of debt issuance costs

 

 

 

3,388,319

 

Noncash interest expense on convertible notes

 

 

 

313,299

 

Noncash expense (income) from change in valuation

   of warrants and put and call options

 

 

 

1,903,446

 

Gain on sale of property and equipment

 

 

 

(91,285

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in other current assets

 

272,718

 

 

 

(1,137,080

)

Increase (decrease) in accounts payable

 

131,343

 

 

 

(429,702

)

Increase (decrease) in accrued liabilities

 

(567,486

)

 

 

133,931

 

Decrease in deferred revenue

 

(1,642,281

)

 

 

(1,987,525

)

Increase in other long-term liabilities

 

13,583

 

 

 

6,643

 

Net cash used in operating activities

 

(4,413,024

)

 

 

(5,890,694

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

(34,148

)

 

 

(173,182

)

Sale of property and equipment

 

 

 

127,354

 

Net cash used in investing activities

 

(34,148

)

 

 

(45,828

)

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

)

Net cash provided by financing activities

 

 

 

6,474,026

 

Net (decrease) increase in cash and cash equivalents

 

(4,447,172

)

 

 

537,504

 

Cash and cash equivalents, beginning of period

 

16,812,459

 

 

 

5,924,241

 

Cash and cash equivalents, end of period

$

12,365,287

 

 

 

6,461,745

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash investing and

   financing activities:

 

 

 

 

 

 

 

Accretion of preferred stock (dividends)

$                       —

 

 

 

6,611,629

 

Accretion of preferred stock (offering costs)

 

 

 

263,479

 

Non-cash conversion of convertible promissory

   notes to common stock

 

 

 

6,121,533

 

Non-cash conversion of preferred stock to

   common stock

 

 

 

876,778

 

 

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 June 30, 2015, we had an accumulated deficit of $225,570,215. We had net losses of $1,304,947 and $2,865,475 for the three and six months ended June 30, 2015, respectively, and net cash used in operating activities of $4,413,024 for the six months ended June 30, 2015. We anticipate that operating losses and net cash used in operating activities will continue over the next several years.

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 June 30, 2015 will be sufficient to fund restructured operations through 2016.

In June 2015, we announced that we were evaluating our strategic options and restructuring the Company. As a result of this restructuring, we eliminated the majority of positions in its workforce and reduced our operating expenses.  As of August 4, 2015, we have six full time employees, including four scientists, one facility manager and one general and administrative employee.  These steps are not expected to have an impact on ongoing clinical trials being conducted by our collaborators in oncology and hepatitis B or the preclinical work we are conducting in our tuberculosis program.  We have engaged Cantor Fitzgerald & Co. to explore alternative ways to maximize stockholder value, including transactions involving the merger or sale of all or part of our assets.

On July 31, 2015, Celgene exercised its option to an exclusive worldwide-license, with the right to sublicense, to our GI-6200 program, including product candidate GI-6207. The GI-6200 license agreement provided for an upfront option exercise payment of $1,900,000 to us and our eligibility for milestone payments of up to $120,000,000, in the aggregate, and tiered royalty payments in the low teens for any sales of GI-6200 product candidates. Celgene also assumed all development responsibilities of the Company’s GI-6300 program and all development, regulatory and commercialization costs and responsibilities related to GI-6200 product candidates, other than our obligation to make outstanding payments in 2016 owed under the Cooperative Research and Development Agreement (NCI reference #02264) dated May 8, 2008 with  the National Cancer Institute, or CRADA.  See the Subsequent Event footnote (7).

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

6


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

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 restructured operating plan and could raise substantial doubt about our ability to continue as a going concern in future periods.

 

(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.

(b)

Unaudited Interim Financial Data

The accompanying condensed balance sheet as of June 30, 2015, condensed statements of operations for the three and six months ended June 30, 2015 and 2014 and condensed statements of cash flows for the six months ended June 30, 2015 and 2014 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 June 30, 2015 and the results of operations for the three and six months ended June 30, 2015 and 2014 and cash flows for the six months ended June 30, 2015. The financial data and other information disclosed in these notes to the financial statements related to the three and six months ended June 30, 2015 and 2014 are unaudited. The results for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 or for any other interim period.  These unaudited financial statements are condensed and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2014 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

(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 effecting 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:

 

 

June 30,

2015

 

 

December 31,

2014

 

 

Accrued compensation

$

326,635

 

 

 

578,091

 

 

Accrued clinical trial holdbacks

 

16,526

 

 

 

32,385

 

 

Other

 

348,685

 

 

 

648,856

 

 

Total Accrued Liabilities

$

691,846

 

 

 

1,259,332

 

 

     

As of June 30, 2015 and December 31, 2014, accrued liabilities included $16,526 and $32,385 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.  Potentially dilutive securities, included convertible preferred stock, warrants, stock options and convertible promissory notes, representing 1,216,378, 1,216,515, 5,030,695 and 4,745,188 weighted average shares of common stock were excluded for the three and six months ended June 30, 2015 and 2014, respectively, because including them would have an anti-dilutive effect on 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 (pending potential delay by the FASB). 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.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for annual and interim reporting periods beginning January 1, 2017 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.  As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, the Company has elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. This election is irrevocable.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.”  The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset.  Debt disclosures will include the face amount of the debt liability and the effective interest rate.  The update requires retrospective application and represents a change in accounting principle.  The update is effective for fiscal years beginning after December 15, 2015.  Early adoption is permitted for financial statements that have not been previously issued.  ASU 2015-03 is not expected to have a material impact on the Company’s condensed consolidated financial statements.

8


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

(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.

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.

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, are measured at fair value on a recurring basis. The carrying amount of money market investments as of June 30, 2015 and December 31, 2014 approximates fair value based on quoted prices in active markets, or Level 1 inputs. There were no transfers between levels for the six months ended June 30, 2015 and the year ended December 31, 2014.

Assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of June 30, 2015 and December 31, 2014:

 

Description

June 30,

2015

 

 

Quoted

prices in

active

markets for

identical

assets

(Level 1)

 

 

Quoted

prices for

similar assets

observable

in the

marketplace

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

December 31,

2014

 

 

Quoted

prices in

active

markets for

identical

assets

(Level 1)

 

 

Quoted

prices for

similar assets

observable

in the

marketplace

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Assets measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market investments

     (included in cash and

      cash equivalents)

 

19,923

 

 

 

19,923

 

 

 

 

 

 

 

 

 

20,173

 

 

 

20,173

 

 

 

 

 

 

 

     

 

(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 bore an interest rate of 8.0%, had a term of three years and could have been 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 was being amortized to interest expense over the term of the Note. Amortization of $17,213 and $34,236 was recorded in the three and six months ended June 30, 2014.                    

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 included 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.

9


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

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 was being amortized to interest expense over the term of the 2014 Notes. Amortization of $1,530,383 and $2,559,639 was recorded in the three and six month periods ended June 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 were included in debt issuance costs and were being amortized to interest expense over the term of the 2014 Notes. Amortization of $482,066 and $803,444 was recorded in the three and six month periods ended June 30, 2014.    

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 included 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.

