Indicate by check mark whether the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark whether the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes
¨
No
x
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 website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
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 June 30, 2017, the last business day
of the registrant’s most recently completed second fiscal quarter, the aggregate market value of shares of common stock held
by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an
affiliate), computed by reference to the closing bid price of such shares on the NASDAQ Capital Markets was $29,813,510.
As of March 20, 2018, the registrant had 31,903,280
shares of common stock on a post-split basis, par value $0.0001 per share, outstanding.
This Annual Report on
Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical facts contained in this Annual Report on Form 10-K, or Form 10-K, including statements regarding
our future results of operations and financial position, business strategy, prospective products, product approvals, research and
development costs, timing and likelihood of success, plans and objectives of management for future operations and future results
of anticipated products, are forward-looking statements.
In some cases, you can
identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,”
“plan,” “anticipate,” “could,” “intend,” “target,” “project,”
“contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue”
or the negative of these terms or other similar expressions. These forward-looking statements are only predictions. We have based
these forward-looking statements largely on our current expectations and projections about future events and financial trends that
we believe may affect our business, financial condition and results of operations. All forward-looking statements speak only as
of the date of this Form 10-K, are expressly qualified in their entirety by the cautionary statements included in this Form 10-K
and are subject to a number of risks, uncertainties and assumptions, including those described under the sections in this Form
10-K entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and elsewhere in this Form 10-K.
These statements involve
known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
These factors include, but are not limited to, the following:
Further, any forward-looking
statement speaks only as of the date on which it is made. New risk factors and uncertainties may emerge from time to time, and
it is not possible for management to predict all risk factors and uncertainties, or how they may affect us. Except as required
by law, we do not intend to update or revise the forward-looking statements in this Form 10-K after the date of this Form 10-K,
whether as a result of any new information, future events, changed circumstances or otherwise. This Form 10-K also contains market
data related to our business and industry. This market data includes projections that are based on a number of assumptions. If
these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result,
our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected
rates may have a material adverse effect on our business, financial condition, results of operations and the market price of our
common stock.
PART
I
ITEM 1. BUSINESS.
Overview
Immune Pharmaceuticals
Inc., together with its subsidiaries (collectively, “Immune” or the “Company” or “us,” “we,”
or “our”) is a clinical stage biopharmaceutical company specializing in the development of novel targeted therapeutic
agents in the fields of immunology, inflammation, dermatology and oncology.
Our lead product candidate
is bertilimumab, a first-in-class, fully human, anti-eotaxin-1 antibody, currently in phase 2 clinical trials for bullous pemphigoud
(“BP”) and ulcerative colitis (“UC”). Also, we are developing “NanoCyclo,” a topical nano-encapsulated
formulation of cyclosporine, for the treatment of atopic dermatitis (“AD”) and psoriasis.
Our pain portfolio
includes AmiKet and AmiKet Nano, a topical analgesic cream containing amitriptyline and ketamine for the treatment of
postherpetic neuralgia (“PHN”) and diabetic peripheral neuropathy (“DPN”). We are determining the
optimal path forward for this program.
Our oncology portfolio
includes Ceplene, which is approved in the European Union for the maintenance of remission in patients
with Acute Myeloid Leukemia (“AML”) and Azixa and crolibulin, two clinical-stage, vascular disrupting agents (“VDA”)
which have demonstrated encouraging preliminary proof of concept study results. In addition, we have two oncology platform assets,
consisting of a bispecific antibody platform and a nanotechnology combination platform, which we refer to as “NanomAbs.”
We intend to divest these oncology assets, which are held in our oncology-focused subsidiary, Cytovia Inc (“Cytovia”).
Our current product portfolio
is summarized below:
Summary of Immune’s Asset Portfolio
Program
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Primary Indication(s)
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Status
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Bertilimumab
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Bullous Pemphigoid
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Phase 2
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Ulcerative colitis
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Phase 2
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NanoCyclo
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Atopic Dermatitis, Psoriasis
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Preclinical
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Ceplene/IL-2
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Acute Myeloid Leukemia
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Phase 3 (US)
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Approved (European Union)
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Crolibulin
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Solid Tumors
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Phase 2
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Azixa
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Glioblastoma multiforme
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Phase 2
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NanomAbs
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Solid Tumors
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Preclinical
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Bispecific Antibodies
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Oncology
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Preclinical
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AmiKet/AmiKet Nano
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Neuropathic Pain
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Phase 2
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Lido PAIN
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Pain
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Phase 2
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Ceplene
®
,
LidoPain
®
, Epicept
®
, Amiket
TM
, and Azixa
TM
are trademarks that we own. This
Annual Report on Form 10-K contains references to our trademarks. Solely for convenience, trademarks and trade names referred to
in this report, including logos, artwork and other visual displays, may appear without the
®
or ™ symbols,
but such references, or the lack thereof, are not intended to indicate, in any way, that we will not assert, to the fullest extent
under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend
our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship
of us by, any other companies.
History- Reverse Merger
On August 25, 2013, Immune
Pharmaceuticals Ltd., a privately held Israeli company (“Immune Ltd.”) consummated a merger transaction (the “Merger”)
with EpiCept Corporation (“EpiCept”), a Delaware corporation, pursuant to a definitive Merger Agreement and Plan of
Reorganization, dated as of November 7, 2012, as amended (the “Merger Agreement”) by and among EpicEpt, EpiCept Israel
Ltd., an Israeli company and a wholly-owned subsidiary of EpiCept (“Merger Sub”) and Immune Ltd. Pursuant to the Merger
Agreement, Merger Sub merged with and into Immune Ltd., following which Immune Ltd. became a wholly-owned subsidiary of EpiCept
and the former stockholders of Immune Ltd. received shares of EpiCept, which constituted a majority of the outstanding shares of
Immune. EpicCept changed its name to Immune Pharmaceuticals Inc. upon consummation of the Merger.
Reverse Stock-Split
On April 12, 2017, following
receipt of shareholder approval, we announced a reverse stock split of our shares of common stock at a ratio of 1-for-20. Beginning
with the opening of trading on April 13, 2017, our common stock began trading on a post-split basis on the Nasdaq Capital Market
(“Nasdaq”). Our shareholders ratified the effectiveness of the April 2017 reverse stock split pursuant to Delaware
General Corporation Law Sec. 204 at our Annual Meeting of Stockholders, held in relevant part on February 23, 2018, and the ratification
proposal received the affirmative vote of the majority of the outstanding shares of our common stock as of the Record Date (as
such term is defined in our Definitive Proxy Statement filed with the Securities and Exchange Commission (“SEC”) on
January 26, 2018). All share and per share amounts in this Form 10-K have been reflected on a post-split basis.
Business Strategy
Our business strategy is
to develop novel therapeutics with the potential to treat or prevent immunologic and inflammatory diseases. We intend to obtain
revenues from licensing fees, milestone payments, development fees, royalties and/or sales related to the use of our drug candidates
or intellectual property for specific therapeutic indications or applications.
In April 2017,
we announced a corporate restructuring with the objective of prioritizing and segregating our research and development
efforts on our core assets, bertilimumab and NanoCyclo product candidates, while streamlining our operations by divesting or
spinning off our non-core assets, including our oncology asset portfolio consisting of Ceplene, Azixa, crolibulin, NanomAbs
and our bispecific antibody platform. We announced our plan to pursue a spin-off of Cytovia Inc. (“Cytovia”) our
oncology focused subsidiary into a separate, stand-alone company, under the management and leadership of our founder and
former Chief Executive Officer, Dr. Daniel Teper. We intend to develop bertilimumab for a variety of indications and
NanoCyclo for the treatment of AD and moderate psoriasis. We are evaluating AmiKet and AmiKet Nano for the treatment of PHN
and DNP and will determine an optimal path forward for this program.
Cytovia will
focus on the development and commercialization of novel oncology and hematology therapeutics. Consistent with our objective to
preserve our capital to support development of bertilimumab and NanoCyclo, Cytovia, led by Dr. Teper, is seeking separate capitalization
from third-party sources for Cytovia’s start-up costs, expenses of the spin-off, payment of costs related to Ceplene and
other relevant items. This capitalization from third party sources is a prerequisite to further continuation of the spin–off
process. If the necessary capitalization is not obtained in the near future, we do not expect to pursue completion of the spin-off
process and instead will determine the optimal path forward to monetize these assets. This strategy will allow us to focus our
resources and build upon our promising clinical stage pipeline in immunotherapy and dermatology related indications and thereby
unlock our intrinsic value.
Products and Programs
Bertilimumab
Our lead product candidate,
bertilimumab, is a first-in-class, human monoclonal antibody that targets eotaxin-1, a chemokine that plays a role in both innate
and adaptive immune responses and modulates the cross-talk between key cells involved in inflammation. Chemokines are small proteins
that can act as chemical attractants of inflammatory cells to sites of inflammation and infection. We licensed all non-ocular uses
of bertilimumab from iCo Therapeutics Inc. in 2011.
Eotaxin-1 has been shown
to be a chemoattractant for eosinophils, which are inflammatory cells that play an important role in the pathogenesis of allergic
airway diseases, inflammatory bowel disease, skin conditions and potentially in many other conditions. By neutralizing eotaxin-1,
bertilimumab may prevent the migration and activation of eosinophils, thus helping to relieve inflammatory conditions associated
with eotaxin-1. Bertilimumab has potential applications as a treatment for a variety of allergic and inflammatory diseases, including
BP, inflammatory bowel disease, AD, and asthma, among others.Bertilimumab was shown to have biological activity in a variety of
preclinical studies, with high affinity and specificity for human eotaxin-1 and was safe and well-tolerated in primates. In a phase
1 clinical study consisting of a single intravenous (“IV”) administration to healthy volunteers, bertilimumab demonstrated
excellent safety and tolerability (no significant adverse events and no anti-bertilimumab antibodies) and demonstrated an elimination
half-life consistent with biweekly dosing. In phase 2 studies, bertilimumab has been safely administered via intravenous, intranasal
and ocular routes of administration and has shown activity in patients with allergic rhinitis. Currently, bertilimumab is being
studied in two active clinical programs, BP and UC.
We believe that if successfully
developed and approved by the United States Food and Drug Administration (“FDA”), European Medicines Agency (“EMA”)
or other regulatory authorites, bertilimumab could address both large and orphan underserved markets that have limited treatment
alternatives.
Bertilimumab and Bullous Pemphigoid
Published studies have
suggested that eotaxin-1 plays a role in the pathogenesis of BP. Therefore, bertilimumab, which blocks eotaxin-1 has the potential
to be an effective therapeutic agent for BP patients.
In October 2015,
we submitted an Investigational New Drug Application (“IND”) to the FDA for the study of bertilimumab in
patients with BP. In February 2016, we launched a phase 2a clinical trial, IMNP BP-01,
“Evaluation of Safety,
Efficacy and Pharmacodynamic Effect of Bertilimumab in Patients with Bullous Pemphigoid”
(ClinicalTrials.gov
Identifier: NCT02226146). This trial is an open-label, single arm study in adults with moderate to
extensive BP being conducted at sites in the United States and Israel. The primary end point is safety and secondary
endpoints include a variety of efficacy measures related to clinical signs and symptoms and tapering of systemic
corticosteroids. Subjects in this study receive bertilimumab IV at a dose of 10 mg/kg on days 0, 12 and 28 and are followed
for a total of 84 days. In addition, they receive oral prednisone at a maximum initial dose of 30 mg/day, which is to be
tapered rapidly according to the subject’s clinical status.
In February 2017, we reported
results from the first three subjects enrolled in the study and in September 2017, we announced results from the first six subjects
enrolled. These results were presented at the Late-Breaking Research Forums during the 2018 American Academy of Dermatology Annual
Meeting in San Diego, CA in February 2018.
The interim analysis showed
that the six subjects in the study experienced a decline in the Bullous Pemphigoid Disease Area Index (BPDAI) Total Activity Score
of 85% (p=0.0096). All six subjects in the study achieved a greater than 50% reduction in their BPDAI Total Activity Score by the
final assessment, and four of the six patients had a greater than 90% reduction. Bertilimumab was well tolerated in all six subjects
and no serious adverse events were reported. Moreover, these six subjects received approximately 30 mg per day less prednisone
over the course of the study than they would have been expected to receive in a standard BP treatment regimen.
In October 2014, we requested
Orphan Drug Designation from the FDA for the use of bertlimumab in treating BP. The FDA did not grant the request because the application
lacked data from a disease-specific animal model or clinical trials. In February 2017, we filed a new request, including preliminary
results from three subjects in the BP-01 clinical trial. In August 2017, the FDA indicated that the additional clinical data that
we provided was not sufficient to support an Orphan Drug Designation. We will determine the timing of a new request based on our
assessment of the robustness of the supporting data. We do not intend to disclose the timing or content of any subsequent Orphan
Drug Designation requests submitted to FDA or any other regulatory agency.
Bertilimumab and
Ulcerative Colitis
Published studies have
suggested that eotaxin-1 plays a role in the pathogenesis of UC. In June 2015, we initiated a phase 2 study, IMNP UC-01,
“Evaluation
of Safety, Efficacy, Pharmacokinetics and Pharmacodynamics of Bertilimumab in Patients with Active Moderate to Severe Ulcerative
Colitis”
(ClinicalTrials.gov Identifier: NCT01671956) at sites in Israel. In 2016, we expanded the study to include sites
in Russia.
