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KALOBIOS PHARMACEUTICALS, INC.

FORM 10-Q


			Page

PART I. FINANCIAL INFORMATION			3

	Item 1.	Financial Statements (unaudited)	3

		Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3

		Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2015 and 2014	4

		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

	Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION			25

	Item 1.	Legal Proceedings	25

	Item 1A.	Risk Factors	25

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

	Item 3.	Defaults Upon Senior Securities	54

	Item 4.	Mine Safety Disclosures	54

	Item 5.	Other Information	54

	Item 6.	Exhibits	55

SIGNATURES			56

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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	June 30,		December 31,
	2015		2014
	(Unaudited)		(Note 2)
Assets
Current assets:
Cash and cash equivalents	$	16,122	$	10,923
Marketable securities		6,907		29,790
Prepaid expenses and other current assets		963		1,532
Total current assets		23,992		42,245

Property and equipment, net		447		414
Restricted cash		193		193
Other assets		116		125
Total assets	$	24,748	$	42,977

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,329	$	1,822
Accrued compensation		1,400		1,400
Deferred rent, short term		26		16
Accrued research and clinical liabilities		2,279		3,470
Notes payable		8,425		10,928
Financing derivative		227		89
Other accrued liabilities		311		328
Total current liabilities		13,997		18,053

Deferred rent, long-term		298		311
Total liabilities		14,295		18,364

Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value: 85,000,000 shares and 85,000,000 shares authorized at June 30, 2015 and December 31, 2014 respectively; 4,124,379 and 4,124,004 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively		4		4
Additional paid-in capital		204,324		202,830
Accumulated other comprehensive income		—		(8)
Accumulated deficit		(193,875)		(178,213)
Total stockholders’ equity		10,453		24,613
Total liabilities and stockholders’ equity	$	24,748	$	42,977

See accompanying notes

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KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
	(unaudited)				(unaudited)

Operating expenses:
Research and development		3,332		6,721		9,237		14,411
General and administrative		2,299		2,813		5,736		5,283
Total operating expenses		5,631		9,534		14,973		19,694

Loss from operations		(5,631)		(9,534)		(14,973)		(19,694)

Other (expense) income:
Interest expense		(252)		(290)		(532)		(550)
Interest income		10		31		26		45
Other (expense) income, net		(167)		(21)		(183)		(23)
Net loss		(6,040)		(9,814)		(15,662)		(20,222)
Other comprehensive income:
Net unrealized gains (losses) on marketable securities		2		2		8		(2)
Comprehensive loss	$	(6,038)	$	(9,812)	$	(15,654)	$	(20,224)

Basic and diluted net loss per common share	$	(1.46)	$	(2.38)	$	(3.80)	$	(4.91)

Weighted average common shares outstanding used to calculate basic and diluted net loss per common share		4,124,259		4,122,659		4,124,132		4,121,721

See accompanying notes

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KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)


	Six Months Ended June 30,
	2015		2014
	(unaudited)
Operating activities:
Net loss	$	(15,662)	$	(20,222)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		91		230
Noncash interest expense		111		101
Financing derivative		138		—
Amortization of premium on marketable securities		123		217
Stock based compensation expense		642		1,018
Modification of stock options related to executive retirement		389		—
Modification of stock options related to restructuring activities		463		—
Changes in operating assets and liabilities:
Prepaid expenses and other assets		554		(351)
Accounts payable		(493)		(540)
Accrued compensation		—		(81)
Accrued research and clinical liabilities		(1,191)		(1,101)
Other liabilities		(17)		49
Deferred rent		(3)		(3)
Net cash (used in) operating activities		(14,855)		(20,683)

Investing activities:
Purchase of marketable securities		(3,703)		(49,902)
Proceeds from maturities of marketable securities		26,471		22,460
Purchases of property and equipment		(125)		(287)
Changes in restricted cash		—		(193)
Net cash provided by (used in) investing activities		22,643		(27,922)

Financing activities:
Proceeds from issuances of notes payable		—		5,000
Proceeds from issuance of common stock		—		59
Principal payments under notes payable		(2,589)		(1,621)
Net cash (used in) provided by financing activities		(2,589)		3,438

Net increase (decrease) in cash and cash equivalents		5,199		(45,167)
Cash and cash equivalents, beginning of period		10,923		54,220
Cash and cash equivalents, end of period	$	16,122	$	9,053

Supplemental cash flow disclosure:
Cash paid for interest	$	442	$	425

See accompanying notes.

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KaloBios Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations

KaloBios Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company whose primary business is to develop monoclonal antibody therapeutics for diseases that represent a significant burden to society and to patients and their families. Our clinical development efforts are focused in oncology, including both hematologic malignancies and potentially solid tumors. The Company was incorporated on March 15, 2000 in California and reincorporated as a Delaware corporation in September 2001. All of the Company’s assets are located in California.