 

(5)

Deferred Revenue

Deferred revenue consisted of the following as of:

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Celgene

 

9,111,585

 

 

$

10,751,120

 

 

 

 

 

 

 

 

 

 

 

Gilead

 

30,203

 

 

 

32,949

 

 

 

 

 

 

 

 

 

 

 

Total deferred revenue

 

9,141,788

 

 

 

10,784,069

 

 

 

 

 

 

 

 

 

 

 

Less:  current portion

 

(3,340,571

)

 

 

(3,340,571

)

 

 

 

 

 

 

 

 

 

 

Deferred revenue, long-term

 

5,801,217

 

 

$

7,443,498

 

 

 

10


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

(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.

·

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, were recognizing 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, 2014 and June 30, 2015, the unamortized balance is expected to be amortized on a straight line basis through March 31, 2018.

11


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

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 June 2016.

We recognized $819,767, $819,767, $1,639,535 and $1,778,510 in license and service revenue during the three and six months ended June 30, 2015 and 2014, respectively. Costs incurred under these agreements, included in costs of collaboration licenses and services in our statement of operations, for the three and six months ended June 30, 2015 and 2014 were $633,871, $742,902, $1,330,211 and $1,356,857, 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.

(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.

12


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

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.

We recognized $1,373, $1,373, $2,746 and $218,646 in license and services revenue under the Gilead arrangement during the three and six months ended June 30, 2015 and 2014, respectively.  In addition, we recognized revenue of $106,340, $578,000, $267,266 and $712,825 during the three and six months ended June 30, 2015 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, for the three and six months ended June 30, 2015 and 2014 were $3,855, $182,239, $229,404 and $401,138, respectively. Manufacturing services costs incurred under agreements with Gilead are included in costs of manufacturing services in our statement of operations, for the three and six months ended June 30, 2015 and 2014 were $106,340, $578,000, $267,266 and $712,825, 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, 2015.  

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.

 

(7)

Subsequent Events      

On July 31, 2015, we and Celgene entered into (a) Amendment No. 5, or the Celgene Amendment, to the Collaboration and Option Agreement between us and Celgene; (b) a Notice of Exercise of Celgene’s Election to Assume Development Responsibilities for GI-6300 pursuant to the Program License Agreement, dated July 26, 2013, or the Notice Letter,; and (c) a GI-6200 Program License Agreement, or the GI-6200 License Agreement.

The Celgene Amendment provides, among other matters, that our GI-6100 program replaced our GI-3000 program as a drug candidate under the Collaboration and Option Agreement and that we are eligible for milestone payments of up to $145,000,000, in the aggregate, and tiered royalty payments in the low teens for sales of GI-6100 product candidates.

The Notice Letter provides for (i) notice of Celgene’s election to assume all development responsibilities of our GI-6300 program in accordance with the terms of the Program License Agreement, dated July 26, 2013, or the Program License Agreement; and (ii) amends and updates the patents which are subject to the terms of the Program License Agreement.

13


GLOBEIMMUNE, INC.

Notes to Condensed Financial Statements

(unaudited)

 

The GI-6200 License Agreement provides Celgene an exclusive worldwide-license, with the right to sublicense, to our GI-6200 program, including product candidate GI-6207. The GI-6200 License agreement provides for, among other matters, (i) an upfront option exercise payment of $1,900,000 to us; (ii) our eligibility for milestone payments of up to $120,000,000, in the aggregate, and tiered royalty payments in the low teens for any sales of GI-6200 product candidates; and (iii) Celgene’s assumption of all subsequent development, regulatory and commercialization costs and responsibilities related to GI-6200 product candidates, other than our obligation to make outstanding payments in 2016 owed under the CRADA.

 

 

 

 

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2014 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, 2014 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  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. We have four Tarmogen product candidates in clinical evaluation for infectious disease and multiple cancer indications.  We believe that our Tarmogen platform has applicability to a number of diseases.

We have two strategic collaborations with leading biotechnology companies. In 2011, Gilead Sciences, Inc., or Gilead, exclusively licensed product candidates intended to treat chronic hepatitis B virus, or HBV, infection.  A product candidate from the Gilead collaboration, GS-4774 is currently being evaluated in randomized Phase 2 clinical trials. Celgene Corporation, or Celgene, entered into a collaboration and option agreement for GlobeImmune oncology product candidates in 2009. Under this agreement, in 2013, Celgene exercised its option for a worldwide, exclusive license to the GI-6300 program, including the GI-6301 product candidate, which targets the brachyury protein. Brachyury plays a role in the metastatic progression of certain cancers and is believed to be fundamental in the formation of chordomas, rare bone tumors of the spine.  GI-6301 is currently being evaluated in a randomized Phase 2 trial at the National Cancer Institute, or NCI, in subjects diagnosed with chordoma.  In July 2015, Celgene exercised its option for a worldwide, exclusive license to the GI-6200 program, including the GI-6207 product candidate, which targets carcinoembryonic antigen, or CEA. GI-6207 is the second Tarmogen product candidate licensed by Celgene under the collaboration.  Under the terms of the agreement, GlobeImmune will receive an option exercise payment of $1.9 million, and is eligible for up to $120 million in potential future development, regulatory and sales milestones, and royalties on product sales.  GI-6207 is currently being evaluated in a Phase 2 clinical trial at the NCI in subjects with medullary thyroid cancer or MTC. Through June 30, 2015, we have received over $64 million from these collaborations.

In June 2015, we announced that we were evaluating our strategic options and restructuring the Company. As a result of this restructuring, we eliminated the majority of positions in our workforce and reduced our operating expenses. As of August 4, 2015, we have six full time employees, including four scientists, one facility manager and one general and administrative employee.  These steps are not expected to have an impact on ongoing clinical trials being conducted by our collaborators in oncology and hepatitis B or the preclinical work we are conducting in our tuberculosis program.  We have engaged Cantor Fitzgerald & Co. to explore alternative ways to maximize stockholder value, including transactions involving the merger or sale of all or part of our assets.

15


 

We have incurred operating losses and have an accumulated deficit as a result of ongoing research and development spending. As of June 30, 2015, we had an accumulated deficit of $225.6 million. We had a net loss of $1.3 and $2.9 million for the three and six months ended June 30, 2015. Our losses have resulted principally from costs incurred in our discovery and development activities. We anticipate that operating losses will continue over the next several years.  Our plans to advance our own product candidates are dependent on receiving additional financing, which may include milestone payments from our collaboration agreements, public or private equity or debt financings, new collaborative relationships, or other available financing transactions. 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 lead infectious disease Tarmogen product candidate, GS-4774, is being developed pursuant to a world-wide collaboration with Gilead Sciences, Inc., or Gilead.  GS-4774, currently being evaluated in two randomized Phase 2 trials, is a Tarmogen designed 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 and Gilead agreed to fund a Phase 1 trial. As a result of our activities under this agreement, we have received an additional $5 million in milestone payments. Gilead is responsible for all 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. Untreated chronic HBV is associated with significant morbidity, including liver cirrhosis, hepatic decompensation, and hepatocellular carcinoma.  Rates of mortality are also increased for patients with chronic HBV, with 25–40% of patients dying from complications of liver disease.  GS-4774 is being developed as an immunotherapy designed to generate T cell immune responses directed 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 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 a total of three months. The Phase 1 results indicated that GS-4774 was generally well tolerated and 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.