IMNP UC-01 is a randomized,
double blind, placebo-controlled trial in adult patients with active moderate-to-severe UC. Subjects are randomized
in a 2:1 ratio to receive bertilimumab or placebo and receive bertilimumab 10 mg/kg IV or placebo on days 0 and 14 and 28,
and are followed for safety and efficacy measures for 12 weeks. The primary end point is clinical response assessed by the Mayo
Clinic Ulcerative Colitis Disease Index at 8 weeks. Secondary end points include assessment of mucosal injury and clinical remission.
NanoCyclo
In January 2016, we entered
into a worldwide exclusive licensing agreement with BioNanoSim Ltd. (“BNS”) an Israeli company led by Professor Simon
Benita, former Head of the Drug Research Institute at the Hebrew University of Jerusalem, for the development of a topical nano-encapsulated
formulation of cyclosporine.
Cyclosporine, an oral immunosuppressive
drug used for organ transplantation and the treatment of a variety of immunologic diseases, does not penetrate the skin and thus
has never been developed to treat dermatological inflammatory conditions such as atopic dermatitis and psoriasis. The NanoCyclo
technology is designed to deliver cyclosporine into the epidermis and dermis. NanoCyclo has shown efficacy in several preclinical
models of skin inflammation.
We are conducting
additional preclinical efficacy and toxicity studies on NanoCyclo to select a formulation to move forward into clinical
development. Because cyclosporine is no longer patent-protected and is approved for systemic administration, NanoCyclo
potentially could be developed under the FDA’s 505(b)(2) pathway, which is typically a faster process than the
traditional 505(b)(1) regulatory submission required for new chemical entities. We intend to develop NanoCyclo as a topical
treatment for atopic dermatitis and psoriasis.
AmiKet and AmiKet
Nano
AmiKet is a topical analgesic
cream containing two FDA-approved drugs: amitriptyline, an antidepressant often used to treat chronic pain disorders; and ketamine,
an N-methyl-D-aspartic acid (“NMDA”) antagonist that is used as an intravenous anesthetic. AmiKet has completed phase
1 and 2 clinical trials involving 1,700 patients for the treatment of neuropathic pain. In 2010, the FDA granted AmiKet Orphan
Drug Designation for the treatment of PHN. A PHN phase 3 clinical trial has been designed based on prior clincial studies, including
a phase 2 trial that showed comparable efficacy of AmiKet and oral gabapentin (ClinicalTrials.govIdentifier: NCT00475904). In addition
to PHN, AmiKet may be developed for the treatment of DPN and chemotherapy-induced neuropathic pain.
We are conducting research
on a new and improved formulation of AmiKet, which we refer to as “AmiKet Nano,”utilizing a proprietary and patent-protected
nano-encapsulation technology developed by Professor Benita and licensed from Yissum Research Development Company, the technology
transfer company of the Hebrew University of Jerusalem, Ltd. AmiKet Nano may offer similar efficacy or improved efficacy with lower
doses of amitriptyline and ketamine, thus improving the therapeutic index and safety profile of the program. We are determining
the optimal path forward for this program.
LidoPAIN
LidoPAIN
is an adhesive-backed, lidocaine-based patch for the treatment of acute lower back pain. In 2003, our predecessor, EpiCept Corporation,
entered into a license agreement with Endo Pharmaceuticals Inc. (“Endo”) pursuant to which it granted to Endo the exclusive
worldwide right to commercialize LidoPAIN and to use certain of our patents for the development of certain other non-sterile, topical
lidocaine patches, including Lidoderm, Endo’s non-sterile topical lidocaine-containing patch for the treatment of chronic
lower back pain. In July 2015, the license agreement was amended. We transferred to Endo its previously licensed patents related
to the use of topical lidocaine in acute and chronic back pain and Endo granted to us a royalty-free, non-exclusive, fully transferable
license to those patents. Endo will make undisclosed milestone payments to us if Endo receives approval for a back-pain indication
for a lidocaine-based product. We regained full exclusive rights to develop, commercialize and license LidoPAIN.
We
intend to divest this non-core asset.
Oncology
In April 2017, we announced
our plan to pursue a spin-off of Cytovia, our oncology subsidiary, into a separate, stand-alone company. Our oncology programs
include the following:
Ceplene
Ceplene (histamine dihydrochloride),
our lead oncology product candidate, is a first-in-class, small molecule, targeting the Histamine-2 Receptor. Ceplene was approved
for marketing in Europe in 2008 and Israel in 2010 and has been granted Orphan Drug Designation in the United States and E.U. for
the treatment of AML.
We acquired the rights
to Ceplene in the United States and Israel in the Merger. On June 15, 2017, we entered into an Asset Purchase Agreement with Meda
Pharma Sarl, a Mylan NV company, to repurchase assets relating to Ceplene, including the right to commercialize Ceplene in Europe
and to register and commercialize Ceplene in certain other countries (the “Asset Purchase Agreement”). Cytovia intends
to undertake commercialization efforts in Europe, Asia and Latin America.
Cytovia intends to develop
Ceplene for use in combination with low dose Interleukin-2 (“IL-2”) (Proleukin
®
) to overcome immunosuppression
in AML and potentially other malignancies. Ceplene is thought to suppress tumor growth by inhibiting NOX-2, in turn inhibiting
macrophage and leukemic cell reactive oxygen species production, allowing IL-2 activation of natural killer (“NK”)
and cytotoxic T cells, with consequent leukemic cell death. Data from a European study presented at the American Association of
Cancer Research Annual Meeting in April 2016 demonstrated that Ceplene in conjunction with IL-2 is active in monocytic forms of
AML.
Cytovia plans to finalize
a phase 3 protocol for a single pivotal study assessing overall survival in AML to support an NDA filing in the United States for
Ceplene in remission maintenance in AML. The study will compare Ceplene plus low dose IL-2 to placebo plus low dose IL-2. The primary
end point will be overall survival at 2 years with a secondary end point of Leukemia Free Survival. An independent interim analysis
will be conducted at one year for both futility, and to assess the one-year efficacy based on Event Free Survival.
Crolibulin
Crolibulin is a novel small
molecule VDA and apoptosis inducer for the treatment of patients with solid tumors and is a novel microtubule destabilizer that
is selective for pathologic vasculature. Crolibulin has shown promising vascular targeting activity with potent anti-tumor activity
in preclinical in vitro and in vivo studies and in a Phase I clinical trial conducted in part by the National Cancer Research Institute.
The molecule has been shown to induce tumor cell apoptosis and selectively inhibit growth of proliferating cell lines, including
multi-drug resistant cell lines. Murine models of human tumor xenografts demonstrated crolibulin inhibits growth of established
tumors of a number of different cancer types. In preclinical animal tumor models, combination therapy has demonstrated synergistic
activity with cytotoxic drugs as well as anti-angiogenic drugs. This may support further development of crolibulin in cancers other
than anaplastic thyroid cancer, including but not limited to refractory ovarian cancer and neuro-endocrine tumors.
Azixa
Azixa (verubulin) is a
novel microtubular destabilizer that functions as a VDA. It evades multidrug resistance pumps, thus crossing the blood-brain-barrier
and achieving high central nervous system concentrations. In phase 1 and 2 clinical trials in glioblastoma multiforme (“GBM”),
evidence of objective response was seen, including in patients who had failed previous bevacizumab (Avastin) therapy. Azixa has
Orphan Drug Designation for GBM in the United States.
NanomAbs
NanomAbs is an antibody-drug
conjugate platform that allows the targeted delivery of combinations of chemotherapeutics into cancer cells. NanomAbs is potentially
capable of generating novel drugs with enhanced profiles as compared to stand-alone antibodies. The technology conjugates monoclonal
antibodies to drug loaded nanoparticles to target drugs to specific cells. NanomAbs selectively accumulates in diseased tissues
and cells, resulting in higher drug accumulation at the site of action with minimal off-target exposure.
Bispecific Antibodies
In December 2015, we published
data regarding a novel bispecific antibody platform for the production of tetravalent IgG1-like bispecific antibodies. The prototype
bispecific antibody retained effector functions and mediated redirect killing of target cells by cytokine induced killer T cells
demonstrating direct anti-cancer effects in vitro as well as anti-tumor activity and improved survival in a mouse xenograft model
of disseminated leukemia. We believe that this platform may be used to generate novel bispecific antibodies against immuno-oncology
targets. This work was developed by a collaborative European consortium and funded in part by a European grant.
Material Agreements
Bertilimumab
iCo Therapeutics
Inc.
In December 2010,
iCo Therapeutics Inc. (“iCo”) granted Immune an option to sub-license the use and development of bertilimumab for all
human indications, other than ocular indications, pursuant to a Product Sublicense Agreement. iCo obtained exclusive license rights
to intellectual property relating to bertilimumab pursuant to a license agreement with Cambridge Antibody Technology Group
Plc dated December 20, 2006, and to which we became a party. On June 24, 2011, we exercised our option and obtained a
worldwide license from iCo pursuant to the Product Sublicense Agreement. We paid iCo $0.5 million and issued to iCo common
stock and warrants to purchase our common stock. iCo is entitled to $32.0 million in milestone payments plus royalties on
future development and sales of bertilimumab. Milestones include the first dosing in a phase 3 clinical trial, filing a Biologics
License Application/Marketing Authorization Application (“BLA/MMA”) and approval of a BLA/MAA in any indication and
the achievement of $100 million in aggregate sales of licensed products for use in IBD. The term of the license lasts until
the expiration of all payment obligations on a country-by-country basis, being on the later to occur of (a) the tenth (10th) anniversary
of the first commercial sale of a licensed product in an applicable country or (b) the expiration date in such country of the last
to expire of any issued iCo patent that includes at least one valid claim that claims the particular licensed product or its manufacture
or use, at which point the license will be deemed fully paid, perpetual and irrevocable with respect to that country. iCo
retains the worldwide exclusive right to the use of bertilimumab (iCo-008) for all ocular applications.
Lonza Sales AG
In May 2012, Lonza Sales
AG (“Lonza”) granted us a non-exclusive worldwide license (the “Lonza License”) under certain know-how
and patent rights to use, develop, manufacture, market, sell, offer, distribute, import and export bertilimumab produced through
the use of Lonza’s system of cell lines, vectors and know-how. We are not obligated to manufacture bertilimumab through the
use of Lonza’s system.
We agreed to pay Lonza
(i) a royalty of 1% of the net selling price of bertilimumab manufactured by Lonza; or (ii) an annual payment of approximately
$0.1 million (first payable upon commencement of phase 2 clinical trials) plus a royalty of 1.5% of the net selling price of bertilimumab
if it is manufactured by us or one of our strategic partners; or (iii) an annual payment of approximately $0.5 million (first payable
upon commencement of the relevant sublicense) plus a royalty of 2% of the net selling price of bertilimumab if it is manufactured
by any party other than Lonza, us or one of our strategic partners. The royalties are subject to a 50% reduction based on the lack
of certain patent protections, including the expiration of patents, on a country-by-country basis. Unless earlier terminated,
the license agreement continues until the expiration of the last enforceable valid claim to the licensed patent rights, which began
to expire in 2014 and continued to expire between 2015 and 2016, or for so long as the System Know How (as defined in the License)
is identified and remains secret and substantial, whichever is later. We considered the System Know How as secret and substantial
as of December 31, 2017 and accordingly, the license remains in effect as of that date.
For the year ended December
31, 2017, there were no payments due related to this license.
On June 27, 2011,
we entered into a manufacturing agreement with Lonza for the manufacture of bertilimumab for use in our phase 2 bertilimumab clinical
trials. See “Manufacturing” below.
We completed the manufacturing
of bertilimumab with Lonza in 2016 and intend to manufacture further supplies of bertilimumab with another manufacturer. Therefore,
we do not intend to utilize the Lonza License in the future and will not be subject to the royalty obligations contained therein.
NanoCyclo
BioNanoSim Ltd
In January 2016, our wholly
owned subsidiary, Immune Ltd., entered into a definitive research and license agreement with BNS, a Yissum spin-off company. We
obtained from BNS an exclusive worldwide sublicense, with a right to further sublicense, for the development, manufacturing and
commercialization of certain inventions and research results regarding Yissum’s patents in connection with nanoparticles
for topical delivery of cyclosporine-A (NanoCyclo) for all topical skin indications. As consideration for the grant of the license,
we are required to pay the following consideration:
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an annual maintenance fee of $30,000, commencing on January 1, 2021,
which will increase by 30% each year up to a maximum annual maintenance fee of $0.1 million and may be credited against royalties
or milestone payments payable in the same calendar year;
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a license fee in the amount of $0.5 million, paid in 2016;
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royalties on net sales of products (as such term is defined in the
License) by us of up to 5%, subject to certain possible reductions in certain jurisdictions;
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sublicense fees in the amount of 18% of any non-sales related consideration
received by us from a sublicense or an option to receive a sublicense for the products and/or the licensed technology (as such
terms are defined in the license); and
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milestone payments of up to approximately $4.5 million and 250,000
shares of our common stock (12,500 shares after giving effect to the April 2017 Reverse Stock Split) upon the achievement of certain
regulatory, clinical development and commercialization milestones. In the event that we receive consideration from a sublicensee
for any such milestones, we will pay to BNS the higher of either (a) the amount of the particular milestone payment or (b) the
amount of the sublicense fees that are due for such sublicensee consideration paid to us.