The Company has incurred significant losses and had an accumulated deficit of $193.9 million as of June 30, 2015. The Company has financed its operations primarily through the sale of equity securities, grants and the payments received under its agreements with Novartis Pharma AG (Novartis) and Sanofi Pasteur S.A. (Sanofi). To date, none of the Company’s product candidates have been approved for sale and therefore the Company has not generated any revenue from product sales. Management expects operating losses to continue for the foreseeable future. As a result, the Company will continue to require additional capital through equity offerings, debt financing and/or payments under new licensing or collaboration agreements. If sufficient funds on acceptable terms are not available when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm its business, financial condition and results of operations. Further, any failure to raise capital could be deemed a material adverse change under our Loan and Security Agreement with MidCap Financial and that may, in turn, result in the lender declaring the loan in default and demanding repayment of the principal, accrued interest, the exit fee and a prepayment fee. These conditions could raise substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company has classified the notes payable as current. The report of our Independent Registered Public Accounting Firm included an explanatory paragraph about the Company’s ability to continue as a going concern in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the periods presented. These financial statements have been prepared on a basis which assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The December 31, 2014 Condensed Consolidated Balance Sheet was derived from the audited financial statements but does not include all disclosures required by GAAP. These interim financial results are not necessarily indicative of the results to be expected for the year ending December 31, 2015, or for any other future annual or interim period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Form 10-K for the year ended December 31, 2014.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company believes judgment is involved in determining the stock-based compensation and accruals. The Company evaluates estimates and assumptions as facts and circumstances

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dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements.

Concentration of Credit Risk

Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration of credit risk in the event of a default by the related financial institution holding the securities, to the extent of the value recorded in the balance sheet. The Company invests cash that is not required for immediate operating needs primarily in highly liquid instruments with lower credit risk. The Company has established guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk.

Cash, Cash Equivalents, and Marketable Securities

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Investments in securities with remaining maturities of less than one year, or where our intent is to use the investments to fund current operations or to make them available for current operations, are classified as short-term and available for sale. Investments in securities with remaining maturities greater than one year are classified as noncurrent and available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The Company has estimated the fair value amounts by using available market information. The cost of available-for-sale securities sold is based on the specific-identification method.

Research and Development Expenses

Development costs incurred in the research and development of new products are expensed as incurred, including expenses that may or may not be reimbursed under research and development collaboration agreements. Research and development costs include, but are not limited to, salaries, benefits, stock-based compensation, laboratory supplies, allocated overhead, fees for professional service providers and costs associated with product development efforts, including preclinical studies and clinical trials. Research and development expenses under collaborative agreements approximate or exceed the revenue recognized under such agreements.

The Company estimates preclinical study and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. During the three month and six month periods ended June 30, 2015, accrued liabilities were reduced by $312,000 related to research-related manufacturing expenses incorrectly recorded in 2014. We analyzed and assessed the effect of this adjustment on the previously reported annual and interim periods in 2014 as well as the impact of the benefit from the reversal of these expenses to the results of operations for the three and six month periods ended June 30, 2015. Following this analysis and taking into account both quantitative and qualitative factors; we believe that the uncorrected out-of-period costs are not material to the respective periods in which the errors occurred.

Stock-Based Compensation Expense

The Company measures employee and director stock-based compensation expense for stock awards at the grant date and employee stock purchase plan, or ESPP, based on the fair value-based measurement of the award, and the expense is recorded over the related service period, generally the vesting period, net of estimated forfeitures. The Company calculates the fair value-based measurement of stock options and ESPP using the Black-Scholes valuation model and the single-option method and recognizes expense using the straight-line attribution approach.

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The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options with vesting is affected each reporting period by changes in the fair value of the Company’s common stock.

Comprehensive Loss

Comprehensive loss represents net loss adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net loss. The unrealized gains or losses are reported on the Consolidated Statements of Comprehensive Loss.

Reverse Stock Split

In July, 2015, the Company’s board of directors approved the filing of an Amended Certificate of Incorporation to effectuate a reverse split of the issued and outstanding shares of the Company’s common stock on a one-for-eight basis. All references to the numbers of issued and outstanding shares of our common stock, price per share and per-share amounts of stock, and shares issuable under share-based compensation arrangements and warrants in the accompanying financial statements have been adjusted retroactively to reflect the Company’s one-for-eight reverse stock split effectuated on July 13, 2015. The par value per share and number of authorized shares were not adjusted as a result of the reverse stock split.

Net Loss Per Common Share

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included in the calculation of diluted net loss per common share when their effect is dilutive.

The Company’s potential dilutive securities which include unvested stock options and warrants have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share and be antidilutive. Therefore, the denominator used to calculate both basic and diluted net loss per common share is the same in all periods presented.

The following shares of outstanding potentially dilutive securities have been excluded from the computations of diluted net loss per common share as the effect of including such securities would be antidilutive:


	As of June 30,
	2015	2014
Options to purchase common stock	491,072	331,644
Unvested restricted stock units to purchase common stock	3,750	—
ESPP contributions to purchase common stock	750	108
Warrants to purchase common stock	11,067	11,067
	506,639	342,819

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3. Investments

At June 30, 2015, the amortized cost and fair value of investments, with gross unrealized gains and losses, were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses		Fair Value
Money market funds	$	11,619	$	—	$	—	$	11,619
Federal agency securities		4,501		—		—		4,501
Corporate debt securities		5,460		—		(1)		5,459
Total investments	$	21,580	$	—	$	(1)	$	21,579

Reported as:
Cash and cash equivalents							$	14,479
Marketable securities, current								6,907
Restricted cash								193
Total investments							$	21,579

At December 31, 2014, the amortized cost and fair value of investments, with gross unrealized gains, were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses		Fair Value
Money market funds	$	9,663	$	—	$	—	$	9,663
Federal agency securities		13,774		—		(4)		13,770
Commercial paper		1,499		1		—		1,500
Corporate debt securities		14,525		—		(5)		14,520
Total investments	$	39,461	$	1	$	(9)	$	39,453

Reported as:
Cash and cash equivalents							$	9,470
Marketable securities								29,790
Restricted cash								193
Total investments							$	39,453

There were no realized gains or losses from the sale of marketable securities for the three and six months ended June 30, 2015 and 2014.