Subsequent to the Phase 1 trial, Gilead has initiated two clinical trials of GS-4774:

·

a Phase 2 clinical trial initiated in 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 178 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.  In May 2015, we announced top line results from this study.  Patients treated with the highest dose of GS-4774 plus ongoing oral antiviral therapy, or OAV did not show a reduction in HBsAg at week 24, the primary endpoint of the study, but at 48 weeks had a mean -0.17 log10 reduction of HBsAg compared with a -0.04 log10 reduction in the OAV alone group

16


 

(p=not significant). Three patients receiving the highest dose of GS-4774 had HBsAg reductions between -0.94 and -3.89 log10 at 48 weeks. There was no difference in HBsAg reductions between the two lowest dose groups versus the control arm at 48 weeks.  These study results have been submitted to an upcoming scientific conference.

·

a second Phase 2 clinical trial initiated in 2014, 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 1401 trial is enrolling patients.   The 48-week results are projected to be available in the middle of 2016.

A long-term follow-up registry study was initiated in 2014, GS-US-330-1508, or the 1508 trial, for the study of individuals with chronic HBV infection, previously treated with GS-4774 in a Gilead-sponsored trial.

We have additional preclinical infectious disease programs in various stages of development. In 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 and or prevent tuberculosis infection. The work under this grant is being performed and reimbursed over four years.  We have constructed initial Tarmogen product candidates expressing a combination of novel tuberculosis protein targets. Early experiments in mice show antigen-specific T cell immune responses.  These constructs are being evaluated with our collaborators at Colorado State University in various mouse and guinea pig models of tuberculosis infection.

Oncology Programs

In 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-6300 program, including GI-6301, and the GI-6200 program, including GI-6207, were exclusively licensed by Celgene.  We have received $10.9 million in payments under these licenses and are eligible to receive up to $265 million in milestone payments as well as royalties on product sales from Celgene. 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 collaboration and option agreement, in 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 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. GI-6301 is currently being evaluated in a randomized Phase 2 trial at the NCI in subjects diagnosed with 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 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 completing 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.  

17


 

·

In four previously published Phase 2 chordoma trials since 2005, only 1 of 92 chordoma subjects (1%) 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%.

·

Data for the eleven chordoma patients in the GI-6301-01 Phase 1 trial presented in October 2014 at the 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.

We believe that the summary results from the eleven chordoma patients enrolled in this trial, as discussed above, compare favorably with historically published data.  In April 2015, we and our collaborators including the NCI and Celgene opened for enrollment a Phase 2 clinical trial designed to investigate the safety and efficacy of GI-6301 in combination with radiation therapy in patients with chordoma.  The GI-6301-02 Phase 2 clinical trial is a randomized, double-blind, placebo controlled trial of GI-6301, in combination with standard of care radiation for patients with locally advanced, unresectable chordoma.   The primary endpoint for the trial will be overall response rate defined as CR or PR by RECIST after up to 24 months of treatment.  Participants randomized to the placebo arm will be allowed to cross-over to receive GI-6301 at time of confirmed disease progression.  

In July 2015, Celgene exercised its option to an exclusive worldwide-license, with the right to sublicense, to our GI-6200 program, including product candidate GI-6207. The GI-6200 license agreement provided for an upfront option exercise payment of $1,900,000 to us and our eligibility for milestone payments of up to $120,000,000, in the aggregate, and tiered royalty payments in the low teens for any sales of GI-6200 product candidates. Celgene also assumed all development responsibilities of the Company’s GI-6300 program and all development, regulatory and commercialization costs and responsibilities related to GI-6200 product candidates, other than our obligation to make outstanding payments in 2016 owed under the Cooperative Research and Development Agreement (NCI reference #02264) dated May 8, 2008  with  the National Cancer Institute, or CRADA.

The NCI has completed a dose escalation Phase 1 clinical trial of GI-6207 in 25 subjects with Stage IV cancers expressing CEA, and has initiated a randomized Phase 2 trial in subjects with MTC.   The GI-6207-02 Phase 2 study is planned to enroll a total of 34 subjects in a cross-over trial design. Subjects will be administered either GI-6207 for one year or be observed for six months and then administered GI-6207 for one year. The primary endpoint for the trial will be the effect of GI-6207 on changes in calcitonin levels. Calcitonin is a tumor marker that can be measured in a patient’s circulating blood that correlates with tumor burden in MTC. Elevated calcitonin values after surgery indicate persistent or recurrent disease. Based on current enrollment rates, we believe that this trial could be fully enrolled in the fourth quarter 2015 or the first quarter 2016, with results available in the second half of 2016. Development and commercialization rights to the GI-6200 program, including GI-6207, remain subject to option by Celgene. Celgene has the option to exclusively license GI-6207 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. In March 2013, Celgene declined to exercise its option to GI-4000 and returned all rights and development responsibility to us.  Further clinical development of GI-4000 is contingent on identifying additional sources of financing. 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%) 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

18


 

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 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.

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 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.

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, 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.

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.

19


 

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.

In June 2015, we announced that we were evaluating our strategic options and restructuring the Company. As a result of this restructuring, we eliminated the majority of positions in our workforce and reduced our operating expenses. As of August 4, 2015, we have six full time employees, including four scientists, one facility manager and one general and administrative employee.  These steps are not expected to have an impact on ongoing clinical trials being conducted by our collaborators in oncology and hepatitis B or the preclinical work we are conducting in our tuberculosis program.  We have engaged Cantor Fitzgerald & Co. to explore alternative ways to maximize stockholder value, including transactions involving the merger or sale of all or part of our assets.

On July 31, 2015, Celgene exercised its option to an exclusive worldwide-license, with the right to sublicense, to our GI-6200 program, including product candidate GI-6207. The GI-6200 license agreement provided for an upfront option exercise payment of $1,900,000 to us and our eligibility for milestone payments of up to $120,000,000, in the aggregate, and tiered royalty payments in the low teens for any sales of GI-6200 product candidates. Celgene also assumed all development responsibilities of the Company’s GI-6300 program and all development, regulatory and commercialization costs and responsibilities related to GI-6200 product candidates, other than tour obligation to make outstanding payments in 2016 owed under the CRADA.

General and Administrative Expense

General and administrative expense primarily consists of salaries, severance 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.

Results of Operations

Comparison of the Three Months Ended June 30, 2015 and 2014

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

 

 

Three months ended June 30,

 

 

 

 

 

 

%

 

 

2015

 

 

2014

 

 

Increase

(Decrease)

 

 

Increase

(Decrease)

 

 

(in thousands, except percentages)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration license and services

$

1,171

 

 

 

1,153

 

 

 

18

 

 

 

2

%

Manufacturing services

 

106

 

 

 

578

 

 

 

(472

)

 

 

(82

%)

Total revenue

 

1,277

 

 

 

1,731

 

 

 

(454

)

 

 

(26

%)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of collaboration license and services

 

646

 

 

 

925

 

 

 

(279

)

 

 

(30

%)

Costs of manufacturing services

 

106

 

 

 

578

 

 

 

(472

)

 

 

(82

%)

Research and development for proprietary programs

 

580

 

 

 

637

 

 

 

(57

)

 

 

(9

%)

Total research and development

 

1,332

 

 

 

2,140

 

 

 

(808

)

 

 

(38

%)

General and administrative

 

1,181

 

 

 

856

 

 

 

325

 

 

 

38

%

Depreciation and amortization

 

68

 

 

 

71

 

 

 

(3

)

 

 

(4

%)

Total operating expenses

 

2,581

 

 

 

3,067

 

 

 

(486

)

 

 

(16

%)

Income (loss) from operations

 

(1,304

)

 

 

(1,336

)

 

 

32

 

 

 

(2

%)

Change in value of warrants, income (expense)

 

 

 

 

(2,151

)

 

 

2,151

 

 

 

(100

%)

Interest expense

 

 

 

 

(2,227

)

 

 

2,227

 

 

 

100

%

Income (loss) before taxes

$

(1,304

)

 

 

(5,714

)

 

 

4,410

 

 

 

(77

%)

 

20


 

Collaboration license and services revenues. Collaboration license and services revenues for the three months ended June 30, 2015 were $1.2 million compared to $1.2 million for the three months ended June 30, 2014.