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In addition, we are obligated
to reimburse BNS within 60 days for expenses relating to patent fees and will sponsor a 12-month research program to prepare the
program for IND submission.
In November 2017, we issued
250,000 shares valued at $225,000 to BNS without giving effect to the impact of the April 2017 Reverse Stock Split because we decided
that the importance of the NanoCyclo program and the need to maintain a positive working relationship with BNS warranted ignoring
the impact of the Reverse Split and instead issuing 250,000 Shares to BNS as if the Reverse Split had not occurred.
For the year ended December
31, 2016, we paid a license fee of $0.5 million and approximately $0.2 million in research fees. For the year ended December 31,
2017, we paid approximately $0.3 million in research fees.
AmiKet and AmiKet Nano
Dalhousie University
In July 2007, we entered
into a license agreement with Dalhousie University (“Dalhousie”) under which we obtained an exclusive license to certain
patents for the topical use of tricyclic anti-depressants and N-methyl-D-aspartate (“NMDA”) receptor antagonists as
topical analgesics for neuralgia. These and other patents cover the combination treatment consisting of amitriptyline and ketamine
in AmiKet. We obtained worldwide rights to make, use, develop, sell and market products utilizing the licensed technology in connection
with passive dermal applications. We are obligated to make payments to Dalhousie upon achievement of specified milestones and royalties
based on annual net sales derived from the products incorporating the licensed technology. In April 2014, we entered into a Waiver
and Amendment to the license agreement pursuant to which Dalhousie agreed to irrevocably waive our obligation to pay maintenance
fees. In exchange, we agreed to pay Dalhousie royalties of 5% of net sales of licensed technology in countries in which patent
coverage is available and 3% of net sales in countries in which data protection is available. Also, we agreed to amend the timing
and increase the amounts of the milestone payments payable under the license agreement.
Yissum
In June 2015, we entered
into a definitive research and license agreement with Yissum. We obtained an exclusive, worldwide license from Yissum, with certain
sublicensing rights, to make commercial use of certain of Yissum’s patents and know-how in connection with a topical nano-formulated
delivery of AmiKet for the development, manufacturing, marketing, distribution and commercialization of products based on the technology.
As consideration for the grant of the license, we are required to pay the following consideration:
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an annual maintenance fee of $30,000 commencing on June 25, 2020, which maintenance fee shall increase
by 30% each year, up to a maximum annual maintenance fee of $0.1 million and may be credited against royalties or milestone payments
payable in the same calendar year;
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royalties on net sales of products (as such term is defined in the license) by us in the amount
of up to 3%, subject to certain possible reductions in certain jurisdictions;
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milestones payments of up to approximately $4.5 million upon the achievement of certain regulatory,
clinical development and commercialization milestone; and
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reimbursement of related patent fees
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In addition, we agreed
to fund an annual research program in the amount of approximately $0.5 million, plus VAT and any applicable taxes, commencing on
October 1, 2015 (or such other time as mutually agreed between the parties). The results of the research, including any patents
or patent applications will automatically be licensed to us.
For the year ended December
31, 2016, we paid research fees of approximately $0.1 million. As of December 31, 2017, $250,000 is due to Yissum for research
fees.
Oncology
Ceplene
Meda Pharma SARL
On June 15, 2017, we entered
into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Meda Pharma SARL, a Mylan N.V. company (“Meda”)
to repurchase assets relating to Ceplene (histamine dihydrochloride), including the right to commercialize Ceplene in Europe and
to register and commercialize Ceplene in certain other countries, for a fixed consideration of $5 million payable in installments
over a three-year period. The assets acquired from Meda include rights to marketing authorizations, trademarks, patents, and other
intellectual property related to Ceplene and its use. Under the terms of the Asset Purchase Agreement, we have agreed to pay Meda
a fixed price, which is payable in installments, as well as additional amounts contingent on the achievement of certain milestones.
Daniel Kazado
On June 15, 2017, substantially
contemporaneous with the entry into the Asset Purchase Agreement, we entered into a Standby Financing Agreement (the “Standby
Financing Agreement”) with Daniel Kazado (the “Standby Financer”), a member of our Board of Directors and a beneficial
owner of our capital stock. Currently, we intend to finance the $5.0 million financial obligations contemplated by the Asset Purchase
Agreement through Cytovia on a basis that is on terms that are acceptable to our board of directors and without recourse to us.
The Standby Financer will support the financial obligations of the Company to pay the fixed consideration installments, in the
aggregate amount of $5,000,000, due under and in accordance with the terms of the Asset Purchase Agreement. In the event
that Cytovia has not obtained funding on terms reasonably acceptable to us (including, without limitation, that such funding be
on a basis that is without recourse to us), then, pursuant to the terms of the Standby Financing Agreement, at or prior to each
installment date, the Standby Financer shall lend us or Cytovia (as determined in the discretion of our Board of Directors) an
amount in immediately available funds equal to the fixed consideration installment payment then due and payable under the Asset
Purchase Agreement (the “Standby Commitment”). The loan made by the Standby Financer in respect of such fixed payment
shall be evidenced by a promissory note in an aggregate principal amount equal to the amount of funds lent by the Standby Financer.
The Standby Commitment shall expire on the earliest of (a) satisfaction in full by the Standby Financer of his obligations under
the Standby Financing Agreement, (b) Cytovia having obtained funding on terms reasonably acceptable to us and (c) the Company having
been fully discharged of and released from all liability of all of its obligations under the Asset Purchase Agreement.
Pint Pharma International
S.A.
On July 10, 2017, Cytovia entered into an exclusive licensing agreement (the “Licensing Agreement”) with
Pint Pharma International S.A. (“Pint”) a specialty pharmaceutical company focused on Latin America and other markets,
for the marketing, commercialization and distribution of Ceplene throughout Latin America (the “Territory”, as more
fully defined in the Licensing Agreement) through Pint and one or more of its affiliates. Pursuant to the Licensing Agreement,
Cytovia is entitled to (i) 35% of Ceplene net sales in the Territory (ii) a milestone payment of $0.5 million when net sales
of Ceplene in the Territory reach $10.0 million in any calendar year and (iii) a milestone payment of $1.25 million when
net sales of Ceplene in the Territory reach $25.0 million in any calendar year (collectively, the “Ceplene Payments”).
Cytovia further granted Pint and its affiliates certain sublicensing rights to Ceplene, and a right of first refusal on any new
products of Cytovia within the Territory during the term of the Licensing Agreement. With regard to any regulatory approvals and
filings related to the commercialization of Ceplene within the Territory, Pint shall be the applicant, holder of such regulatory
approvals and will be responsible for the content of such regulatory submissions, as well as all costs and expenses related to,
among other items delineated in the Licensing Agreement, the fees, filings, compliance, registration and maintenance of such required
regulatory approval matters. Cytovia shall be responsible for providing (or if in the control of a third party, to ensure such
third party provides) all appropriate documentation, samples and other information in support of Pint in connection with its regulatory
submissions, compliance and maintenance matters in the Territory concerning the Ceplene product(s).
Additionally, in connection
with the Licensing Agreement, the parties agreed that Pint Gmbh, an affiliate of Pint, will separately enter into an investment
agreement, pursuant to which Pint Gmbh will make an investment of $4.0 million at series A valuation into Cytovia in exchange
for an equity interest in Cytovia. Dr. Massimo Radaelli, Executive Chairman of Pint, will also join the board of Cytovia upon completion
of the investment and effective spin off of Cytovia from us, if and as consummated.
NanomAbs
Yissum
In April 2011, we entered
into a license agreement with Yissum, which includes patents, research results and know-how developed by Professor Simon Benita
related to the NanomAbs technology. Yissum granted us an exclusive license, with a right to sub-license, to make commercial use
of the licensed technology in order to develop, manufacture, market, distribute or sell products derived from the license. As consideration
for the grant of the license, we are required to pay the following consideration:
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royalties in the amount of up to 4.5% of net sales;
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beginning on the sixth anniversary, an annual license maintenance
fee between $30,000 for the first year and up to a maximum of $0.1 million thereafter;
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research fees of at least $0.3 million for the first year and at
least $0.1 million from the second year through the sixth year (but, not to exceed $1.8 million in the aggregate);
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milestone payments of up to $8.6 million, based on the attainment
of certain milestones, including IND application submission, patient enrollment in clinical trials, regulatory approval and commercial
sales;
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sub-license fees in amounts up to 18% of any sub-license consideration;
and
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equity consideration in the amount of 8% of our shares of common
stock on a fully diluted basis.
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The license expires, on
a country-by-country basis, upon the later of the expiration of (i) the last valid licensed patent, (ii) any exclusivity
granted by a governmental or regulatory body on any product developed through the use of the licensed technology or (iii) the
15-year period commencing on the date of the first commercial sale of any product developed through the use of the licensed technology.
Upon the expiration of the license, we will have a fully paid, non-exclusive license to the licensed technology.
For the year ended December
31, 2017, we paid research fees of approximately $0.1 million.
Bispecific Antibodies
SATT Sud-Est
In January 2017, we entered
into an exclusive patent sub-license agreement with SATT Sud-Est, (“SATT”) a French technology transfer office of the
five universities of the Provence-Alpes-Cote-d’Azur and Corsica regions in France, relating to certain patents covering the
development, use, manufacture and commercialization of monoclonal and bispecific antibodies targeting components of the tumor microenvironment
and angiogenic factors. In addition, SATT agreed to grant us an exclusive option relating to the pro-angio vascular endothelial
growth factor (“VEGF”) invention to be filed as a patent application during the term of the agreement. We will have
a month after the filing of the patent to exercise the option. In consideration of the sub-license and option agreement, we agreed
to pay an approximately $0.2 million upfront payment, with $0.1 million payable in January 2017 and the remainder payable in three
equal quarterly payments thereafter beginning in March 2017. As of December 31, 2017, we have not made any payments. In addition,
we agreed to certain milestone and royalty payments for each monoclonal and bispecific product developed.
Atlante Biotech SAS
In December 2015, we entered
into an exclusive license with Atlante Biotech SAS (“Atlante”) relating to the patents and know-how for a new format
of bispecific antibody platform. The technology, the result of a collaborative European consortium led by Dr. Jean Kadouche and
funded by a European grant, developed the novel platform for the production of tetravalent IgG1-like bispecific antibodies. A prototype
bispecific antibody utilizing the platform was shown to retain effector functions and mediate redirect killing of target cells
by cytokine induced killer T cells. Moreover, the bispecific antibody demonstrated direct in-vitro and in-vivo anti-cancer effects
in tumor models and improved survival in a mouse xenograft model of disseminated leukemia.
Other Material Agreements
MabLife SAS
In March 2012, we
acquired from MabLife SAS (“MabLife”), a biotechnology company specializing in research and development of antibody-based
therapeutics for the treatment of cancers, autoimmune and inflammatory disorders, all right, title and interest in and to the patent
rights, technology and deliverables related to the anti-Ferritin monoclonal antibody (“AMB8LK”), including its nucleotide
and protein sequences, its ability to recognize human acid and basic ferritins, or a part of its ability to recognize human acid
and basic ferritins. The consideration was: $0.6 million payable in six equal installments (total payments to date totaled
$0.2 million) and royalties of 0.6% of net sales of any product containing AMB8LK or the manufacture, use, sale, offering or importation
of which would infringe on the patent rights with respect to AMB8LK. We are required to assign the foregoing rights back
to MabLife if it fails to make any of the required payments, is declared insolvent or bankrupt or terminates the agreement.
In February 2014, we acquired
from MabLife all rights, titles and interests in and to the secondary patent rights related to the use of anti-ferritin monoclonal
antibodies in the treatment of some cancers, Nucleotide and protein sequences of an antibody directed against an epitope common
to human acidic and basic ferritins, monoclonal antibodies or antibody-like molecules comprising these sequences.
During the first quarter
of 2015, MabLife informed us that it had filed for bankruptcy. On May 30, 2017, we received a summons from the bankruptcy court-liquidator
to appear before the commercial court of Evry, France on September 19, 2017. In December 2017, we reached an agreement with the
bankruptcy court-liquidator to settle all amounts due to Mablife for a payment of approximately $0.2 million. We paid the settlement
amount in January 2018 and are awaiting confirmation by the commercial court.
Endo Pharmaceuticals
Inc.
In
December 2003, EpiCept entered into a license agreement (“License Agreement”) with
Endo Pharmaceuticals
Inc.
(“Endo”) under, which EpiCept granted Endo (and its affiliates) the exclusive
(including as to EpiCept and its affiliates) worldwide right to commercialize LidoPAIN, adhesive-backed, lidocaine-based patch
for the treatment of acute lower back pain. EpiCept also granted Endo worldwide rights to use certain of EpiCept’s
patents
for the development of certain other non-sterile, topical lidocaine patches, including Lidoderm, Endo’s
non-sterile topical lidocaine-containing patch for the treatment of chronic lower back pain. We assumed the License Agreement upon
the Merger.