4. Fair Value of Financial Instruments

Cash, accounts payable and accrued liabilities are carried at cost, which approximates fair value given their short-term nature. Marketable securities and cash equivalents are carried at fair value.

The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company measures the fair value of financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets and liabilities (investments) that are measured at fair value and the classification by level of input within the fair value hierarchy:


	Fair Value Measurements as of
	June 30, 2015
(in thousands)	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	11,619	$	—	$	—	$	11,619
Federal agency securities		—		4,501		—		4,501
Corporate debt securities		—		5,459		—		5,459
Total assets measured at fair value	$	11,619	$	9,960	$	—	$	21,579

Financing derivative		—		—		227		227
Total liabilities measured at fair value	$	—	$	—	$	227	$	227


	Fair Value Measurements as of
	December 31, 2014
(in thousands)	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	9,663	$	—	$	—	$	9,663
Federal agency securities		—		13,770		—		13,770
Commercial paper		—		1,500		—		1,500
Corporate debt securities		—		14,520		—		14,520
Total assets measured at fair value	$	9,663	$	29,790	$	—	$	39,453

Financing derivative		—		—		89		89
Total liabilities measured at fair value	$	—	$	—	$	89	$	89

The Company’s Level 2 investments include U.S. government-backed securities, commercial paper and corporate debt securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The average remaining maturity of the Company’s Level 2 investments as of June 30, 2015 is less than one month and all of these investments are rated A3/A-/A- or P1/A1/F1, or higher by Moody’s, S&P and Fitch.

In December 2014, the Company recorded a financing derivative liability resulting from an embedded derivative related to the prepayment feature of the Loan and Security Agreement with MidCap Financial. At June 30, 2015, the Company remeasured the financing derivative liability as $227,000 and recorded the loss of $135,000 as other expense. The fair value of this derivative was determined using Level 3 inputs, or significant unobservable inputs. The value of the financing derivative was determined by comparing the difference between the fair value of the notes payable with and without the financing derivative by calculating the respective present values from future cash flows using a 14% discount rate, adjusted for the probability of the occurrence of an event of default under the Loan and Security Agreement with MidCap Financial. The 14% discount rate assumption was based on an effective borrowing rate under the current circumstances considering the quoted borrowing rate for the Company and the imputed fair value of any additional financial instruments that may be required to be extended to the lender in order to obtain such debt financing. As compared to March 31, 2015, the probability of the occurrence of an event of default under the Loan and Security Agreement with MidCap Financial was perceived to be higher at June 30, 2015 based on management’s judgment. Refer to Note 5 for additional details regarding the Loan and Security Agreement with MidCap Financial.

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The following table presents changes in financial instruments measured at fair value using Level 3 inputs:


		Fair Value Measurements of Level 3 Liabilities
		(in thousands)
Balance as of December 31, 2014	$	89
Loss on remeasurement of the financing derivative liability		3
Balance as of March 31, 2015		92
Loss on remeasurement of the financing derivative liability		135
Balance as of June 30, 2015	$	227

The estimated fair value of the notes payable as of June 30, 2015, based on current market rates for similar borrowings, as measured using Level 3 inputs, approximates the carrying amount as presented on the condensed consolidated balance sheet.

5. Notes Payable

Loan and Security Agreement

In September 2012, the Company entered into the Agreement with MidCap Financial, providing for the borrowing of up to $15 million, of which $10 million was required to be drawn. The remaining $5 million was available to be drawn at the option of the Company. The Agreement provides for the loan to be issued in three tranches: the first tranche of $5 million was issued in September 2012; the second tranche of $5 million was issued in December 2012; and, prior to the amendment described below, the final tranche could have been drawn at the option of the Company no later than June 2013. The loan has a monthly variable interest rate, reset each month, if applicable, as determined by adding to 600 basis points the greater of: (a) one month LIBOR or (b) 3% (the LIBOR floor). Interest on amounts outstanding are payable monthly in arrears. There was an interest only period to December 31, 2013 followed by straight-line principal payments over thirty-six months until December 31, 2016. At the time of final payment, the Company must pay an exit fee of 3% of the drawn amount. Pursuant to the Agreement, the Company provided a first priority security interest in all existing and after-acquired assets, excluding intellectual property. In addition, the terms of the Agreement provided MidCap Financial a warrant to purchase shares of the Company’s Series E convertible preferred stock (Series E Preferred) equal to 4% of the amount drawn down under the facility divided by the Series E Preferred exercise price of $12.11 per share. The warrant expired upon the completion of the Company’s IPO.

The Company has the right to prepay all or a portion of the borrowed amounts under the Agreement; however, if the Company exercises this option, the Company must pay a prepayment fee determined by multiplying the outstanding loan amount by 2% if the prepayment occurs in 2015 and 1% if the prepayment occurs in the final year. In the event of default, upon which all amounts borrowed become immediately due and payable, the Company will be subject to the prepayment fee ranging from 1% to 2% of the amount due on the loan and a step up in interest rate of 5%. An event of default includes, but is not limited to, an occurrence such as a payment default, a material adverse change, insolvency, or a change of control. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm its business, financial condition and results of operations. Further, any failure to raise capital could be deemed a material adverse change under our Loan and Security Agreement with MidCap Financial and that may, in turn, result in the lender declaring the loan in default and demanding repayment of the principal, accrued interest, the exit fee and a prepayment fee. Therefore, the Company has classified notes payable as current.