Manufacturing services revenues. Manufacturing services revenues for the three months ended June 30, 2015 were $0.1 million compared to $0.6 million for the three months ended June 30, 2014, a decrease of $0.5 million.  The decrease was due to a decrease in the revenue relating to manufacturing services for Gilead for the Phase 2 HBV trial.

Costs of Collaboration License and Services. Costs of collaboration license and services expense for the three months ended June 30, 2015 was $0.6 million compared to $0.9 million for the three months ended June 30, 2014, a decrease of $0.3 million. The decrease was primarily due to a decrease in the expenses related to Phase 1 HBV clinical trial expenses.

Costs of Manufacturing Services. Costs of manufacturing services for the three months ended June 30, 2015 were $0.1 million compared to $0.6 million for the three months ended June 30, 2014, a decrease of $0.5 million.  The decrease was due to a decrease in the expenses relating to manufacturing services for Gilead for the Phase 2 HBV trial.

Research and Development for Proprietary Programs Expense. Research and development for proprietary programs expense for the three months ended June 30, 2015 was $0.6 million compared to $0.6 million for the three months ended June 30, 2014.

General and Administrative Expense. General and administrative expense for the three months ended June 30, 2015 was $1.2 million compared to $0.9 million for the three months ended June 30, 2014, an increase of $0.3 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 June 30, 2015 was $0.1 million compared to $0.1 million for the three months ended June 30, 2014.

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 June 30, 2015 was $0 compared to $2.2 million for the three months ended June 30, 2014.  In the three months ended June 30, 2015, 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 upon the completion of the initial public offering.  In the three months ended June 30, 2014, we recorded $2.2 million of expense related to the increase in the estimated fair value of the outstanding warrants.

Interest Expense. Interest expense for the three months ended June 30, 2015 was $0 million compared to $2.2 million for the three months ended June 30, 2014. Interest expense in the three months ended June 30, 2015 was $0 as the convertible notes were converted to common stock upon the completion of the initial public offering.  In the three months ended June 30, 2014, we recorded $2.2 million of interest expense due to the $7.5 million of the convertible notes and the related amortization of debt discount and debt issuance costs.

21


 

 

Comparison of the Six Months Ended June 30, 2015 and 2014

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

 

 

Six months ended June 30,

 

 

 

 

 

 

%

 

 

2015

 

 

2014

 

 

Increase

(Decrease)

 

 

Increase

(Decrease)

 

 

(in thousands, except percentages)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration license and services

$

2,198

 

 

 

2,437

 

 

 

(239

)

 

 

(10

%)

Manufacturing services

 

267

 

 

 

713

 

 

 

(446

)

 

 

(63

%)

Total revenue

 

2,465

 

 

 

3,150

 

 

 

(685

)

 

 

(22

%)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of collaboration license and services

 

1,568

 

 

 

1,758

 

 

 

(190

)

 

 

(11

%)

Costs of manufacturing services

 

267

 

 

 

713

 

 

 

(446

)

 

 

(63

%)

Research and development for proprietary programs

 

973

 

 

 

1,208

 

 

 

(235

)

 

 

(19

%)

Total research and development

 

2,808

 

 

 

3,679

 

 

 

(871

)

 

 

(24

%)

General and administrative

 

2,375

 

 

 

1,870

 

 

 

505

 

 

 

27

%

Depreciation and amortization

 

147

 

 

 

141

 

 

 

6

 

 

 

4

%

Total operating expenses

 

5,330

 

 

 

5,690

 

 

 

(360

)

 

 

(6

%)

Loss from operations

 

(2,865

)

 

 

(2,540

)

 

 

(325

)

 

 

13

%

Change in value of warrants, income (expense)

 

 

 

 

(1,904

)

 

 

1,904

 

 

 

(100

%)

Interest expense

 

 

 

 

(3,714

)

 

 

3,714

 

 

 

100

%

Loss before taxes

 

(2,865

)

 

$

(8,158

)

 

 

5,293

 

 

 

(65

%)

 

Collaboration license and services revenues. Collaboration license and services revenues for the six months ended June 30, 2015 were $2.2 million compared to $2.4 million for the six months ended June 30, 2014, a decrease of $0.2 million.

Manufacturing services revenues. Manufacturing services revenues for the six months ended June 30, 2015 were $0.3 million compared to $0.7 million for the six months ended June 30, 2014, a decrease of $0.4 million.  The decrease was due to a decrease in the revenue relating to manufacturing services for Gilead for the Phase 2 HBV trial.

Costs of Collaboration License and Services. Costs of collaboration license and services expense for the six months ended June 30, 2015 was $1.6 million compared to $1.8 million for the six months ended June 30, 2014, a decrease of $0.2 million. The decrease was primarily due to a decrease in the expenses related to Phase 1 HBV clinical trial expenses.

Costs of Manufacturing Services. Costs of manufacturing services for the six months ended June 30, 2015 were $0.3 million compared to $0.7 million for the six months ended June 30, 2014, a decrease of $0.4 million.  The decrease was due to a decrease in the expenses relating to manufacturing services for Gilead for the Phase 2 HBV trial.

Research and Development for Proprietary Programs Expense. Research and development for proprietary programs expense for the six months ended June 30, 2015 was $1.0 million compared to $1.2 million for the six months ended June 30, 2014, a decrease of $0.2 million. The decrease was primarily due to a reduction in employees and expenses related to the GI-4000 program.

General and Administrative Expense. General and administrative expense for the six months ended June 30, 2015 was $2.4 million compared to $1.9 million for the six months ended June 30, 2014, an increase of $0.5 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 six months ended June 30, 2015 was $0.1 million compared to $0.1 million for the six months ended June 30, 2014.

Change in Value of Warrants and Put and Call Options. Change in value of warrants and put and call options for the six months ended June 30, 2015 was $0 compared to $1.9 million for the six months ended June 30, 2014.  In the six months ended June 30, 2015, 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 upon the completion of the initial public offering.  In the six months ended June 30, 2014, we recorded $1.9 million of expense related to the increase in the estimated fair value of the outstanding warrants.

22


 

Interest Expense. Interest expense for the six months ended June 30, 2015 was $0 million compared to $3.7 million for the six months ended June 30, 2014. Interest expense in the six months ended June 30, 2015 was $0 as the convertible notes were converted to common stock upon the completion of the initial public offering.  In the six months ended June 30, 2014, we recorded $3.7 million of interest expense due to the $7.5 million of the convertible notes and the related amortization of debt discount and debt issuance costs.