Under the
License Agreement, we are entitled to receive milestone payments of up to $52.5 million upon the achievement of various milestones
relating to product development, regulatory approval and sales-based royalties on sales of LidoPAIN and Endo’s own back
pain product, if covered by our patents. Royalties are payable until generic equivalents to the LidoPAIN product are available
or until expiration of the patents covering LidoPAIN, whichever is sooner. Also, we are eligible to receive milestone payments
from Endo of up to $30 million upon the achievement of specified regulatory and net sales milestones of Lidoderm, Endo’s
chronic lower back pain product candidate, if covered by our patents. The License Agreement terminates upon the later of the conclusion
of the royalty term, on a country-by-country basis, and the expiration of the last applicable EpiCept patent covering licensed Endo product
candidates on a country-by-country basis. Either party may terminate the agreement upon an uncured material breach by the
other or, subject to the relevant bankruptcy laws, upon a bankruptcy event of the other.
In
July 2015, we amended the License Agreement. We transferred to Endo its previously licensed patents related to the use of topical
lidocaine in acute and chronic back pain and Endo granted to us a royalty-free, non-exclusive, fully transferable license to those
patents. Endo will make undisclosed milestone payments to us if Endo receives approval for a back pain indication for a lidocaine-based
product. We regained full exclusive rights to develop, commercialize and license LidoPAIN.
Dr. Jean Kadouche
and Alan Razafindrastita
In December 2011,
Dr Jean Kadouche sold, assigned and transferred to us the entire right, title and interest for all countries, in and to any and
all patents and inventions related to mice producing human antibodies and a method of preparation of human antibodies (the “Human
Antibody Production Technology Platform”) for 40,000 shares of our common stock and $20,000 (paid to Dr. Kadouche and Alan
Razafindrastita). Through the Human Antibody Production Technology Platform and additional laboratory work, human immune
systems and specific cell lines were introduced in mice, enabling the mice to produce human monoclonal antibodies.
Shire BioChem Inc.
In connection with the
Merger, we acquired a license agreement for the rights to the MX2105 series of apoptosis inducer anti-cancer compounds from Shire
BioChem Inc. (“Shire BioChem”), (formerly known as BioChem Pharma, Inc.). Under the license agreement, we are required
to pay Shire BioChem a portion of any sublicensing payments we receive if we relicense the series of compounds or make milestone
payments to Shire BioChem totaling up to $26.0 million and pay a royalty on product sales if we develop the compounds internally
for the treatment of a cancer indication.
Intellectual Property
We seek to protect our
product candidates and our technology through a combination of patents, trade secrets, proprietary know-how, regulatory exclusivity
and contractual restrictions on disclosure.
We own or license rights
with respect to patents and patent applications relating to bertilimumab, NanoCyclo, AmiKet and AmiKet Nano, Ceplene, antibodies
and other product candidates. The patent positions for our product candidates and platforms include 24 granted United States patents,
113 granted foreign patents, 12 pending United States applications, and 26 pending foreign patent applications. We intend to seek
patent term extensions in the United States for approved products. The length of the patent term extension will vary and is related
to the length of time the drug is under regulatory review while the patent is in force.
Our patent positions are
as follows:
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A license to a patent family that covers a composition of matter of bertilimumab and a method of
using bertilimumab to screen for an antibody or antibody fragment that binds eotaxin-1, including: four registered patents in the
United States and registered patents in Europe (Switzerland, Germany, France, United Kingdom (UK), and Ireland), Brazil, Canada,
Israel, Australia, Japan, New Zealand and Singapore, and one pending patent application in the United States. The U.S. patents
will expire, without extension between March 2021 and August 2022. The foreign patents and patents granted with respect to pending
patent applications in this family will expire, without extension, in March 2021.
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All rights, title and interest in and to a patent application family that covers a method for treating
an inflammatory bowel disease with an anti-human eotaxin antibody, including bertilimumab in the United States, Europe, Australia,
Canada, China, Israel, and New Zealand. Any patents granted with respect to the pending patent application will expire, without
extension, in March 2034.
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A license to a PCT patent application that covers a method for treating altered hepatic function
and/or insulin resistance with an anti-human eotaxin antibody, including bertilimumab. Any patents granted with respect to the
pending PCT patent application will expire, without extension, in June 2037.
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All rights, title and interest in and to a provisional patent application that covers a method
for treating bullous pemphigoid with reduced or no corticosteroids via administration of an anti-human eotaxin antibody, including
bertilimumab.
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A license to a patent family that covers polymer-based nanoparticles for the dermal or systemic
delivery of therapeutic compounds, including: registered patents in Australia, China, Israel, and Japan and pending patent applications
in Canada, China, Europe, India, South Korea, and the U.S. Any patents granted with respect to this pending patent application
will expire, without extension, in January 2032.
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A license to a provisional patent application that covers a powder comprising polymer-based nanoparticles
and topical and ophthalmic formulations of nanoparticles. Any patents granted with respect to this pending patent application will
expire, without extension, in February 2039.
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All rights, title and interest in and to several families of patents related to the AmiKet product,
including four granted U.S. patents, as well as granted patents in Canada, Chile, Hong Kong, Israel, Mexico, New Zealand, and Singapore.
Patent applications for this family are pending in Mexico. These granted patents and any patents granted with respect to any pending
patent applications will expire, without extension, between 2018 and 2023. These patents and patent application have claims directed
to topical uses of tricyclic antidepressants, such as amitriptyline, and NMDA receptor antagonists, such as ketamine, as treatments
for relieving pain, including neuropathic pain.
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A license to a patent family that covers Lidopain anesthetic patch, including 2 granted U.S. patents,
a granted Mexico patent, and a pending Mexico patent application. These granted patents and any patents granted with respect to
any pending patent applications will expire, without extension, between March 2020 and March 2021.
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All rights, title and interest in and to patents covering the synthesis of histamine dihydrochloride
(Ceplene) and its use for treating cancer, including five granted U.S. patents, as well as a registered Australian, European (Austria,
Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Monaco, Netherlands, Portugal, Spain, Sweden,
Switzerland, and UK), Canadian, China, Hong Kong, Indian, Israel, and Japanese patents. The U.S. patents will expire in January
2019 and October 2021, and the other patents will expire in December 2019. There are pending PCT and US Provisional patent applications
as well. Any patents granted with respect to any pending patent applications will expire, without extension in 2037 and 2038, respectively.
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All rights, title and interest in and to U.S., China, India, Japanese, and South Korean patents
related to Azixa and uses thereof. The U.S. composition and methods patents will expire, without extension, in November 2026 and
January 2030, respectively. The other patents will expire in July 2024.
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All rights, title and interest in and to U.S. and Canadian patents and European and Canadian patent
applications related to crolibulin, structurally related analogs, and uses thereof. The U.S. patents will expire, without extension,
between July 2022 and November 2029. The granted Canadian patent and any pending patent applications will expire in July 2027.
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A license to a patent family that covers bispecific antibodies, including granted US and China
patents, as well as pending Canadian, European, Indian, Japanese, Mexican, and Korean patent applications. The U.S. patent will
expire, without extension, in March 2033, while the other patent and any patents granted with respect to any pending patent applications
will expire, without extension, in July 2032.
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All rights, title and interest in and to the U.S. and European (Germany, Switzerland, Spain, UK,
Italy, and France) registered patents that cover an anti-ferritin antibody composition of matter and/or methods of use for targeting
of a molecule to certain tumors and for localizing a tumor in a subject. The European patents directed to the use will expire,
without extension, in January 2020. The U.S. patent, which benefits from patent term adjustment from the United States Patent and
Trademark Office (“USPTO”), will expire in January 2022. The European patents directed to the composition of matter
will expire, without extension, in September 2027. The U.S. composition of matter patent, which benefits from patent term adjustment
from the USPTO, will expire in July 2030.
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We seek to protect our
proprietary information by requiring our employees, consultants, contractors, outside partners and other advisers to execute, as
appropriate, nondisclosure and assignment of invention agreements upon commencement of their employment or engagement. Also, we
require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.
Our commercial success
will depend in part on obtaining and maintaining patent protection and trade secret protection of our technologies and product
candidates as well as successfully defending these patents against third-party challenges. We have various compositions of matter
and use patents, which have claims directed to our product candidates or their methods of use. Our patent policy is to pursue,
maintain, defend, retain and secure patents and patent rights, whether developed internally or licensed from third parties, for
the technology, inventions and improvements related to our core portfolio of product candidates and that are or may be commercially
important to the development of our business. Also, we rely on trade secrets, technical know-how and continuing innovation to develop
and maintain our competitive position.
The pharmaceutical, biotechnology
and other life sciences industries are characterized by the existence of a large number of patents and frequent litigation based
upon allegations of patent infringement. We believe that our current activities fall within the scope of the exemptions provided
by 35 United StatesC. Section 271(e) in the United States and Section 55.2(1) of the Canadian Patent Act, each of which covers
activities related to developing information for submission to the FDA and its counterpart agency in Canada. The possibility of
an infringement claim against us increases as potential products progress toward commercialization. We attempt to ensure that our
product candidates and the methods we employ to manufacture them do not infringe other parties’ patents and other proprietary
rights, yet competitors or other parties may assert that we have infringed on their patents or other proprietary rights.
We rely on trade secrets
and technical know-how to develop and maintain our competitive position. We seek to protect our proprietary processes, in part,
through confidentiality and invention assignment agreements with our employees, consultants, scientific advisors, contractors and
commercial partners. Also, we seek to preserve the integrity and confidentiality of our data, trade secrets and technical know-how
by maintaining physical security of our premises and physical and electronic security of our information technology systems. Such
agreements or security measures are not immune from breach, and we may not have adequate remedies for any breach. Furthermore,
our trade secrets may become known or be independently discovered by competitors or others.
Manufacturing
We do not own or operate
manufacturing facilities for any of our product candidates, nor do we plan to develop our own manufacturing operations in the foreseeable
future. We depend on third party contract manufacture organizations for all of our bulk drug substance and drug candidates for
our preclinical and clinical trials.
Where applicable, manufacturers
of our products are required to comply with applicable Good Manufacturing Practices (“GMP”) regulations, which require,
among other things, quality control and quality assurance, as well as the corresponding maintenance of records and documentation.
In addition, changes to the manufacturing process generally require prior Regulatory Health Authority approval before being implemented.
We take responsibility to ensure that all of the processes, methods and equipment are compliant with GMP for drugs on an ongoing
basis, as mandated by the FDA and other regulatory authorities, and conduct audits of our vendors, contract laboratories and suppliers.
The raw materials that
we use to manufacture our product candidates are readily available commodities commonly used in the pharmaceutical industry.
Bertilimumab
Lonza has manufactured
all of our bertilimumab phase 2 clinical trial material pursuant to a manufacturing agreement that we signed with Lonza in 2011.
In addition, we rely on certain third parties to perform filling, finishing, labeling, packaging, distribution, laboratory testing
and other services related to the manufacture of our bertilimumab clinical supply.
In 2014, we entered into
an agreement with Probiogen AG to develop a new Chinese Hamster Ovary (“CHO”) derived cell line for the manufacture
of bertilimumab with improved characteristics, including higher yield, as compared to the bertilimumab derived from the manufacturing
process utilized by Lonza. In 2015, we transferred the CHO cell line to STC Biologics for the development of the new manufacturing
process for bertilimumab.
Ceplene
Currently, Lonza manufactures
our clinical and commercial supply of Ceplene. Cytovia plans to qualify a backup manufacturer in the near future.
Contract Research Organizations
We outsource our clinical
trial activities to Clinical Research Organizations (“CROs”). We utilize CROs that comply with guidelines from the
International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use, which attempt
to harmonize the FDA and the EMA regulations and guidelines. We create our drug development plans and manage our CROs according
to the specific requirements of the drug candidate under development. We ensure that our CROs comply with relevant federal regulations,
including 21 C.F.R. parts 50, 54, 56, 58 and 318, which pertain to, among other things, institutional review boards, informed consent,
financial conflicts of interest by investigators, good laboratory practices and submission of IND applications.
Marketing, Sales and Commercialization
We do not have any internal
sales, marketing or distribution infrastructure or capabilities. We intend to pursue commercialization relationships, including
strategic alliances and licensing, with pharmaceutical companies and other strategic partners, which are equipped to market and/or
sell our products if we receive regulatory approval for any of our product candidates. We may out-license some or all of our worldwide
patent rights to more than one party to achieve the fullest development, marketing and distribution of any of our product candidates.
Environmental Matters
We and our agents and service
providers, including manufacturers, may be subject to various environmental, health and safety laws and regulations, including
those governing air emissions, water and wastewater discharges, noise emissions, the use, management and disposal of hazardous,
radioactive and biological materials and wastes and the cleanup of contaminated sites. We believe that our business, operations
and facilities, including, to our knowledge, those of our agents and service providers, are being operated in compliance in all
material respects with applicable environmental and health and safety laws and regulations.
Government Regulation
The FDA and comparable
regulatory authorities in state and local jurisdictions and in other countries impose substantial and burdensome requirements upon
companies involved in the clinical development, manufacture, marketing and distribution of drugs, such as the drugs that we are
developing. These agencies and other federal, state and local entities regulate the research and development, testing, manufacture,
quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion, distribution, post-approval
monitoring and reporting, sampling and export and import of our drug candidates.