In connection with the Agreement and the first tranche draw down of $5 million in September 2012 and second tranche draw down of $5 million in December 2012, the Company issued a warrant to MidCap Financial to purchase shares of the Company’s Series E Preferred. Contemporaneously with the issuance of the warrant, the Company recorded a debt discount of $79,000.

Debt issuance costs paid directly to MidCap Financial of $114,000 (financing fees) and the fair value of the warrant issued to MidCap Financial were treated as a discount on the debt and are being accreted using the interest method. Other debt issuance costs for legal fees are included in other assets in the accompanying consolidated balance sheet and

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are being amortized using the interest method. The accretion of the debt discount and amortization of other debt issuance costs are recorded as non‑cash interest expense in the consolidated statements of comprehensive loss.

In June 2013, the Company entered into the Amendment to extend the draw down date for the final tranche of $5.0 million from June 2013 to May 2014. In addition, the final tranche was changed from an optional draw down to a required draw down. In connection with the Amendment, the Company issued a warrant to purchase up to 6,193 shares of the Company’s common stock with an exercise price of $96.88 per share. The warrant expires in June 2023, on the tenth anniversary of its issuance date. The warrants issued to MidCap Financial had an initial fair value of $130,000, which represent financing fees, and are included in other assets in the accompanying consolidated balance sheet and are being amortized as non-cash interest expense over the remaining term of the Agreement using the effective interest method. The Company estimated the fair values of these warrants using the Black-Scholes option-pricing model, based on the inputs for the estimated fair value of the underlying common stock at the valuation measurement date, the contractual term of the warrant, risk-free interest rates, expected dividend rates and expected volatility of the price of the underlying common stock. Pursuant to this Amendment, the Company drew down the final tranche of $5.0 million in May 2014.

In August 2015, the Company entered into an additional amendment to the Agreement, Amendment No. Two, whereby the Company agreed to maintain, in a separate account with a financial institution (held in the Company’s name), an amount equal to the aggregate of the remaining future principal, interest and exit fee due under the Loan and Security Agreement, equating to $8.3 million as of the date of this amendment. MidCap Financial can draw payments from this account under the terms of the Agreement as they become due and upon such draws there will be a corresponding reduction in the amount owed to MidCap Financial by the Company. MidCap Financial has exclusive control to withdraw funds from that account, which is to be maintained either until the debt has been repaid in full, or until MidCap Financial determines that the Company has satisfied certain capital requirements as they relate to the Company’s future operating plans.

Future payments as of June 30, 2015 under the Agreement, assuming no adjustments to the variable rate of interest of 9% as of June 30, 2015, are as follows:


(in thousands)
Remainder of 2015	$	2,915
2016		5,909
Total minimum payments		8,824
Less amount representing interest		(625)
Notes payable, gross		8,199
Discount on notes payable		(31)
Accretion of the final exit fee payment		257
Carrying value of notes payable	$	8,425

6. Past Collaborations

Sanofi

In January 2010, the Company and Sanofi entered into an agreement for the development and commercialization of KB001, the precursor to KB001-A, an investigational new biologic for the treatment and prevention of Pseudomonas aeruginosa (Pa) infections (the Sanofi agreement). Under the terms of the Sanofi agreement, the Company received an initial upfront non-refundable payment of $35 million and received an additional non-refundable payment of $5 million that represented a second installment of the upfront fees due to the Company under the agreement upon completion of a sublicense negotiation with a third party in August 2011. Sanofi was solely responsible for conducting, at its cost, the research, development, manufacture, and commercialization of the licensed products for the diagnosis, treatment and/or prevention of all human diseases and conditions caused by Pa, except that the Company retained responsibility, at the Company’s cost, for developing and promoting the products for the diagnosis, treatment and/or prevention of Pa in patients with cystic fibrosis (CF) or bronchiectasis. Under the terms of the Sanofi agreement, the Company received specified research and development funding for services performed in connection with KB001-A research and

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development efforts and could have also received contingent payments based on the occurrence of development, regulatory or commercial events, and royalties on any product sales.

In July 2014, the Company and Sanofi executed an agreement (the Termination Agreement) under which the Sanofi agreement was terminated. As a result of the Termination Agreement, KaloBios regained full global rights to license, develop, manufacture and commercialize KB001-A in all indications, as well as a non-exclusive license to the KB001-A manufacturing process developed by Sanofi. In consideration for entering into the Termination Agreement, Sanofi would be entitled to royalties on net sales of KB001-A if approved, subject to a $40 million cap on the aggregate royalties to be paid. In addition, Sanofi would be entitled to receive up to 10% of certain sub-license payments or other milestone payments received in the event KaloBios successfully re-partners KB001-A, subject to a separate $40 million cap on the aggregate amount of sub-license payments to be shared with Sanofi. Based on results of the Phase 2 data released in early 2015, we have discontinued development of KB001-A in all indications.

7. Commitments and Contingencies

Contractual Obligations and Commitments

As of June 30, 2015, there were no significant and material changes to our contractual obligations from those set forth in our Form 10-K filed with the Securities and Exchange Commission (SEC) on March 16, 2015.

Guarantees and Indemnifications

The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid.