Liquidity and Capital Resources

Since our inception through June 30, 2015, we have funded our operations principally through the receipt of $208.8 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; $24.6 million received under the Gilead collaboration agreement and additional supply services to Gilead; and receipt of $7.1 million from research grants. We had cash and cash equivalents of $12.4 million as of June 30, 2015. 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 $17.3 million 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 and the warrants issued to the holders of the 2014 Notes become exercisable for 12,373 and 750,000 shares of common stock, respectively.  

In June 2015, we announced that we were evaluating our strategic options and restructuring the Company. As a result of this restructuring, we eliminated the majority of positions in our workforce and reduced our operating expenses. As of August 4, 2015, we have six full time employees, including four scientists, one facility manager and one general and administrative employee.  These steps are not expected to have an impact on ongoing clinical trials being conducted by our collaborators in oncology and hepatitis B or the preclinical work we are conducting in our tuberculosis program.  We have engaged Cantor Fitzgerald & Co. to explore alternative ways to maximize stockholder value, including transactions involving the merger or sale of all or part of our assets.

On July 31, 2015, Celgene exercised its option to an exclusive worldwide-license, with the right to sublicense, to our GI-6200 program, including product candidate GI-6207. The GI-6200 license agreement provided for an upfront option exercise payment of $1,900,000 to us and our eligibility for milestone payments of up to $120,000,000, in the aggregate, and tiered royalty payments in the low teens for any sales of GI-6200 product candidates. Celgene also assumed all development responsibilities of the Company’s GI-6300 program and all development, regulatory and commercialization costs and responsibilities related to GI-6200 product candidates, other than tour obligation to make outstanding payments in 2016 owed under the CRADA.

Based on our current level of operations, we believe that our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements through 2016. 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. Our plans to advance our own product candidates are dependent on receiving additional financing, which may include milestone payments from our collaboration agreements, public or private equity or debt financings, new collaborative relationships, or other available financing transactions.  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 June 30, 2015, we have an accumulated deficit of approximately $225.6 million. We had a net loss of $1.3 million and $2.9 million for the three and six months ended June 30, 2015, and net cash used in operating activities of $4.4 million for the six months ended June 30, 2015. 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 continue to occur over the next several years.

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.

23


 

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 additional 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 restructured operating plan and could raise substantial doubt about our ability to continue as a going concern in future periods.

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

 

 

Six months ended June 30,

 

 

2015

 

 

2014

 

Net cash used in operating activities

$

(4,413

)

 

 

(5,891

)

Net cash provided by (used in) investing activities

 

(34

)

 

 

(46

)

Net cash provided by financing activities

 

-

 

 

 

6,474

 

Net (decrease) increase in cash and cash equivalents

 

(4,447

)

 

 

537

 

 

Operating Activities

For the six months ended June 30, 2015 and 2014, our operating activities used cash of $4.4 million and $5.9 million, respectively. The cash used in operating activities of $4.4 million for the six months ended June 30, 2015 was primarily due to a net loss of $2.9 million primarily attributed research and development activities and by a decrease in deferred revenue of $1.6 million, which primarily resulted from the recognition of revenue under the Celgene collaboration agreement. The cash used in operating activities of $5.9 million for the six months ended June 30, 2014 was primarily due to a net loss of $8.2 million primarily attributed to interest expense, change in value of warrants and research and development activities and by a decrease in deferred revenue of $2.0 million, which primarily resulted from the recognition of revenue under the Celgene collaboration agreement, a decrease in accounts payable of $0.4 million offset by a noncash interest expense of $3.4 million and noncash change in warrant and put and call option expense of $1.9 million.

Investing Activities

For the six months ended June 30, 2015 and 2014, we did not engage in any significant investing activities.  

Financing Activities

For the six months ended June 30, 2015, we did not engage in any significant financing activities. For the six months ended June 30, 2014, our financing activities provided net cash of $6.5 million from the issuance of the 2014 Notes.

Operating Capital Requirements

We anticipate that we will continue to generate operating losses for the next several years. We believe that our existing cash and cash equivalents and contingent, future milestone payments under our collaboration agreements will allow us to fund our restructured operations through 2016. The amounts and timing of our actual expenditures depend on numerous factors, including the ongoing status of, and results from, clinical trials and other studies, achievement of milestones under our existing collaborations completion of public or private equity or debt financings, other available financing transactions, any additional collaborations that we may enter into with third parties for our product candidates and any unforeseen cash needs. 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 may seek to sell additional equity or debt securities or obtain a credit facility if our available cash and cash equivalents are insufficient to satisfy our liquidity requirements or if we develop additional opportunities to do so. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all.

24


 

Because of the numerous risks and uncertainties associated with research, development and commercialization of biopharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

·

the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities;

·

the cost, timing and outcomes of regulatory proceedings (including FDA review of any Biologics License Application, or BLA, that we file);

·

payments required with respect to development milestones we achieve under our in-licensing agreements, including any such payments to University of Colorado, or CU, pursuant to our license agreement with them;

·

the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

·

the costs associated with commercializing our product candidates, if they receive regulatory approval;

·

the cost and timing of developing our ability to establish sales and marketing capabilities;

·

competing technological efforts and market developments;

·

changes in our existing research relationships;

·

our ability to establish collaborative arrangements to the extent necessary;

·

revenues received from any existing or future products; and

·

payments received under any future strategic collaborations.

In June 2015, we announced that we were evaluating our strategic options and restructuring the Company. As a result of this restructuring, we eliminated the majority of positions in our workforce and reduced our operating expenses. As of August 4, 2015, we have six full time employees, including four scientists, one facility manager and one general and administrative employee.  These steps are not expected to have an impact on ongoing clinical trials being conducted by our collaborators in oncology and hepatitis B or the preclinical work we are conducting in our tuberculosis program.  We have engaged Cantor Fitzgerald & Co. to explore alternative ways to maximize stockholder value, including transactions involving the merger or sale of all or part of our assets.  

Critical Accounting Policies and Significant Judgments and Estimates

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Not applicable.

 

25


 

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that as a result of the material weakness described below, our disclosure controls and procedures were not effective as of June 30, 2015 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Notwithstanding the material weakness described below, management has concluded that our financial statements for the periods included in this report are fairly stated in all material respects in accordance with U.S. generally accepted accounting principles for each of the periods presented herein.

Internal Control Over Financial Reporting

Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting. As a result, our management did not perform an evaluation of our internal control over financial reporting as of June 30, 2015. Further, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting.

For the year ending December 31, 2015, pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. Under current SEC rules, our independent registered public accounting firm may also eventually be required to deliver an attestation report on the effectiveness of our internal control over financial reporting when we no longer qualify as an emerging growth company. During the year ended December 31, 2014, we identified a material weakness in our internal controls due to the fact that we only have one employee in our accounting and finance department. As a result, we were unable to allow for proper segregation of duties and reviews of transactions prior to being entered into our books and records. This material weakness continued during the six months ended June 30, 2015. We may qualify as an emerging growth company for as long as five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if our annual gross revenues equal or exceed $1 billion, we would cease to be an emerging growth company as of the following December 31.

 

 

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

None

 

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. In evaluating our business, investors should carefully consider the following risk factors, together with all other information included in this Quarterly Report, before deciding whether to invest in shares of our common stock. These risk factors contain, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. The order in which the following risks are presented is not intended to reflect the magnitude of the risks described. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and prospects. In that case, the trading price of our common stock could decline, and you may lose part or all of your investment.