In the United States, the
FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (the “FDCA”) and the implementing of regulations
in the FDCA. The processes, rules, regulations and requirements of other regulatory agencies, such as that of the EMA which regulates
drug approvals in the European Union, are similar though not identical to those of the FDA (see “International Regulations”
below).
The process of obtaining
regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations requires
the expenditure of substantial time and financial resources. Failure to comply with the applicable United States requirements at
any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative
or judicial sanctions, such as the FDA’s refusal to approve pending New Drug Applications (“NDAs”) or Biologics
License Applications (“BLAs”) withdrawal of an approval, imposition of a clinical hold, issuance of warning letters,
product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government
contracts, restitution, disgorgement or civil or criminal penalties.
The process required by
the FDA before a drug may be marketed in the United States generally involves the following:
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completion of preclinical laboratory tests, animal studies and formulation
studies in compliance with the FDA’s good laboratory practice (“GLP”) regulations;
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submission to the FDA of an IND which must become effective before
human clinical trials may begin;
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approval by an independent institutional review board (“IRB”)
at each clinical site before each trial may be initiated;
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performance of adequate and well controlled human clinical trials
in accordance with good clinical practice (“GCP”) requirements to establish the safety and efficacy of the proposed
drug product for each indication;
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submission to the FDA of an NDA;
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satisfactory completion of an FDA advisory committee review, if applicable;
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satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the product is produced to assess compliance with current GMP requirements and to assure that the
facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and
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FDA review and approval of the NDA.
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Preclinical studies include
laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safety and
efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical
data and any available clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing
may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before
that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on
a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can
begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.
Clinical trials involve
the administration of the investigational new drug to human patients under the supervision of qualified investigators in accordance
with GCP requirements, which include the requirement that all research patients provide their informed consent in writing for their
participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives
of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each
clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each
institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at
that institution. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes
of Health (the “NIH”) for public dissemination on their www.clinicaltrials.gov website.
Human clinical trials are
typically conducted in three sequential phases, which may overlap or be combined:
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Phase 1 clinical trial: The drug is initially introduced into healthy
human volunteers or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism,
distribution, excretion and, if possible, to gain an early indication of its effectiveness.
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Phase 2 clinical trial: The drug is administered to a limited patient
population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific
targeted diseases and to determine dosage tolerance and optimal dosage.
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Phase 3 clinical trial: The drug is administered to an expanded patient
population, generally at geographically dispersed clinical trial sites, in well controlled clinical trials to generate enough data
to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of
the product, and to provide adequate information for the labeling of the product.
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Progress reports detailing
the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events
occur. Each of phase 1, phase 2 and phase 3 clinical trials may not be completed successfully within any specified period, or at
all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a
finding that the research patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate
approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s
requirements or if the drug has been associated with unexpected serious harm to patients.
A drug being studied in
clinical trials may be made available to individual patients in certain circumstances. Pursuant to the 21st Century Cures Act (the
“Cures Act”) which was signed into law in December 2016, the manufacturer of an investigational drug for a serious
disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding
to requests for individual patient access to such investigational drug. This requirement applies on the latest of 60 calendar days
after the date of enactment of the Cures Act or the first initiation of a phase 2 or phase 3 trial of the investigational drug.
Assuming successful completion
of the required clinical testing, the results of the preclinical studies and clinical trials, together with detailed information
relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the
FDA as part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an
NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act (“PDUFA”) guidelines
that are currently in effect, the FDA has a goal of ten months from the date of “filing” of a standard NDA for a new
molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted
to FDA because the FDA has approximately two months to make a “filing” decision.
In addition, under the
Pediatric Research Equity Act of 2003 (“PREA”) as amended and reauthorized, certain NDAs or supplements to an NDA must
contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric
subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective.
The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric
data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.
The FDA also may require
submission of a risk evaluation and mitigation strategy (“REMS”) plan to ensure that the benefits of the drug outweigh
its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, or elements to assure
safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.
The FDA conducts a preliminary
review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently
complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this
event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review
before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review.
The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which
it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality
and purity.
The FDA may refer an application
for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other
scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and
under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations
carefully when making decisions.
Before approving an NDA,
the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application
unless it determines that the manufacturing processes and facilities are in compliance with Current Good Manufacturing Practice
(“cGMP”) requirements and adequate to assure consistent production of the product within required specifications. Additionally,
before approving an NDA, the FDA may inspect one or more clinical trial sites to assure compliance with GCP requirements.
After evaluating the NDA
and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing
facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete
response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the
NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission
of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for
approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval
letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
Even if the FDA approves
a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions
be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further
assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization,
or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which
can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of
a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the
approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further
testing requirements and FDA review and approval.
Under the Orphan Drug Act
of 1983, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is generally
a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the
United States and for which there is no reasonable expectation that the cost of developing and making available in the United States
a drug for this type of disease or condition will be recovered from sales in the United States for that drug. Orphan drug designation
must be requested before submitting an NDA. After the FDA grants orphan drug designation, the name of the sponsor, identity of
the drug or biologic and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not shorten
the duration of the regulatory review or approval process, but does provide certain advantages, such as a waiver of PDUFA fees,
enhanced access to FDA staff and potential waiver of pediatric research requirements.
If a product that has orphan
drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is
entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full NDA,
to market the same drug or biologic for the same indication for seven years, except in limited circumstances, such as a showing
of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving
a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition.
Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the application user fee.
A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication
for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later
determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities
of the product to meet the needs of patients with the rare disease or condition.
Drugs manufactured or distributed
pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements
relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse
experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling
claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products
and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with
clinical data.
The FDA may impose a number
of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including
Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.
In addition, drug manufacturers
and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments
with the FDA and state agencies and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance
with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before
being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose
reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use.
Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain
cGMP compliance.
Once an approval is granted,
the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur
after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of
unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result
in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials
to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences
include, among other things:
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restrictions on the marketing or manufacturing of the product, complete
withdrawal of the product from the market or product recalls;
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fines, warning letters or holds on post-approval clinical trials;
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refusal of the FDA to approve pending NDAs or supplements to approved
NDAs, or suspension or revocation of product approvals;
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product seizure or detention, or refusal to permit the import or
export of products; or
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injunctions or the imposition of civil or criminal penalties.
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The FDA strictly regulates
marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved
indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and
regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses
may be subject to significant liability.
Coverage and Reimbursement
Sales of our drug candidates,
if approved, will depend, in part, on the extent to which such products will be covered by third-party payors, such as government
health care programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly limiting
coverage or reducing reimbursements for medical products and services. In addition, the United States government, state legislatures
and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on reimbursement
and requirements for substitution of generic products. Third-party payors decide which therapies they will pay for and establish
reimbursement levels. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own
coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided
for any drug candidates that we develop will be made on a payor-by-payor basis. Each payor determines whether or not it will provide
coverage for a therapy, what amount it will pay the manufacturer for the therapy, and on what tier of its formulary it will be
placed. The position on a payor’s list of covered drugs, or formulary, generally determines the co-payment that a patient
will need to make to obtain the therapy and can strongly influence the adoption of such therapy by patients and physicians. Adoption
of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls
and measures, could further limit our net revenue and results. Decreases in third-party reimbursement for our drug candidates or
a decision by a third-party payor to not cover our drug candidates could reduce physician usage of our drug candidates, once approved,
and have a material adverse effect on our sales, results of operations and financial condition.
Other Healthcare Laws
We are subject to healthcare
regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business, including
our clinical research, proposed sales, marketing and educational programs. Failure to comply with these laws, where applicable,
can result in the imposition of significant civil penalties, criminal penalties, or both.
The United States laws
that may affect our ability to operate, among others, include: the federal Health Insurance Portability and Accountability Act
of 1996 (“HIPAA”) as amended by the Health Information Technology for Economic and Clinical Health Act, which governs
the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;
certain state laws governing the privacy and security of health information in certain circumstances, some of which are more stringent
than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance
efforts; the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly
and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either
the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made
under federal healthcare programs such as the Medicare and Medicaid programs; federal false claims laws which prohibit, among other
things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid,
or other third-party payors that are false or fraudulent; federal criminal laws that prohibit executing a scheme to defraud any
healthcare benefit program or making false statements relating to healthcare matters; the Physician Payments Sunshine Act, which
requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the United States Department of
Health and Human Services information related to payments and other transfers of value to physicians (defined to include doctors,
dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and ownership and investment interests held by physicians
and their immediate family members; and state law equivalents of each of the above federal laws, such as anti-kickback and false
claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.
In addition, many states
have similar laws and regulations, such as anti-kickback and false claims laws that may be broader in scope and may apply regardless
of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to the extent that
our product is sold in a foreign country, we may be subject to similar foreign laws.
Healthcare Reform
Current and future legislative
proposals to further reform healthcare or reduce healthcare costs may result in lower reimbursement for our products. The cost
containment measures that payors and providers are instituting and the effect of any healthcare reform initiative implemented in
the future could significantly reduce our revenues from the sale of our products.
For example, implementation
of the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, collectively the
Affordable Care Act (“PPACA”) has substantially changed healthcare financing and delivery by both governmental and
private insurers, and significantly impacted the pharmaceutical industry. The PPACA, among other things, established an annual,
nondeductible fee on any entity that manufactures or imports certain specified branded prescription drugs and biologic agents,
revised the methodology by which rebates owed by manufacturers to the state and federal government for covered outpatient drugs
under the Medicaid Drug Rebate Program are calculated, increased the minimum Medicaid rebates owed by most manufacturers under
the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled
in Medicaid managed care organizations, and provided incentives to programs that increase the federal government’s comparative
effectiveness research. Since its enactment there have been judicial and Congressional challenges to certain aspects of the PPACA.
Some of the provisions of the PPACA have yet to be implemented, and there have been judicial and Congressional challenges to certain
aspects of the PPACA. In addition, the current administration and Congress will likely continue to seek legislative and regulatory
changes, including repeal and replacement of certain provisions of the PPACA. Prior to the 2016 United States elections, regulations
under the PPACA were expected to continue to be drafted, released, and finalized through the next several years. However, throughout
2017 President Trump and members of Congress sought to repeal and replace the PPACA and implement regulatory changes to limit the
PPACA and other healthcare reform programs enacted under President Obama’s administration. For example, in January 2017,
President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the PPACA to waive,
defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory
burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Another
example is the recent United States tax reform legislation enacted by Congress and signed into law by President Trump, The Tax
Cuts and Jobs Act of 2017, which repealed the requirement that individuals maintain health insurance coverage or face a penalty
(known as the “individual mandate”). President Trump’s administration, Alex Azar, head of Health and Human Services,
and Congress will likely continue to seek legislative and regulatory changes to reform healthcare, including repeal and replacement
of certain provisions of the PPACA.
In addition, other legislative
changes have been proposed and adopted since the PPACA was enacted. In August 2011, then President Obama signed into law the Budget
Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress
proposals for spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion
for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes
reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent
legislative amendments, will remain in effect through 2025 unless additional Congressional action is taken. Additionally, in January
2013, then President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare
payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers
from three to five years. More recently, there has been heightened governmental scrutiny over the manner in which manufacturers
set prices for their marketed products. For example, there have been several recent Congressional inquiries and proposed bills
designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer
patient programs, and reform government program reimbursement methodologies for drug products.
We expect additional federal
and state, as well as foreign, healthcare reform measures will be adopted in the future, any of which could result in reduced demand
for our products or additional pricing pressure.
International Regulations
Whether or not we obtain
FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries
before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country
to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement also vary greatly from country to country. Although governed by the
applicable country, clinical trials conducted outside of the United States typically are administered with the three-phase sequential
process described above under “Government Regulation—United States” However, the foreign equivalent of an IND
is not a prerequisite to performing pilot studies or phase 1 clinical trials.
Under European Union regulatory
systems, we may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized
procedure, which is required for oncology products and is available for medicines produced by biotechnology or which are highly
innovative, provides for the grant of a single marketing authorization that is valid for all member states. This authorization
is a marketing authorization application. The decentralized procedure provides for mutual recognition of national approval decisions.
Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states.
Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.
This procedure is referred to as the mutual recognition procedure.
In addition, regulatory
approval of prices is required in most countries other than the United States We face the risk that the resulting prices would
be insufficient to generate an acceptable return to us, our shareholders or our collaborators.
Research and Development
We have devoted substantial
efforts and resources to advancing our intellectual property estate and scientific research and drug development. Generally, research
and development expenditures are allocated to specific research projects. Due to various uncertainties and risks, it is not possible
to accurately predict future spending or time to completion by project or project category. Research and Development costs were
$5.5 million and $8.3 million during the fiscal years ended December 31, 2017 and 2016, respectively. We will require additional
investments in research and development to bring our product candidates to market.