The Company has certain agreements with service providers with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third-party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. As the Company has not incurred any indemnification losses to date, there were no accruals for or expenses related to indemnification issues for any period presented.

8. Warrants to Purchase Common Stock

On June 19, 2013, in connection with the Amendment to its debt agreement with MidCap Financial, the Company issued a warrant to purchase up to 6,193 shares of the Company’s common stock with an exercise price of $96.88 per share. The warrant expires in June 2023. The Company recorded the initial value of the warrants in equity and other assets in the accompanying consolidated balance sheet, with the deferred other asset to be amortized over the remaining term of the debt using the effective interest method.

In addition, the Company has outstanding warrants to purchase an aggregate of 4,874 shares of common stock at $41.04 per share which will expire on October 31, 2015.

9. Stockholders’ Equity

2012 Equity Incentive Plan

As of June 30, 2015, under the 2012 Equity Incentive Plan, the Company may grant shares, stock units, stock appreciation rights, performance cash awards and/or options to employees, directors, consultants, and other service providers. For options, the per share exercise price may not be less than the fair market value of a Company common

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share on the date of grant. Awards generally vest over four years and expire 10 years from the date of grant. Options generally become exercisable as they vest following the date of grant.

A summary of stock option activity for the six months ended June 30, 2015 under all of the Company’s options plans is as follows:


		Weighted
		Average
		Exercise
	Options	Price
Outstanding at December 31, 2014	334,686	$	34.00
Granted	224,620		3.61
Exercised	—		—
Cancelled (forfeited)	(56,747)		31.28
Cancelled (expired)	—		—
Outstanding at March 31, 2015	502,559	$	20.70
Granted	20,625		4.33
Exercised	—		—
Cancelled (forfeited)	(26,221)		9.75
Cancelled (expired)	(5,891)		19.66
Outstanding at June 30, 2015	491,072	$	20.61

The weighted average fair value of options granted during the three months and six months ended June 30, 2015 was $2.52 and $2.30 per share.

In addition, 3,750 restricted stock units were issued during the three months ended June 30, 2015.

2012 Employee Stock Purchase Plan

The Employee Stock Purchase Plan, or ESPP, provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions, based on a six-month look-back period, at a price equal to the lesser of 85% of the fair market value of the ordinary shares at either the beginning or ending of the relevant offering period. The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. However, the ESPP is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The ESPP will terminate on January 15, 2033 unless sooner terminated. There were 21,058 shares initially authorized for issuance under the plan, and the first offering period commenced June 1, 2014 and ended on October 31, 2014. Subsequent offering periods will each be six months in duration and will commence on November 1st and May 1st each year. There were 583 and 375 shares issued under the plan on October 31, 2014 and April 30, 2015, respectively.

Stock-Based Compensation

The Company recorded stock-based compensation expense in the condensed consolidated statements of operations and comprehensive loss as follows:


	Three Months				Six Months
	Ended June 30,				Ended June 30,
(in thousands)	2015		2014		2015		2014
General and administrative	$	187	$	247	$	329	$	473
Research and development		150		280		313		545
	$	337	$	527	$	642	$	1,018

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During the three months ended June 30, 2015, the Company recorded charges of $48,000 relating to the fair value of stock options which were modified due to restructuring activities, and classified them as general and administrative expenses. Further, during the six months ended June 30, 2015, the Company recorded charges of $0.4 million and $0.45 million relating to the fair value of stock options which were modified due to executive retirement and restructuring activities, and classified $0.45 million and $0.4 million as general and administrative expenses and research and development expenses, respectively.

At June 30, 2015, the Company had $1.8 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 1.6 years.

10. Restructuring Charges

Restructuring charges incurred during the six months ended June 30, 2015 primarily consist of severance and other post-termination benefit costs resulting from the cost reduction program implemented by the Company in January 2015. These activities primarily consisted of 20% reduction of the workforce. Per ASC 420-10-05-1, Exit or Disposal Cost Obligations, include, but are not limited to involuntary termination benefits provided to employees under the terms of a one-time benefit arrangement that, in substance, is not an ongoing benefit arrangement or a deferred compensation contract, and certain contract termination costs. Restructuring costs are expensed during the period in which the Company determines it will incur those costs and all requirements of accrual are met. The Company recorded approximately $0.6 million and $0.2 million in restructuring charges relating to such obligations during the three months ended March 31, 2015 and three months ended June 30, 2015, respectively. In addition, certain contract termination costs of $1.2 million were accrued as of December 31, 2014 relating to manufacturing activity that no longer had identifiable future benefit to the Company.


(in thousands)		Contract termination costs - R&D		Salaries and benefits - R&D		Salaries and benefits - G&A		Total
Balance as of December 31, 2014	$	1,185	$	—	$	—	$	1,185
Accrued		—		522		82		604
Paid		(479)		(257)		—		(736)
Balance as of March 31, 2015	$	706	$	265	$	82	$	1,053
Accrued		—		57		122		179
Paid		(135)		(142)		—		(277)
Balance as of June 30, 2015	$	571	$	180	$	204	$	955

As disclosed in Note 9, the Company recorded stock based compensation expense of $0.45 million related to the fair value of stock options of former employees which were modified such that they did not expire upon termination. The Company classified $48,000 and $0.4 million as general and administrative expenses and research and development expenses, respectively.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission, or SEC, on March 16, 2015 and our Quarterly Report on Form 10-Q for the quarter year ended March 31, 2015, filed with the SEC on May 11, 2015. This discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward looking statements involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements. Although we believe the expectations reflected in these forward- looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under “Risk Factors” under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