FINANCIAL RISKS

We have incurred net operating losses throughout our history. We expect to continue to incur net losses for the foreseeable future, and we may never achieve or maintain profitability.

We are not profitable and have incurred significant net losses in each year since our inception in February 1995, except for 2013, including net losses of $1.3 million and $2.9 million for the three and six months ended June 30, 2015, respectively. As of June 30, 2015, we had an accumulated deficit of $225.6 million. Our losses have resulted principally from costs incurred in our discovery and development activities. We anticipate that our operating losses will continue over the next several years. While we reported net income in 2013, we do not anticipate that we will have net income again in the foreseeable future.

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. 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 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 rate of growth or contraction of our expenses and 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 products successfully, obtain the required regulatory approvals, 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, restructure our business or enter into a strategic transaction.  We may never be able to generate a sufficient amount of product revenue to cover our expenses.  Our plans to advance our own product candidates are dependent on receiving additional financing, which may include milestone payments from our collaboration agreements, public or private equity or debt financings, new collaborative relationships, or other available financing transactions.

We will require substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

Development of our Tarmogen product candidates will require substantial additional funds to conduct research, development and clinical trials necessary to bring such product candidates to market and to establish manufacturing, marketing and distribution capabilities. Our future capital requirements will depend on many factors, including, among others:

·

the scope, rate of progress, results and costs of the preclinical and non-clinical studies, clinical trials and other research and development activities undertaken by our collaborators;

·

the cost, timing and outcomes of regulatory proceedings, including U.S. Food and Drug Administration, or FDA, review of any BLA that we or our collaborators submit;

·

payments required with respect to development milestones we achieve under our in-licensing agreements, including any such payments to University of Colorado or the National Institutes of Health, pursuant to our license agreements with them;

·

the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

·

the costs associated with commercializing our product candidates, if they receive regulatory approval;

27


 

·

the cost and timing of establishing sales and marketing capabilities;

·

competing technological efforts and market developments;

·

changes in our existing research relationships;

·

our ability to establish collaborative arrangements to the extent necessary;

·

revenues received from any future products;

·

the ability to achieve and receive milestone payments for products licensed to collaborators; and

·

payments received under any future strategic collaborations.

We anticipate that we will continue to generate significant losses for the next several years as we incur expenses to complete our clinical trial programs for our product candidates. We believe that based on our current operations, together with our existing cash and cash equivalents will allow us to fund our restructured operating plan through 2016. Our plans to advance our own product candidates are dependent on receiving additional financing, which may include milestone payments from our collaboration agreements, public or private equity or debt financings, new collaborative relationships, or other available financing transactions.  However, our operating plan may change as a result of factors currently unknown to us. Changing circumstances may cause us to consume capital 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.

There can be no assurance that our revenue and expense forecasts will prove to be accurate, and any change in the foregoing assumptions could require us to obtain additional financing earlier than anticipated. There is a risk of delay or failure at any stage of developing a product candidate, and the time required and costs involved in successfully accomplishing our objectives cannot be accurately predicted. Actual drug research and development costs could substantially exceed budgeted amounts, which could force us to delay, reduce the scope of or eliminate one or more of our research or development programs.

We may never be able to generate a sufficient amount of product revenue to cover our expenses. Until we do, we expect to seek additional funding through public or private equity or debt financings, collaborative relationships, or other available financing transactions. However, there can be no assurance that additional financing will be available on acceptable terms, if at all, and such financings could be dilutive to existing security holders. Moreover, in the event that additional funds are obtained through arrangements with collaborators, such arrangements may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves.

If adequate funds are not available, we may be required to further delay, reduce the scope of or eliminate one or more of our research or development programs.  For instance, we have determined that any further development of our GI-4000 oncology program is contingent on identifying additional sources of financing. Our failure to obtain adequate financing when needed and on acceptable terms would have a material adverse effect on our business, financial condition and results of operations.

There is no guarantee that even if we do engage in a strategic transaction that such strategic transaction will increase stockholder value.

We have engaged Cantor Fitzgerald & Co. to facilitate possible strategic transactions, including transactions involving the merger or sale of all or part of our assets, and other alternatives with the goal of maximizing stockholder value. We may never complete a strategic transaction, and in the event that we do complete a strategic transaction, implementation of such transactions may impair stockholder value or otherwise adversely affect our business. Any such transaction may require us to incur non-recurring or other charges and may pose significant integration challenges and/or management and business disruptions, any of which could harm our results of operation and business prospects and impair the value of any such strategic transaction to our stockholders.

BUSINESS RISKS

Risks Relating to Clinical Development and Commercialization of Our Product Candidates

If we, or our collaborators, Celgene Corporation, Gilead Sciences, Inc. and the NCI, fail to successfully complete clinical trials, fail to obtain regulatory approval or fail to successfully commercialize our Tarmogen product candidates, our business would be harmed and the value of our securities would decline.

Investors should evaluate us in light of the uncertainties and complexities affecting a pre-commercial biopharmaceutical company. We have not completed clinical development for any of our product candidates. Our lead Tarmogen product candidate is GS-4774, which has been exclusively licensed to Gilead Sciences, Inc., or Gilead, and which is in Phase 2 clinical testing.  The GI-6300 program, including GI-6301, our oncology product targeting cancers expressing the brachyury protein, and GI-6207, our

28


 

oncology product targeting cancers that express carcinoembryonic antigen, or CEA, have been exclusively licensed to Celgene.  In April 2015, the NCI opened for enrollment a Phase 2 clinical trial designed to investigate the safety and efficacy of GI-6301 in combination with radiation therapy in patients with chordoma.  GI-6207 is currently being evaluated in a Phase 2 clinical trial at the NCI to evaluate GI-6207 in subjects with medullary thyroid cancer, or MTC.

Gilead is responsible for the clinical development and any future commercialization activities for GS-4774.  In May 2015, we announced top line results from this study.  Patients treated with the highest dose of GS-4774 plus ongoing oral antiviral therapy, or OAV, did not show a reduction in HBV surface antigen, or HBsAg  at week 24, the primary endpoint of the study, but at 48 weeks had a mean -0.17 log10 reduction of HBsAg compared with a -0.04 log10 reduction in the OAV alone group (p=not significant). Three patients receiving the highest dose of GS-4774 had HBsAg reductions between -0.94 and -3.89 log10 at 48 weeks. There was no difference in HBsAg reductions between the two lowest dose groups versus the control arm at 48 weeks.  A second Phase 2 clinical trial was initiated in 2014, 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 1401 trial is enrolling patients.   The 48-week results are projected to be available in the middle of 2016.  There can be no assurance that this trial will have a better outcome than the first Phase 2 trial.

The GI-6300 program, including GI-6301, which is being developed for the treatment of brachyury-expressing cancers, was exclusively licensed to Celgene.  Celgene will lead future clinical development and any future commercialization activities for GI-6301. As a result, we are completely dependent on their ability and willingness to fund and execute clinical development, regulatory approvals and commercialization activities. The Phase 2 program for GI-6301 in chordoma will be run at NCI.  We will have no control over the execution of this trial, including the rate of and completion of enrollment of the trial.  We have limited control over the amount and timing of resources that Celgene and Gilead dedicate to the development of our product candidates, potentially negatively impacting the likelihood of clinical or commercial success for these products candidates.