Competition
We operate in highly competitive
segments of the biopharmaceutical markets. We face competition from many different sources, including commercial pharmaceutical
and biotechnology companies, academic institutions, government agencies, and private and public research institutions. Many of
our competitors have significantly greater financial, product development, manufacturing and marketing resources than we possess.
Large pharmaceutical companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. As a
result, these companies may obtain marketing approval more rapidly and may be more effective in selling and marketing their products
than us. Smaller or early stage companies may prove to be significant competitors, particularly through collaborative arrangements
with large, established companies. Also, many universities and private and public research institutes are active in cancer research,
some in direct competition with us. Adequate protection of intellectual property, successful product development, adequate funding
and retention of skilled, experienced and professional personnel are among the many factors critical to our success.
Employees
As of March 15, 2018, our
workforce consisted of five full time United States and two full time Israeli employees.
Corporate and Available Information
Immune (formerly EpiCept)
was incorporated in Delaware in March 1993. Immune Ltd., incorporated in Israel in July 2010, entered into a definitive merger
agreement with EpiCept in November 2012, which was completed on August 25, 2013. Our principal executive offices are located at
550 Sylvan Avenue, Suite 101, Englewood Cliffs, NJ 07632. Our telephone number is (201) 464-2677, and our website address is
www.immunepharma.com
.
The information contained
in, or accessible through our website does not constitute a part of and is not deemed or otherwise incorporated by reference in
this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
and all amendments to those reports, are available to you free of charge through the “Investors — SEC Filings”
section of our website as soon as reasonably practicable after such materials have been electronically filed with, or furnished
to, the Securities and Exchange Commission. Our shares of common stock are listed on The Nasdaq Capital Market under the symbol
“IMNP.”
ITEM 1A. RISK FACTORS
Our operations and financial
results are subject to various risks and uncertainties, including those described below, which could adversely affect our business,
financial condition, results of operations, cash flows, and the trading price of our common stock. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial also may materially affect our business operations.
Risks relating to our financial position
and need for additional capital
We have limited liquidity.
As of December 31, 2017,
our cash and cash equivalents balance was $6.8 million, which we believe will not be sufficient to fund our anticipated level of
operations for at least the next 12 months, and our working capital deficit as $2.2 million. Our cash used in operations was $11.6
million and $12.3 million for the fiscal years ended December 31, 2017 and 2016, respectively.
We have financed our operations
to date through private placements and public offerings of common and preferred stock and convertible debt securities and borrowings
under secured loans. Our revenue to date has consisted of royalties on licensed patents and sales of Ceplene used in clinical trials.
Our ability to continue
operations depends on our ability to access the capital markets, license our technology to third parties and obtain regulatory
approval to market our drugs. We expect to finance our cash needs from additional equity or debt financing, or strategic alliances
on products until we can achieve profitability and positive cash flows from operating activities, if ever.
We have incurred operating losses since
our inception. We expect to incur operating losses for the foreseeable future and may never achieve or maintain profitability.
We have incurred significant
losses since inception and expect to continue to incur losses for the foreseeable future. We incurred net losses of $17.9 million
and $32.7 million, resulting in a total accumulated deficit of $113.5 million and $95.6 million, for the fiscal years ended
December 31, 2017 and 2016, respectively.
We have devoted substantially
all of our financial resources and efforts to developing bertilimumab, NanoCyclo, Nano AmiKet and the products in our oncology
portfolio. We are in the early stages of development of our product candidates and expect to continue to incur significant expenses
and operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to
year. We anticipate that our expenses will increase substantially as we continue the research and development of our product candidates.
We must succeed in developing
and commercializing products that generate significant revenue to become and remain profitable, which will require us to be successful
in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, obtaining
regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain
regulatory approval, and establishing and managing our collaborations at various stages of each candidate’s development.
We are in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, we may
never generate revenues that are significant enough to achieve profitability.
None of our drug candidates
has received FDA or foreign regulatory marketing approval (except Ceplene). In order to grant marketing approval, the FDA or foreign
regulatory agencies must conclude that our clinical data and that of our collaborators establish the safety and efficacy of our
drug candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development
and commercialization of our products. In the event that third parties have control over the preclinical development or clinical
trial process for a product candidate, the estimated completion date would largely be under control of that third party rather
than under our control. We cannot forecast with any degree of certainty which of our drug candidates will be subject to future
collaborations or how such arrangements would affect its development plan or capital requirements.
We are unable to predict
accurately the timing or amount of increased expenses or when, or if, we will be able to achieve profitability due to the numerous
risks and uncertainties associated with pharmaceutical product development. In addition, our expenses could increase and revenue
could be further delayed if we are required by the FDA or EMA to perform studies in addition to those currently expected, or if
there are any delays in completing our clinical trials or the development of any of our product candidates.
We may not be able to sustain
or increase profitability on a quarterly or annual basis even if we achieve profitability. Our failure to become and remain profitable
would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research
and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our Company
could also cause you to lose part or all of your investment.
The estimates and judgments we make,
or the assumptions on which we rely, in preparing our consolidated financial statements could prove inaccurate.
Our consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our
assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and
liabilities. Such estimates and judgments include revenue recognition, inventory, valuation of stock-based awards, research and
development expenses and income tax. We base our estimates on historical experience, facts and circumstances known to us and on
various other assumptions that we believe to be reasonable under the circumstances. We cannot provide assurances, however, that
our estimates, or the assumptions underlying them, will not change over time or otherwise prove inaccurate. If this is the case,
we may be required to restate our consolidated financial statements, which could, in turn, subject us to securities class action
litigation. Defending against such potential litigation relating to a restatement of our consolidated financial statements would
be expensive and would require significant attention and resources of our management. Moreover, our insurance to cover our obligations
with respect to the ultimate resolution of any such litigation may be inadequate. As a result of these factors, any such potential
litigation could have a material adverse effect on our financial results and cause our stock price to decline, which could in turn
subject us to securities class action litigation.
We will require substantial additional
funding, which may not be available to us on acceptable terms, or at all. If we fail to raise the necessary additional capital,
we will be unable to complete the development and commercialization of our product candidates or continue our development programs.
Our operations have consumed
substantial amounts of cash since our inception in 2010. We will require additional capital for the further development and commercialization
of our product candidates and to fund our other operating expenses and capital expenditures.
We cannot be certain that
additional funding will be available on acceptable terms or at all. If we are unable to raise additional capital in sufficient
amounts or on terms acceptable to us we may need to significantly delay, scale back or discontinue the development or commercialization
of one or more of our product candidates. We may need to seek collaborators for one or more of our current or future product candidates
at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available. Any
of these events could significantly harm our business, financial condition and results of operations.
We expect that a large
percentage of our future research and development expenses will be incurred in support of current and future preclinical and clinical
development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. We test our product
candidates in numerous preclinical studies for toxicology, safety and efficacy. We then conduct early stage clinical trials for
each drug candidate. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain
product candidates or programs in order to focus resources on more promising product candidates or programs. Completion of clinical
trials may take several years but the length of time generally varies according to the type, complexity, novelty and intended use
of a drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising
during clinical development.
In order to carry out our
business plan and implement our strategy, we will need to obtain additional financing and may choose to raise additional funds
through public or private equity or debt financing, licensing arrangements, strategic collaborations, asset sales, government grants,
or other arrangements. We cannot be sure that any additional funding will be available on terms favorable to us, or at all. Furthermore,
any additional equity or equity-related financing may be dilutive to our stockholders, and debt or equity financing, if available,
may subject us to restrictive covenants and significant interest costs. We may be required to relinquish our rights to certain
of our product candidates or marketing territories if we obtain funding through licensing arrangements or strategic collaborations.
In addition, certain investors
may be unwilling to invest in our securities if we are unable to maintain the listing of our common stock on a United States national
securities exchange. Our inability to raise capital when needed would harm our business, financial condition and results of operations,
and could cause our stock price to decline or require that we wind down our operations altogether.
We have a limited operating history,
expect to continue to incur substantial operating losses and may be unable to obtain additional financing, causing substantial
doubt about our ability to continue as a going concern over the next twelve months from the filing of this annual report. The report
of the Independent Registered Public Accounting Firm includes an explanatory paragraph that expresses substantial doubt about our
ability to continue as a going concern.
We commenced operations
in 2010. Our limited operating history hinders an evaluation of our prospects, which should be considered in light of the risks,
expenses and difficulties frequently encountered in the establishment of a business in a new industry, characterized by a number
of market entrants and intense competition, and in the shift from development to commercialization of new products based on innovative
technologies.
Due to our limited resources,
we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel to
satisfy needs from expected growth. The expansion of our operations may lead to significant costs and may divert our management
and business development resources. Any inability on the part of our management to manage growth could delay the execution of our
business plans or disrupt our operations. As a new business, we may encounter unforeseen expenses, difficulties, complications,
delays and other known and unknown factors.
The Independent Registered
Public Accounting Firm’s Report issued in connection with our audited financial statements for the year ended December 31,
2017 states that there is “substantial doubt about our ability to continue as a going concern”. Our ability to continue
as a going concern is dependent on a combination of several factors, including, our ability to raise capital by issuing debt or
equity securities to investors, license or sell our product candidates to other pharmaceutical companies, and generate revenues
from successfully developed products. If we are not able to continue our business as a going concern, we may be forced to liquidate
our assets for an amount less than the value at which those assets are carried on our financial statements, and it is likely that
investors will lose part or all of their investment.
In connection with the
preparation of our audited financial statements as of and for the year ended December 31, 2017, our management has evaluated whether
there is substantial doubt about our ability to continue as a going concern and has determined that substantial doubt existed based
on the following factors: (i) our available cash as of the date of this filing will not be sufficient to fund its anticipated level
of operations within 12 months after the financial statements were issued; (ii) we may not identify commercial partners to support
development of its drug candidates; and (iii) if we fail to obtain needed capital, we will be forced to delay, scale back, or eliminate
some or all of its R&D programs or perhaps cease operations. In the opinion of management, these factors, among others, raise
substantial doubt about the ability of us to continue as a going concern.
If we fail to comply with the continued
minimum closing bid requirements of the NASDAQ Capital Market LLC (“NASDAQ”) or other requirements for continued listing,
our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively
impacted.
Our common stock is listed
for trading on the NASDAQ. We must satisfy NASDAQ’s continued listing requirements, including, among other things, a minimum
closing bid price requirement of $1.00 per share for 30 consecutive business days. If a company’s common stock trades
for 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ will send a deficiency notice to
us, advising that it has been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable
requirements. Thereafter, if such a company does not regain compliance with the bid price requirement, a second 180-day compliance
period may be available.
On December 1, 2017, we
received a notification letter from NASDAQ informing us that for the last 30 consecutive business days, the bid price of our securities
had closed below $1.00 per share. This notice had no immediate effect on our NASDAQ listing and we have 180 calendar days, or until
May 30, 2018, to regain compliance. The closing bid price of our securities must be at least $1.00 per share for a minimum of ten
consecutive business days to regain compliance.
If we are unable to regain
compliance with the minimum stockholders’ equity requirement by May 30, 2018, or such further extended period as may be provided
by NASDAQ, our securities may be delisted from NASDAQ, which could reduce the liquidity of our common stock materially and result
in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise
capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence
by investors, employees and business development opportunities. Such a delisting likely would impair your ability to sell or purchase
our common stock when you wish to do so. Further, if we were to be delisted from NASDAQ, our common stock may no longer be recognized
as a “covered security” and we would be subject to regulation in each state in which we offer our securities. Thus,
delisting from NASDAQ could adversely affect our ability to raise additional financing through the public or private sale of equity
securities, would significantly impact the ability of investors to trade our securities and would negatively impact the value and
liquidity of our common stock.
We may be unable to license our product
candidate AmiKet on terms that reflect the current carrying value of the asset, or at all, which would negatively affect our financial
condition and results of operations.
We perform analyses periodically
to determine whether an impairment exists related to any of our intangible non-depreciable assets. Our annual impairment analysis
for 2016 determined that a change in the carrying value of in-process research and development (“IPR&D”) related
to the AmiKet program (which includes AmiKet and AmKet Nano, a new and improved formulation of AmiKet using the nano-encapsulation
technology that we licensed from Yissum) was required. As a result, we decreased the carrying value of the IPR&D asset from
$27.5 million as of December 31, 2015 to $15.0 million as of December 31, 2016. An independent valuation of the IPR&D related
to the AmiKet program as of December 31, 2017 confirmed that no change in the carrying value was required as of that date. There
is no assurance that future analysis would not result in further impairment of the fair value attributable to the AmiKet IPR&D.
If we are unable to successfully develop AmiKet or AmiKet Nano or if we sell or license AmiKet or AmiKet Nano on terms materially
less favorable than the assumptions used in the current valuation of the AmiKet IPR&D, the carrying value of the asset would
be further impaired, which could materially adversely affect our financial condition and results of operations.
We may be exposed to market risk and
interest rate risk that may adversely impact our financial position, results of operations or cash flows.
We may be exposed to market
risk, i.e
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the risk of loss related to changes in market prices, including foreign exchange rates, of financial instruments
that may adversely impact our financial position, results of operations or cash flows. In addition, our investments may be exposed
to market risk due to fluctuation in interest rates, which may affect its interest income and the fair market value of investments,
if any. At present, our investments consist primarily of cash and cash equivalents. We may invest in investment-grade marketable
securities with maturities of up to three years, including commercial paper, money market funds, and government/non-government
debt securities. The primary objective of our investment activities is to preserve principal while maximizing the income that we
receive from our investments without significantly increasing risk of loss.