Overview

We are a biopharmaceutical company focused on monoclonal antibody therapeutics for diseases that are a significant burden to society and patients and their families. Our clinical development efforts going forward will be focused in oncology, including both hematologic malignancies and potentially solid tumors. Our principal pharmaceutical product candidates that we have advanced to the clinical development stage are:

KB004, a Humaneered ® anti ‑EphA3 monoclonal antibody that has the potential to offer a novel approach to treating both hematologic malignancies and solid tumors. In a Phase 1 dose escalation study KB004 was found to be generally safe and well tolerated and is currently enrolling patients in a Phase 2 cohort expansion study as a potential therapeutic for myelodysplastic syndrome (MDS) and myelofibrosis (MF).

KB003 is a Humaneered®, recombinant monoclonal antibody (mAb) that neutralizes soluble granulocyte-macrophage colony-stimulating factor (GM-CSF), a critical cytokine for the growth of certain hematologic malignancies and solid tumors. KB003 is a GM-CSF antagonist with a favorable safety profile that has been studied in more than 90 subjects in clinical studies in either healthy adults or adults with autoimmune diseases. Given our strategic focus on oncology, and following discussions with clinical experts and regulatory agencies, the Company is working to initiate a Phase 1 clinical trial in patients with chronic myelomonocytic leukemia, or CMML to assess the safety, pharmacokinetics, and clinical activity of KB003 in the second half of 2015.

KB001‑A, a Humaneered ®, PEGylated, anti‑PcrV modified antibody fragment (Fab’) antibody that was being developed for the prevention and treatment of Pseudomonas aeruginosa (Pa) infections in mechanically ventilated patients and cystic fibrosis (CF) patients with chronic Pa lung infections. However, based on results of the phase 2 data released in early 2015, we have discontinued development of this product in all indications.

In order to maintain adequate capital to fund the continued development of our product candidates, management continues to evaluate a number of alternatives, including but not limited to: (i) seeking additional partner(s) for our programs to provide capital for future development and to share in development costs, (ii) undertaking reductions in operating spending, and (iii) evaluating various means to raise additional capital, such as debt or equity offerings. Regardless of any actions we take to address our cash position in the near term, we will also need to raise additional capital in order to further advance our product candidates towards regulatory approval. If management is unsuccessful in

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these efforts, based on our current levels of operating spending our current capital may not be sufficient to fund our operations for the next twelve months.

From the date we commenced our operations through 2006, our efforts focused primarily on research, development, and the advancement of our Humaneered® antibody technology. In 2006, we commenced our first clinical trial. We have incurred significant losses to date and, as of June 30, 2015, we had an accumulated deficit of $193.9 million. We have funded our operations primarily through private and public placements of our equity securities, contract revenue in connection with our collaborations, and grants and borrowings under equipment financing arrangements and our Loan and Security Agreement. On February 5, 2013, we closed our initial public offering (IPO) of 1,093,750 shares of common stock at an offering price of $64.00 per share, resulting in net proceeds of approximately $61.5 million, after deducting underwriting discounts, commissions and offering expenses. On October 1, 2013 we closed a public offering of 1,078,125 shares of common stock at an offering price of $32.00 per share, resulting in net proceeds of approximately $32.0 million, after deducting underwriting discounts, commissions and offering expenses. As of June 30, 2015, we had cash, cash equivalents, and investments of $23.0 million.

We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities and seek regulatory approvals. Specifically, we have incurred substantial expenses in connection with our historical respiratory programs, most notably a Phase 2 clinical trial for KB003 in severe asthma patients inadequately controlled by corticosteroids, and a Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections. We have also incurred significant expenses on our ongoing Phase 1 and Phase 2 clinical trials for our KB004 oncology program, and expect to continue to incur significant costs on our oncology development programs going forward as we continue our current KB004 studies and as we evaluate additional potential oncology indications for both KB004 and KB003. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.

Past Collaborations

Sanofi

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Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There have been no significant and material changes in our critical accounting policies and use of estimates during the three months ended June 30, 2015, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our 2014 Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 16, 2015.

Results of Operations

General

We have not generated net income from operations, except for the year ended December 31, 2007 during which we recognized a one-time license payment from Novartis. At June 30, 2015, we had an accumulated deficit of $193.9 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

Research and Development Expenses

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We currently track external research and development costs incurred by project for each of our clinical programs (KB004, KB003, and KB001-A). We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. Our external research and development costs consist primarily of:

expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;

the cost of acquiring and manufacturing clinical trial and other materials; and

other costs associated with development activities, including additional studies.