The GI-6207 program, which is being developed for the treatment of cancers that express CEA, was exclusively licensed to Celgene in July 2015.  Celgene will lead future clinical development and any future commercialization activities for GI-6207. As a result, we will rely on Celgene’s ability and willingness to fund and execute clinical development, regulatory approvals and commercialization activities related to GI-6207. The Phase 2 program for GI-6207 in MTC is currently being run at NCI.  We do not control the execution of this trial, including the rate of and completion of enrollment of the trial.  

Regulatory agencies, including the FDA, must approve GS-4774, GI-6301, GI-4000 and any of our other product candidates before they can be marketed or sold. The approval process is lengthy, requires significant capital expenditures, and the outcome is uncertain. Our, or our collaborator’s, ability to obtain regulatory approval of any Tarmogen product candidate depends on, among other things, completion of additional clinical trials, whether such clinical trials demonstrate statistically significant efficacy with safety issues that do not potentially outweigh the therapeutic benefit of the product candidates, and whether the regulatory agencies agree that the data from our future clinical trials are sufficient to support approval for any of our product candidates. The final results of our current and future clinical trials may not meet FDA or other regulatory agencies’ requirements to approve a product candidate for marketing. We or our collaborators may need to conduct more clinical trials than we currently anticipate. Even if we do receive FDA or other regulatory agency approval, we or our collaborators may not be successful in commercializing approved product candidates. If any of these events occur, our business could be materially harmed and the value of our securities would decline.

We, or our collaborators, may face delays in completing our clinical trials, and may not be able to complete them at all.

Clinical trials necessary to support an application for approval to market any Tarmogen product candidates have not been completed. Our, or our collaborators’, current and future clinical trials may be delayed, unsuccessful, or terminated as a result of many factors, including:

·

delays in designing an appropriate clinical trial protocol and reaching agreement on trial design with investigators and regulatory authorities;

·

governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy or guidelines;

·

delays in establishing necessary clinical trial sites or the need to establish new clinical trial sites;

·

reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

·

the actual performance of CROs and clinical trial sites in ensuring the proper and timely conduct of our clinical trials;

·

developing and validating companion diagnostics on a timely basis;

29


 

·

adverse effects experienced by subjects in clinical trials;

·

manufacturing sufficient quantities of product candidates at the sufficient level of quality for use in clinical trials; and

·

delays in achieving study endpoints and completing data analysis for a trial.

In addition to these factors, our trials may be delayed, unsuccessful or terminated because:

·

regulators or institutional review boards, or IRBs, may not authorize us to commence or continue a clinical trial;

·

regulators or IRBs may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about patient safety;

·

we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks;

·

patients may not complete clinical trials due to safety issues, side effects, such as injection site discomfort, a belief that they are receiving placebo instead of our product candidates, the length of follow-up periods, or other reasons;

·

patients with serious diseases included in our clinical trials may die or suffer other adverse medical events for reasons that may not be related to our product candidates;

·

in those trials where our product candidate is being tested in combination with one or more other therapies, deaths may occur that may be attributable to the other therapies;

·

we may have difficulty in maintaining contact with patients after administration of our Tarmogen product candidates, preventing us from collecting the data required by our study protocol;

·

product candidates may demonstrate a lack of efficacy during clinical trials;

·

delays in manufacture may delay or hinder completely ongoing or future clinical trials;

·

diagnostic tests we or our collaborators develop, such as the BDX-001 diagnostic for a potential future GI-4000 clinical trial in pancreas cancer patients, may not effectively identify patients that respond to our product candidates;

·

we may have difficulty in finding suitable patients to participate in our, or our collaborators’, clinical trials due to a number of factors, including competing clinical trials, a limited number of clinical trial sites, or the inability to identify a sufficient number of patients that meet trial eligibility criteria, including any diagnostic tests being developed by us or our collaborators, including the BDX-001 diagnostic;

·

personnel conducting clinical trials may fail to properly administer our product candidates; and

·

our collaborators may decide not to pursue further clinical trials, or may allocate resources to other clinical trials, including clinical trials of competitor product candidates.

We could encounter delays if our clinical trials are suspended or terminated by us, by IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Boards for such trials or by the FDA or other regulatory authorities. Such authorities may impose a suspension or termination due to a number of factors, including potential for unacceptable safety risks to patients, inspection of the clinical trial operation or trial site, changes in government regulations or administrative actions.

In addition, we rely on academic institutions, physician practices and CROs to conduct, supervise or monitor some or all aspects of clinical trials involving our product candidates. For example several of our other trials are being conducted by the NCI, including GI-6207-02 for MTC, the GI-6301-01 Phase 1 trial and the GI-6301 Phase 2 trial in chordoma. We have less control over the timing and other aspects of these clinical trials than if we conducted the monitoring and supervision entirely on our own. Third parties may not perform their responsibilities for our clinical trials on our anticipated schedule or consistent with a clinical trial protocol or applicable regulations. We also may rely on CROs to perform our data management and analysis. They may not provide these services as required or in a timely or compliant manner, and we may be held legally responsible for any or all of their performance failures or inadequacies.

Moreover, our development costs will increase because we will be required to complete additional or larger clinical trials for our Tarmogen product candidates prior to FDA or other regulatory approval. If we or our collaborators experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed or eliminated. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm

30


 

our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also lead to the denial of regulatory approval of our product candidates.

If we encounter difficulties enrolling patients in our clinical trials, our clinical trials could be delayed or otherwise adversely affected.

Clinical trials for our product candidates require us to identify and enroll a large number of patients with the disease under investigation. We may not be able to enroll a sufficient number of patients, or those with required or desired characteristics, in a timely manner. Patient enrollment is affected by factors including:

·

severity of the disease under investigation;

·

design of the trial protocol;

·

the size and nature of the patient population;

·

eligibility criteria for the study in question;

·

lack of a sufficient number of patients who meet the enrollment criteria for our clinical trials;

·

delays required to characterize tumor types to allow us to select the proper product candidate, which may lead patients to seek to enroll in other clinical trials or seek alternative treatments;

·

perceived risks and benefits of the product candidate under study;

·

availability of competing therapies and clinical trials;

·

efforts to facilitate timely enrollment in clinical trials;

·

scheduling conflicts with participating clinicians;

·

patient referral practices of physicians;

·

the ability to monitor patients adequately during and after administration of our Tarmogen product candidates;

·

diagnostic tests we or our collaborators develop may not effectively identify patients that respond to our product candidates; and

·

proximity and availability of clinical trial sites for prospective patients.

We have experienced difficulties enrolling patients in our smaller clinical trials due to lack of referrals and may experience similar difficulties in the future. For example, the GI-4000-05 trial conducted at the Lombardi Cancer Center at Georgetown University commenced enrollment in August 2010. Eleven subjects were enrolled as of June 30, 2015. This enrollment rate was slower than we had anticipated and enrollment has been discontinued.

If we have difficulty enrolling a sufficient number or diversity of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have an adverse effect on our business.

Our Tarmogen product candidates are based on a novel technology, which may raise development issues we may not be able to resolve, regulatory issues that could delay or prevent approval, or personnel issues that may keep us from being able to develop our product candidates.