We are exposed to fluctuations in currency
exchange rates, which could have an adverse effect on us.
Our foreign currency exposures
give rise to market risk associated with exchange rate movements of the United States dollar, our functional and reporting currency,
mainly against the New Israeli Shekel, (“NIS”), the Euro and the British pound sterling. A significant portion of our
expenses are denominated in United States dollars (with certain expenses payable to Israeli personnel, including sub-contractors
and consultants, in the NIS). Our United States dollar expenses consist principally of payments made to personnel in the United
States, including sub-contractors and consultants for preclinical studies, clinical trials and other research and development activities.
We anticipate that the bulk of our expenses will continue to be denominated in United States dollars and the NIS. If the United
States dollar fluctuates significantly against the NIS, the Euro or the British pound sterling it may have a negative impact on
our results of operations.
To date, we have not engaged
in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure
from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect
us from the material adverse effects of such fluctuations. Exchange rate fluctuations resulting in a devaluation of the NIS, the
Euro or the British pound sterling compared with the United States dollar could have a material adverse impact on our results of
operations and share price.
We are in default under our agreement
for the acquisition of the European rights to Ceplene. If not cured, we bear significant risk to our business plan regarding Ceplene,
including the loss of such rights.
Under an asset purchase
agreement between Immune and Meda Pharma SARL (“Meda”), we were obligated to make a payment to Meda of $1,500,000 (the
“First Initial Consideration”) no later than December 15, 2017. Under that agreement, we had a 30-day grace period
to make the payment or work out a payment plan with Meda. On January 31, 2018, Meda delivered to us a default notice under the
asset purchase agreement, demanding payment of the First Initial Consideration no later than February 15, 2018. We have yet to
make this payment. Accordingly, Meda could terminate the asset purchase agreement, and cause the loss by us of certain Ceplene-related
assets without consideration to us and cancel our further obligations under the agreement. If such action were to occur, we
would need to either work out a license with Meda or renegotiate terms of a purchase of the European Ceplene rights from Meda.
There can be no guarantee that that we would be able to work out such a deal. Loss of the Ceplene related assets would materially
impair our ability to execute our business plan with respect to our oncology related assets and have a negative effect on our financial
condition.
Risks related to our Common Stock
The price of our common stock is volatile
and fluctuates substantially, which could result in substantial losses for purchasers of our shareholders.
Our stock price is often
volatile. The stock market in general and the market for smaller biopharmaceutical companies in particular have experienced extreme
volatility that often is unrelated to the operating performance of particular companies. The market price for our common stock
may be influenced by many factors, including:
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success of competitive products or technologies;
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results of clinical trials of our product candidates or those of our competitors;
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developments related to our existing or any future collaboration;
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regulatory or legal developments in the United States and other countries;
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developments or disputes concerning patent applications, issued patents or other proprietary rights;
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recruitment or departure of key personnel;
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level of expenses related to any of our product candidates or clinical development programs; product
candidates or products;
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actual or anticipated changes in estimates as to financial results, development timelines or recommendations
by securities analysts;
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variations in our financial results or those of companies that are perceived to be similar to us;
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changes in the structure of healthcare payment systems;
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market conditions in the pharmaceutical and biotechnology sectors;
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general economic, industry and market conditions; and
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other factors described in this “Risk Factors” section.
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A significant number of shares of our
common stock are issuable pursuant to outstanding shares of convertible preferred stock and warrants, and we expect to issue additional
shares of common stock in the future. Conversion, exercise or sales of these securitites will dilute the interests of other security
holders and may depress the price of our common stock.
As of December 31, 2017,
there were 21,002,212 shares of common stock outstanding, with up to 19,948,582 shares of common stock issuable upon conversion
of outstanding convertible preferred stock; 17,676,000 shares of common stock issuable upon exercise of outstanding warrants issued
in connection with the convertible preferred stock; 1,019,677 shares of common stock issuable upon exercise of other outstanding
warrants; and 519,014 shares of common stock issuable upon exercise of outstanding options. In addition, we may issue additional
common stock and warrants from time to time to finance our operations, to fund potential acquisitions or in connection with additional
stock options or other equity awards granted to our employees, officers, directors and consultants under our 2015 Plan. The issuance
of additional shares of common stock, convertible securities or warrants to purchase common stock, the perception that such issuances
may occur, or exercise of outstanding warrants, convertible securities or options will have a dilutive impact on other shareholders
and could have a material negative effect on the market price of our common stock.
If securities or industry analysts do
not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our
stock price and trading volume could decline.
The trading market for
our common stock will be influenced by the research and reports that industry or securities analysts publish about our business
or us. Currently, one analyst in the U.S covers our stock. Our stock price likely would decline if any of the analysts who cover
us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance,
or if our target pre-clinical or clinical studies and operating results fail to meet the expectations.
Provisions in our Certificate of Incorporation,
as amended (our “Certificate of Incorporation”) and amended and restated bylaws (our “Bylaws”) and under
Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent
attempts by our stockholders to replace or remove our current management.
Provisions in our Certificate
of Incorporation and our Bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company
that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares.
These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby
depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders
to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors.
Among other things, these provisions include those establishing:
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a classified board of directors with three-year staggered terms, which may delay the ability of
stockholders to change the membership of a majority of our Board of Directors;
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no cumulative voting in the election of directors, which limits the ability of minority stockholders
to elect director candidates;
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the exclusive right of our Board of Directors to elect a director to fill a vacancy created by
the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from filling
vacancies on our Board of Directors;
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the ability of our Board of Directors to authorize the issuance of shares of preferred stock and
to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used
to significantly dilute the ownership of a hostile acquirer;
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the ability of our Board of Directors to alter our Bylaws without obtaining stockholder approval;
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the required approval of the holders of at least three-quarters (75%) of the shares entitled to
vote at an election of directors to adopt, amend or repeal our Bylaws or repeal the provisions of our Certificate of Incorporation
regarding the election and removal of directors;
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a prohibition on stockholder action by written consent, which forces stockholder action to be taken
at an annual or special meeting of our stockholders;
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the requirement that a special meeting of stockholders may be called only by the Chairman of the
Board of Directors, the chief executive officer, the president or the Board of Directors, which may delay the ability of our stockholders
to force consideration of a proposal or to take action, including the removal of directors; and
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advance notice procedures that stockholders must comply with in order to nominate candidates to
our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise
attempting to obtain control of us.
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Moreover, we are governed
by the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a person who owns in
excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the
transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is
approved in a prescribed manner.
Capital appreciation, if any, will be
your sole source of gain because we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We have never declared
or paid cash dividends on our capital stock. Currently, we intend to retain all of our future earnings, if any, to finance the
growth and development of our business. In addition, our certificate of designation of Series E Convertible Preferred Stock prohibits
us from paying dividends on our outstanding equity securities. As a result, capital appreciation, if any, of our common stock will
be your sole source of gain for the foreseeable future.
We may incur substantial costs in connection
with litigation and other disputes.
In the ordinary course
of business, we may, and in some cases have, become involved in lawsuits and other disputes such as securities claims, intellectual
property challenges, including interferences declared by the USPTO, and employee matters – among other potential claims.
Securities class action litigation often has been brought in the past against a company following a decline in the market price
of its securities, among other reasons. This and other risks are especially relevant for us because pharmaceutical companies have
experienced significant stock price volatility in recent years. It is possible that we may not prevail in claims made against us
in such disputes even after expending significant amounts of money and company resources in defending our positions in such lawsuits
and disputes. The outcome of such lawsuits and disputes is inherently uncertain and may have a negative impact on our business,
financial condition and results of operations.
Our management has identified internal
control deficiencies, which our management believes constitute material weaknesses. Any future material weaknesses or deficiencies
in our internal control over financial reporting could harm stockholder and business confidence in our financial reporting, our
ability to obtain financing and other aspects of our business.
In connection with the
preparation of our audited financial statements as of and for the years ended December 31, 2017 and 2016, we concluded that a material
weakness existed in internal control over financial reporting. As of December 31, 2017, we carried out an assessment of the effectiveness
of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework
(2013), updated and reissued by the Committee of Sponsoring Organizations (2013) (“COSO Framework”).
Based on our evaluation
under the COSO Framework, our management concluded that our internal control over financial reporting was not effective as of December
31, 2017. In connection with the above assessment, management identified material weaknesses in the control environment relating
to lack of sufficient entity level controls, segregation of duties issues due to lack of sufficient accounting and finance personnel,
accounting for complex financial transactions and lack of a sufficient technology infrastructure to support the financial reporting
function.
A material weakness is
a significant deficiency, or combination of significant deficiencies, that results in there being more than a remote likelihood
that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis
by management or employees in the normal course of performing their assigned functions. Although we have attempted to address the
identified material weaknesses, management has concluded that our internal controls over financial reporting were not effective
at December 31, 2017. Therefore, we cannot be certain that, in the future, additional material weaknesses or significant deficiencies
will not exist or otherwise be discovered. If our efforts to address the weakness identified are not successful, or if other deficiencies
occur, these weaknesses or deficiencies could result in misstatements of our results of operations, restatements of our financial
statements, a decline in our stock price and investor confidence or other material effects on our business, reputation, financial
condition or liquidity.
The proposed spin-off of our oncology
business is subject to various risks and uncertainties and may not be completed on the terms or timeline currently contemplated,
if at all, and will involve significant time and expense, which could harm our business, results of operations and financial condition.
In April 2017,
we announced plans to separate our oncology business as a separate, stand-alone company. The transaction is subject to
satisfaction of certain conditions, including separate capitalization from third-party sources to fund Cytovia’s
start-up costs, expenses of the spin-off, payment of costs related to Ceplene and other relevant items. Unanticipated
developments could delay, prevent or otherwise adversely affect this proposed spin-off, including but not limited to failure
to obtain the necessary capitalization, disruptions in general market conditions or potential problems, delays or
difficulties in satisfying conditions and obtaining approvals and clearances or litigation or other legal proceedings that
may arise as a result of the proposed spin-off. In addition, consummation of the spin-off will require clearance of a Form 10
registration statement with the SEC and final approval from our Board of Directors. Therefore, we cannot assure that we will
be able to complete the spin-off on the terms or on the timeline that we announced, if at all.
Significant expenses in
connection with the spin-off will be incurred, and such costs and expenses may be greater than we anticipate and capitalization
of such initial costs may not be attainable in a timely manner, if at all. In addition, completion of the spin-off will require
a significant amount of management time and effort which may disrupt our business or otherwise divert management’s attention
from other aspects of our business operations. Any such difficulties could adversely affect our business, results of operations
and financial condition.
The proposed spin-off may not achieve
some or all of the anticipated benefits.
If the spin-off is completed,
there is uncertainty as to whether the anticipated operational, financial and strategic benefits of the spin-off will be achieved.
There can be no assurance that the combined value of the common stock of the two publicly-traded companies will be equal to or
greater than what the value of our common stock would have been had the proposed separation not occurred. The combined value of
the common stock of the two companies could be lower than anticipated for a variety of reasons, including, but not limited to,
the inability of the new spin-off company to operate and compete effectively as an independent company, and the stock price of
the common stock of each of the two companies could experience periods of volatility. If we fail to achieve the anticipated benefits
of the spin-off, our stock price could decline.
If the spin-off does not qualify as a
transaction that is generally tax-free for U.S. federal income tax purposes, we and our stockholders could be subject to significant
tax liabilities.
We intend to obtain an
opinion of outside counsel regarding the qualification of the distribution in the spin-off, together with certain related transactions,
as a transaction that is generally tax-free for U.S. federal income tax purposes. The opinion will be based and rely on, among
other things, certain facts and assumptions, as well as certain representations, statements and undertakings of Immune and the
new spin-off company, including those relating to the past and future conduct of Immune and the new spin-off company. If any of
these facts, assumptions, representations, statements or undertakings are, or become, inaccurate or incomplete, or if we or the
new spin-off company breach any of their respective covenants in the separation documents, the opinion of counsel may be invalid
and the conclusions reached therein could be jeopardized. It is also possible that the U.S. Internal Revenue Service, or the IRS,
could determine that the distribution in the spin-off, together with certain related transactions, is taxable for U.S. federal
income tax purposes if it determines that any of these facts, assumptions, representations, statements or undertakings are incorrect
or have been violated or if it disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on
the IRS or any court and there can be no assurance that the IRS will not challenge the conclusions reached in the opinion. If the
distribution in the spin-off, together with certain related transactions, is ultimately determined to be taxable, we and our stockholders
that are subject to U.S. federal income tax could incur significant tax liabilities.
Risks Related to Regulatory Development,
Approval and other Legal Compliance
If we are not able to obtain, or if there
are delays in obtaining, required regulatory approvals, we will not be able to develop and then commercialize our product candidates
or will not be able to do so as soon as anticipated, and our ability to generate revenue will be materially impaired.