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Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock‑based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project. The 2015 KB003 expenses below reflect a $312,000 benefit relating to an out of period adjustment. The following table shows our total research and development expenses for the three and six months ended June 30, 2015 and 2014, and for the period from January 1, 2008 to June 30, 2015:


	For the				For the				For the Period from
	Three Months Ended				Six Months Ended				January 1, 2008 to
	June 30,				June 30,				June 30, 2015
(in thousands)	2015		2014		2015		2014
External costs:
KB004	$	1,469	$	1,420	$	3,480	$	3,459	$	35,120
KB003		(63)		1,598		250		3,204		40,413
KB001-A		201		1,446		1,215		3,023		33,795
Internal costs		1,725		2,257		4,292		4,724		68,368
Total research and development	$	3,332	$	6,721	$	9,237	$	14,410	$	177,696

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we continue product development including continuing the Phase 2 expansion portion of our KB004 trial in hematologic malignancies, commencing a Phase 1 clinical study of KB003 in CMML patients, and evaluating KB004 in potential solid tumor indications. Historically, we have incurred significant costs related to our respiratory programs for KB001-A and KB003, and oncology for KB004. However, due to the termination of our respiratory programs, we expect our clinical development efforts going forward will be focused on our KB004 development programs, and on the KB003 Phase 1 study we are planning on commencing in CMML patients. As a result, we expect our research and development expenses will decrease in 2015 as compared to 2014. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential clinical trials and activities beyond the ongoing Phase 2 trial for KB004 and the Phase 1 study of KB003 in CMML patients.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development.

Comparison of Three Months Ended June 30, 2015 and 2014


	Three Months Ended June 30,				Increase/ (Decrease)
(in thousands)	2015		2014		in thousands		%
Contract revenue	$	—	$	—	$	—	(100)
Operating expenses:
Research and development	$	3,332	$	6,721	$	(3,389)	-50%
General and administrative		2,299		2,813		(514)	-18%
Loss from operations		(5,631)		(9,534)		3,903	-41%
Interest expense		(252)		(290)		38	-13%
Interest income		10		31		(21)	-68%
Other (expense) income, net		(167)		(21)		(146)	695%
Net loss	$	(6,040)	$	(9,814)	$	3,774	-38%

Research and development expenses decreased $3.4 million, from $6.7 million for the three months ended June 30, 2014 to $3.3 million for the three months ended June 30, 2015. The decrease was primarily attributed to a $1.9 million decrease in contract manufacturing expenses mainly related to the KB003 program, $1.1 million decrease in clinical activity primarily resulting from the completion of our Phase 2 study of KB001-A in CF patients with chronic Pa

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infections in the first quarter of 2015, and $0.3 million decrease in personnel related expenses primarily due to the restructuring activities during the year. We expect external expenses on KB001-A will decrease in 2015 as a result of the trial being completed in the first quarter of 2015 and our discontinuing development of KB001-A for CF patients with chronic Pa infections. In addition, we began enrollment of patients in a Phase 2 clinical trial in hematologic malignancies of KB004 in the first half of 2014 and will continue the trial through 2016, and as a result, we expect external costs for our KB004 program to increase in 2015. Overall, we expect a decrease in total research and development expense in 2015 as we focus our efforts on our oncology programs with KB004 and KB003.

General and administrative expenses decreased $0.5 million, from $2.8 million for the three months ended June 30, 2014 to $2.3 million for the three months ended June 30, 2015 due to a decrease of $0.1 million in personnel related costs, $0.2 million in consulting costs, $0.1 million decrease in legal expenses and $0.1 million decrease in facility related expenses. We do not expect an increase in general and administrative expenses in 2015.

Interest expense of $0.3 million recognized for the three months ended June 30, 2014 and $0.3 million recognized for the three months ended June 30, 2015, was related to our Loan and Security Agreement with MidCap Financial entered into in September 2012 and amended in 2013. Interest income and other (expense) income, net, primarily consists of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.

Comparison of Six Months Ended June 30, 2015 and 2014


	Six Months Ended June 30,				Increase/ (Decrease)
(in thousands)	2015		2014		in thousands		%

Operating expenses:
Research and development	$	9,237	$	14,411	$	(5,174)	-36%
General and administrative		5,736		5,283		453	9%
Loss from operations		(14,973)		(19,694)		4,721	-24%
Interest expense		(532)		(550)		18	-3%
Interest income		26		45		(19)	-42%
Other (expense) income, net		(183)		(23)		(160)	696%
Net loss	$	(15,662)	$	(20,222)	$	4,560	-23%

Research and development expenses decreased $5.2 million, from $14.4 million for the six months ended June 30, 2014 to $9.2 million for the six months ended June 30, 2015. The decrease was primarily attributed to a $1.2 million decrease in clinical trial expenses related to the KB001-A program, $0.9 million in clinical trial expenses related to the KB003 program, $0.9 million decrease in clinical trial expenses related to the KB004 program, $1.5 million decrease in contract manufacturing costs primarily related to KB003 program and $0.5 million decrease due to the milestone payments for the 2014 KB004 clinical program.

We expect external expenses on KB001-A will decrease in 2015 as a result of the trial being completed in the first quarter of 2015 and our discontinuing development of KB001-A for CF patients with chronic Pa infections. In addition, we began enrollment of patients in a Phase 2 clinical trial in hematologic malignancies of KB004 in the first half of 2014 and will continue the trial through 2016, and as a result, we expect external costs for our KB004 program to increase in 2015. Overall, we expect a decrease in total research and development expense in 2015 as we focus our efforts on our oncology programs with KB004 and KB003.

General and administrative expenses increased $0.4 million, from $5.3 million for the six months ended June 30, 2014 to $5.7 million for the six months ended June 30, 2015 due primarily to an increase in employee-related expenses of $1.4 million related to severance and restructuring expenses, offset by a decrease of personnel related expenses of $0.5 million, $0.3 million in consulting costs, $0.1 million in move-related costs and $0.1 million in other general operating expenses. With the exception of the restructuring expenses, we do not expect an increase in general and administrative expenses.