Our product candidates are based on our novel Tarmogen technology platform. There can be no assurance that development problems related to our novel technology will not arise in the future that cause significant delays or that we are not able to resolve.

Regulatory approval of novel product candidates such as ours can be more expensive and take longer than for other, more well-known or extensively studied pharmaceutical or biopharmaceutical product candidates due to our and regulatory agencies’ lack of experience with them. The novelty of our platform may lengthen the regulatory review process, require us to conduct additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. For example, the FDA could require additional studies or characterization related to our use of heat-inactivated yeast that may be difficult to perform.

The novel nature of our product candidates also means that fewer people are trained in or experienced with product candidates of this type, which may make it difficult to find, hire and retain capable personnel, particularly for research and development positions. For example, study personnel may administer the wrong version of our product candidates or assign study therapy to the

31


 

wrong study group, resulting in potential disqualification of subjects from data analysis. These factors could potentially cause a trial to fail for a reason unrelated to the efficacy of our product candidates. If we are unable to hire and retain the necessary personnel, the rate and success at which we can develop and commercialize product candidates will be limited. Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience significant delays in doing so, we may not realize the full commercial potential of our product candidates.

An important component of our business strategy is to use molecular profiling of patients to target our Tarmogen product candidates to those patients we believe may be most likely to benefit from them, including profiling necessary to determine which version of our GI-4000 series should be given to a patient with Ras mutated cancer and determining which patients should be enrolled in our future GI-4000 pancreas cancer trials, if any, based on the BDX-001 proteomic signature. The BDX-001 test is controlled by Biodesix, Inc. and we may not be able to obtain rights to use the test on commercially reasonable terms, if at all. If we do not obtain rights to BDX-001, we will not be able to use it in clinical development or commercialization. If we do not have access to BDX-001, our future GI-4000 trials, if any, may not be successful and we may never obtain approval to market GI-4000. There has been limited experience in our industry in prospective development of companion diagnostics required to perform the required testing. To be successful, we will need to address a number of scientific, technical and logistical challenges related to the use of companion diagnostics in the development and regulatory approval of our product candidates.

The FDA and similar regulatory authorities outside the United States regulate companion diagnostics. Companion diagnostics require separate or coordinated regulatory approval prior to commercialization of the therapeutic product. The regulatory pathway for co-development of therapeutics and companion diagnostics could delay our development programs or delay or prevent eventual marketing approval for our product candidates that may otherwise be approvable. For our oncology product candidate, GI-4000 we may require in vitro companion diagnostics that will help identify pancreas cancer patients we believe may be likely to benefit from our product candidates. In vitro diagnostics are tests used on specimens taken from the patient being tested.

The FDA may limit our ability to use retrospective data, otherwise disagree with our approaches to trial design, biomarker qualification, clinical and analytical validity, and clinical utility, or make us repeat aspects of a trial or initiate new trials in order to obtain approval of our therapeutic and companion diagnostic product candidates.

Assays that can be used as companion diagnostics for detecting Ras mutations are commercially available, but in some cases they do not yet have regulatory approval for use as companion diagnostics. In future clinical trials, we may use commercially available companion diagnostics or we may co-develop companion diagnostics ourselves or with collaborators. We have limited experience in the development of diagnostics and may not be successful in developing necessary diagnostics to pair with those product candidates that require a companion diagnostic.

Certain proteomic analyses have been performed on plasma samples from 90 of the subjects from the GI-4000-02 trial, potentially identifying a patient selection test named BDX-001 for future trials. Proteomic analyses were not specified in the original trial protocol for GI-4000-02 and the predictive value of the proteomic analyses will need to be validated in another clinical trial. We were only able to review a limited number of samples from the subjects in the trial and future analysis may not confirm the analytical results we have observed to date. Future testing with a companion diagnostic designed to detect the specific protein pattern identified by the initial proteomic testing may show a different proportion of the specific protein signatures which were correlated with later recurrence of the cancer and it may also fail to show the specific protein signature is predictive of the response to GI-4000.

Given our limited experience in developing diagnostics, we expect to rely in part on third parties for their design and manufacture. If we, or any third parties that we engage to assist us, are unable to successfully develop companion diagnostics for our product candidates that require such diagnostics, or experience delays in doing so, the development of our product candidates may be adversely affected, our product candidates may not receive marketing approval and we may not realize the full commercial potential of any products that receive marketing approval. As a result, our business could be materially harmed.

Results of earlier studies and clinical trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the design or results of later-stage clinical trials. The positive results generated to date in clinical trials for our Tarmogen product candidates do not ensure that later clinical trials will demonstrate similar results.  For instance, in May 2015, we announced top line results for the 0101 trial of GS-4774.  These results showed that patients treated with the highest dose of GS-4774 plus ongoing oral antiviral therapy, or OAV, did not show a reduction in serum hepatitis B virus surface antigen, or HbsAg, at week 24, the primary endpoint of the study, but at 48 weeks had a mean -0.17 log10 reduction of HBsAg compared with a -0.04 log10

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reduction in the OAV alone group (p=not significant). Additionally, while we have observed statistically significant improvements in the outcomes of some of our clinical trials, many of the improvements we have seen have not reached statistical significance. The test for the specific proteomic signature, called BDX-001, which we have identified through proteomic testing of subjects from our GI-4000-02 trial, may fail to predict which subjects respond to GI-4000 in our future pancreas cancer clinical trials, if any. Statistical significance is a statistical term that means that an effect is unlikely to have occurred by chance. In order to be approved, product candidates must demonstrate that their effect on patients’ diseases in the trial is statistically significant. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. Early clinical trials frequently enroll patient populations that are different from the patient populations in later trials, resulting in different outcomes in later clinical trials from those in earlier stage clinical trials. In addition, adverse events may not occur in early clinical trials and only emerge in larger, late-stage clinical trials or after commercialization. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials. If later stage clinical trials do not demonstrate efficacy and safety of our product candidates we will not be able to market them and our business will be materially harmed.

We have not completed clinical development of any of our product candidates and do not have any products approved for sale by the FDA or any other regulatory bodies. Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.

We have discussions with and obtain guidance from regulatory authorities regarding certain aspects of our clinical development activities. These discussions are not binding commitments on the part of regulatory authorities. Under certain circumstances, regulatory authorities may revise or retract previous guidance during the course of our clinical activities or after the completion of our clinical trials. A regulatory authority may also disqualify a clinical trial in whole or in part from consideration in support of approval of a potential product for commercial sale or otherwise deny approval of that product. Prior to regulatory approval, a regulatory authority may elect to obtain advice from outside experts regarding scientific issues and/or marketing applications under a regulatory authority review. In the United States, these outside experts are convened through the FDA’s Advisory Committee process, which would report to the FDA and make recommendations that may ultimately differ from the views of the FDA.

The FDA and foreign regulatory agencies may delay, limit or deny marketing approval for many reasons, including:

·

a product candidate may not be considered safe or effective;

·

changes in the agencies’ approval policies or adoption of new regulations may require additional work on our part, for example, the FDA may require us to submit a separate BLA for each product version of GI-4000;

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different divisions of the FDA are reviewing different product candidates and those divisions may have different requirements for approval; and

·

changes in regulatory law, FDA or foreign regulatory agency organization, or personnel may result in different requirements for approval than anticipated.

Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the