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Interest expense of $0.6 million recognized for the six months ended June 30, 2014 and $0.5 million recognized for the six months ended June 30, 2015, was related to our Loan and Security Agreement with MidCap Financial entered into in September 2012 and amended in 2013.

Interest and other income, net, primarily consists of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through proceeds from the public offerings of our common stock, private placements of our preferred stock, debt financings, interest income earned on cash, and cash equivalents, and marketable securities, borrowings against lines of credit, and receipts from agreements with Sanofi and Novartis. At June 30, 2015, we had cash and cash equivalents and investments of $23.0 million.

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:


	Six Months Ended
	June 30,
(in thousands)	2015		2014
Net cash (used in) operating activities	$	(14,855)	$	(20,683)
Net cash provided by (used in) investing activities		22,643		(27,922)
Net cash (used in) provided by financing activities		(2,589)		3,438
Net increase (decrease) in cash and cash equivalents	$	5,199	$	(45,167)

Net cash used in operating activities was $14.9 million and $20.7 million for the six months ended June 30, 2015 and 2014, respectively. The primary use of cash in each of the periods was to fund our operations related to the development of our product candidates. Cash used in operating activities of $14.9 million for the six months ended June 30, 2015 primarily related to our net loss of $15.7 million, adjusted for non-cash items such as $0.6 million of stock-based compensation expense, $0.9 million relating to the fair value of stock options which were modified due to executive retirement and restructuring activities and net cash outflows of $1.2 million related to changes in operating assets and liabilities. Cash used in operating activities of $20.7 million for the six months ended June 30, 2014 primarily related to our net loss of $20.2 million, adjusted for non-cash items such as $1.0 million of stock-based compensation expense and net cash outflows of $2.0 million related to changes in operating assets and liabilities.

Net cash provided by investing activities was $22.6 million for the six months ended June 30, 2015, primarily related to proceeds from maturities of marketable securities of $26.5 million partially offset by purchases of investments of $3.7 million. Net cash used in investing activities was $27.9 million for the six months ended June 30, 2014, primarily related to purchases of investments of $49.9 million partially offset by proceeds from maturities of marketable securities of $22.5 million.

Net cash used in financing activities was $2.6 million for the six months ended June 30, 2015 relating to the payments on our borrowings. Net cash provided by financing activities was $3.4 million for the six months ended June 30, 2014, and consisted primarily of proceeds from issuance of debt of $5.0 million partially offset by payments on our borrowings of $1.6 million.

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates. Specifically, we have incurred substantial expenses in connection with our Phase 2 clinical trial for KB001‑A in CF patients with chronic Pa infections. In addition, we have incurred and expect to continue to incur significant costs as a result of our ongoing Phase 2 clinical trials for our KB004 development program in hematologic malignancies, as well as for any clinical trials we initiate to evaluate KB004 in other indications including potentially solid tumors. We also expect to incur significant costs as a result of the Phase 1 clinical trial we are preparing to commence to evaluate safety, pharmacokinetics and clinical activity of KB003 in CMML patients.

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programs to provide capital for future development and to share in development costs, (ii) undertaking reductions in operating spending, and (iii) evaluating various means to raise additional capital, such as debt or equity offerings. Regardless of any actions we take to address our cash position in the near term, we will also need to raise additional capital in order to further advance our product candidates towards regulatory approval. If management is unsuccessful in these efforts, based on our current levels of operating spending our current capital may not be sufficient to fund our operations for the next twelve months. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. Further, any failure to raise capital could be deemed a material adverse change under our Loan and Security Agreement with MidCap Financial and that may, in turn, result in the lender declaring the loan in default and demanding repayment of the principal, accrued interest, the exit fee and a prepayment fee. These conditions could raise substantial doubt about our ability to continue as a going concern. The report of our Independent Registered Public Accounting Firm included an explanatory paragraph about the Company’s ability to continue as a going concern as included in our Annual Report on Form 10-K for the year ended December 31, 2014.

In August 2015, we entered into an additional amendment, Amendment No. Two, to our Agreement with MidCap Financial as explained in Note 5 to the financial statements, whereby we agreed to maintain, in a separate account with a financial institution (held in our name), an amount equal to the aggregate of the remaining future principal, interest and exit fee due under the Loan and Security Agreement, equating to $8.3 million as of the date of this amendment. MidCap Financial can draw payments from this account under the terms of the Agreement as they become due and upon such draws there will be a corresponding reduction in the amount owed by us. MidCap Financial has exclusive control to withdraw funds from that account, which is to be maintained either until the debt has been repaid in full, or until MidCap Financial determines that we have satisfied certain capital requirements as they relate to our future operating plans.

We will continue to require additional financing to develop our products and fund operations. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

the scope, progress, expansion, costs, and results of our clinical trials;

the timing of and costs involved in obtaining regulatory approvals;

our ability to establish and maintain development partnering arrangements;

the timing, receipt and amount of contingent, royalty, and other payments from Sanofi or any future development partners;

the emergence of competing technologies and other adverse market developments;

the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

the resources we devote to marketing, and, if approved, commercializing our product candidates;

the scope, progress, expansion, and costs of manufacturing our product candidates;

our ability to draw funds from our current or any future Loan and Security Agreement; and

the costs associated with being a public company.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

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Contractual Obligations and Commitments

As of


Delaware		77-0557236
(State or other jurisdiction of		(IRS Employer
incorporation)		Identification No.)


Large accelerated filer ☐		Accelerated filer ☒

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