Our product candidates
and the activities associated with their development, applications for regulatory approval, and commercialization, including their
design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution,
are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by the EMA and similar
regulatory authorities outside the United States and Europe. Failure to obtain approval of clinical trial applications, CTAs, in
European Union countries may delay or prevent us from developing our drugs in one or more jurisdictions. Similarly, failure to
obtain marketing approval for a product candidate (NDA, BLA, or MAA) will prevent us from commercializing our product candidate.
While our executives have experience with the IND, NDA, BLA, CTA and MAA processes, we expect to rely on third parties to assist
us in this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting
information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy.
Securing development and later marketing approval also requires the submission of information about the product manufacturing process
to, and inspection of manufacturing facilities by, the regulatory authorities. Our product candidates may not be effective, may
be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that
may preclude our obtaining marketing approval or prevent or limit commercial use. For example, new drugs frequently are indicated
only for patient populations that have not responded to an existing therapy or have relapsed. If any of our product candidates
with such an indication receives marketing approval, the accompanying label may limit the approved use of our drug in this way,
which could limit sales of the product.
The process of obtaining
marketing approvals, both in the United States and abroad, is expensive and may take many years. If additional clinical trials
are required for certain jurisdictions, these trials can vary substantially based upon a variety of factors, including the type,
complexity and novelty of the product candidates involved, and may ultimately be unsuccessful. Changes in marketing approval policies
during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review
process for each submitted product application, may cause delays in the review and approval of an application. In addition, there
is still uncertainty with respect to the impact President Trump’s administration and the Congress may have, if any, and any
changes will likely take time to unfold. Any new laws or regulations that have the effect of imposing additional costs or regulatory
burden on pharmaceutical manufacturers, or otherwise negatively affect the industry, could adversely affect our ability to successfully
commercialize our products and product candidates. In addition, President Trump has indicated that reducing the price of prescription
drugs sold in the United States will be a priority of his administration. The implementation of any price controls or caps on prescription
drugs, whether at the federal, state level or via other relevant agencies, could adversely affect our business, operating results
and financial condition.
Regulatory authorities
have substantial discretion in the approval process and may reject a marketing application as deficient or may decide that our
data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations
of the data obtained from preclinical studies and clinical trials could delay, limit or prevent marketing approval of a product
candidate. Any marketing approval(s) we ultimately obtain may be limited or subject to restrictions or post-approval commitments
that render the approved product not commercially viable.
Although we have met with
the FDA regarding the development of bertilimumab, it is possible that the FDA may change its requirements or require us to conduct
additional preclinical studies and/or clinical trials that may delay the development and approval of this drug. Unfavorable data
from our clinical trials may restrict the potential development and commercialization of bertilimumab or lead to the termination
of its development.
Ceplene is approved by
the EMA and registered in over 30 countries in Europe and Israel. It also has Orphan Drug Designation in both the European Union
and United States for AML. The FDA however, refused to file the Ceplene NDA submission due to the lack of an Overall Survival primary
endpoint in the study and the lack of an IL-2 treatment alone control arm. Based on new biologic and clinical findings that have
been studied and analyzed since the last communication with the FDA, we are planning further formal discussions with the FDA regarding
a path forward for registration in the United States.
If we experience delays
in obtaining approval or if we fail to obtain approval of any of our product candidates, the commercial prospects for our product
candidates may be harmed and our ability to generate revenues will be materially impaired.
The results from completed preclinical
studies and early stage clinical trials may not be predictive of results in later stage trials and may not be predictive of the
likelihood of regulatory approval.
We and our partners (as
the case may be) discuss with, and obtain guidance from, regulatory authorities on clinical trial protocols. Over the course of
conducting clinical trials, circumstances may change, such as standards of safety, efficacy or medical practice, which could affect
regulatory authorities’ perception of the adequacy of any of our clinical trial designs or the data we develop from our clinical
trials. Clinical trial designs that were discussed with regulatory authorities prior to their commencement may subsequently be
considered insufficient for approval at the time of application for regulatory approval. Changes in circumstances could affect
our ability to conduct clinical trials as planned, including our ability to obtain current, timely and/or sufficient supplies of
the products being tested. Even with successful clinical safety and efficacy data, we may be required to conduct additional, expensive
trials to obtain regulatory approval. Any failure or significant delay in beginning new clinical trials or completing ongoing clinical
trials for our product candidates, or in receiving regulatory approval for the commercialization of our product candidates, may
severely harm our business and delay or prevent us from being able to generate revenue and our stock price will likely decline.
The results of our clinical trials are
uncertain, which could substantially delay or prevent us from bringing our product candidates to market.
Before we can obtain regulatory
approval for a product candidate, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to
the satisfaction of the FDA or other regulatory agencies. Clinical trials are very expensive and difficult to design and implement.
The clinical trial process is also time consuming. The commencement and completion of our clinical trials could be delayed or prevented
by several factors, including:
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delays in obtaining regulatory approvals to commence or continue a study;
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delays in reaching agreement on acceptable clinical trial parameters;
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slower than expected rates of patient recruitment and enrollment;
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inability to demonstrate effectiveness or statistically significant results in our clinical trials;
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unforeseen safety issues;
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uncertain dosing issues;
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inability to monitor patients adequately during or after treatment; and
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inability or unwillingness of medical investigators to follow our clinical protocols.
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We cannot assure you that
our planned clinical trials will begin or be completed on time or at all, or that they will not need to be restructured prior to
completion. Significant delays in clinical testing will impede our ability to commercialize our product candidates and generate
revenue from product sales and could materially increase our development costs. Completion of clinical trials may take several
years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product
candidate.
We rely on third parties over which we
have little or no control to conduct clinical trials for our product candidates and their failure to perform their obligations
in a timely or competent manner may delay development and commercialization of our product candidates.
The nature of clinical
trials and our business strategy requires us to rely on clinical research centers and other third parties to assist us with clinical
testing and certain research and development activities. As a result, our success is dependent upon the success of these third
parties in performing their responsibilities. We cannot directly control the adequacy and timeliness of the resources and expertise
applied to these activities by such third parties. If such contractors do not perform their activities in an adequate or timely
manner, the development and commercialization of our product candidates could be delayed. We may enter into agreements from time
to time with additional third parties for our other product candidates whereby these third parties undertake significant responsibility
for research, clinical trials or other aspects of obtaining FDA approval. As a result, we may face delays if these additional third
parties do not conduct clinical studies and trials, or prepare or file regulatory related documents, in a timely or competent fashion.
The conduct of the clinical studies by, and the regulatory strategies of, these additional third parties, over which we have limited
or no control, may delay or prevent regulatory approval of our product candidates, which would delay or limit our ability to generate
revenue from product sales.
We may not be able to successfully conduct
clinical trials due to various process-related factors which could negatively impact our business plans. The successful start
and completion of any of our clinical trials within time frames consistent with our business plans is dependent on regulatory authorities
and various factors, which include, but are not limited to, our ability to:
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recruit and retain employees, consultants or contractors with the required level of expertise;
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recruit and retain sufficient patients needed to conduct a clinical trial;
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enroll and retain participants, which is a function of many factors, including the size of the
relevant population, the proximity of participants to clinical sites, activities of patient advocacy groups, the eligibility criteria
for the trial, the existence of competing clinical trials, the availability of alternative or new treatments, side effects from
the therapy, lack of efficacy, personal issues and ease of participation;
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timely and effectively contract with (under reasonable terms), manage and work with investigators,
institutions, hospitals and the contract research organizations (“CROs”) involved in the clinical trial;
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negotiate contracts and other related documents with clinical trial parties and institutional review
boards, such as informed consents, CRO agreements and site agreements, which can be subject to extensive negotiations that could
cause significant delays in the clinical trial process, with terms possibly varying significantly among different trial sites and
CROs and possibly subjecting us to various risks;
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ensure adherence to trial designs and protocols agreed upon and approved by regulatory authorities
and applicable legal and regulatory guidelines;
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manage or resolve unforeseen adverse side effects during a clinical trial;
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conduct the clinical trials in a cost-effective manner, including managing foreign currency risk
in clinical trials conducted in foreign jurisdictions and cost increases due to unforeseen or unexpected complications such as
enrollment delays, or needing to outsource certain Company functions during the clinical trial; and
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execute clinical trial designs and protocols approved by regulatory authorities without deficiencies.
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If we are not able to manage
the clinical trial process successfully, our business plans could be delayed or be rendered unfeasible for us to execute within
our planned or required time frames, or at all
If we receive regulatory approval, our
marketed products will also be subject to ongoing FDA and/or foreign regulatory agency obligations and continued regulatory review,
and if we fail to comply with these regulations, we could lose approvals to market any products, and our business would be seriously
harmed.
Following initial regulatory
approval of any of our product candidates, we will be subject to continuing regulatory review, including review of adverse experiences
and clinical results that are reported after our products become commercially available. This would include results from any post-marketing
tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our
product candidates will also be subject to periodic review and inspection by the FDA or foreign regulatory agencies. If a previously
unknown problem or problems with a product, manufacturing or laboratory facility used by us is discovered, the FDA or foreign regulatory
agency may impose restrictions on that product or on the manufacturing facility, including requiring us to withdraw the product
from the market. Any changes to an approved product, including the way it is manufactured or promoted, often require FDA approval
before the product, as modified, can be marketed. Our manufacturers and we will be subject to ongoing FDA requirements for submission
of safety and other post-market information. If we or our manufacturers fail to comply with applicable regulatory requirements,
a regulatory agency may:
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impose civil or criminal penalties;
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suspend or withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements to approved applications;
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impose restrictions on operations;
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close the facilities of manufacturers; or
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seize or detain products or require a product recall.
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In addition, the policies
of the FDA or other applicable regulatory agencies may change and additional government regulations may be enacted that could prevent
or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature, or extent of adverse government
regulation that may arise from future legislation or administrative action, either in the United States or abroad.
Any regulatory approval we receive for
our product candidates will be limited to those indications and conditions for which we are able to show clinical safety and efficacy.
Any regulatory approval
that we may receive for our current or future product candidates will be limited to those diseases and indications for which such
product candidates are clinically demonstrated to be safe and effective. For example, in addition to the FDA approval required
for new formulations, any new indication to an approved product also requires FDA approval. If we are not able to obtain regulatory
approval for a broad range of indications for our product candidates, our ability to effectively market and sell our product candidates
may be greatly reduced and may harm our ability to generate revenue.
While physicians may choose
to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested in
clinical studies and approved by regulatory authorities, our regulatory approvals will be limited to those indications that are
specifically submitted to the regulatory agency for review. These “off-label” uses are common across medical specialties
and may constitute the best treatment for many patients in varied circumstances. Regulatory authorities in the United States generally
do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications
by pharmaceutical companies on the subject of off-label use. If our promotional activities fail to comply with these regulations
or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to follow
regulatory rules and guidelines relating to promotion and advertising may cause the regulatory agency to delay its approval or
refuse to approve a product, the suspension or withdrawal of an approved product from the market, recalls, fines, disgorgement
of money, operating restrictions, injunctions or criminal prosecutions, any of which could harm our business.
Our lead product candidate, bertilimumab,
is a biologic and may face an uncertain duration of market exclusivity.
With the enactment of the
Biologics Price Competition and Innovation Act of 2009 (“BPCIA”) as part of the Health Care Reform Law, an abbreviated
pathway for the approval of biosimilar and interchangeable biological products was created in the United States The new abbreviated
regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation
of a biosimilar as “interchangeable.” The FDA defines an interchangeable biosimilar as a product that, in terms of
safety or diminished efficacy, presents no greater risk when switching between the biosimilar and its reference product than the
risk of using the reference product alone. Under the BPCIA, an application for a biosimilar product cannot be submitted to the
FDA until four years, or approved by the FDA until 12 years, after the original brand product identified as the reference product
was approved under a BLA. The new law is complex and is only beginning to be interpreted by the FDA. As a result, its ultimate
impact, implementation and meaning are subject to uncertainty. While it is uncertain when any such processes may be fully adopted
by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.
We believe that if bertilimumab
or any of our other product candidates were to be approved as biological products under a BLA, such approved products should qualify
for the 12-year period of exclusivity. However, there is a risk that the United States Congress could amend the BPCIA to significantly
shorten this exclusivity period as proposed by President Obama, potentially creating the opportunity for generic competition sooner
than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products
in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a
number of marketplace and regulatory factors that are still developing.
Risks Related to Our Dependence on Third
Parties
Any collaborations that we enter into
could be important to our business. If we are unable to maintain any of these collaborations, or if these collaborations are not
successful, our business could be adversely affected.
We intend to enter into
collaborations with other biopharmaceutical companies to develop our product candidates and generate funding for our research programs.
Currently, we have no agreement with any commercial partner and we may never secure a commercial partner. These collaborations
may pose a number of risks, including:
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collaborators may have significant discretion in determining the efforts and resources that they
will apply to these collaborations;
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collaborators may not perform their obligations as expected;
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collaborators may not pursue development and commercialization of any product candidates that achieve
regulatory approval or may elect not to continue or renew development or commercialization programs based on clinical trial results,
changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, that divert
resources or create competing priorities;
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collaborators may delay clinical trials, provide insufficient funding for a clinical trial program,
stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product
candidate for clinical testing;
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collaborators could independently develop, or develop with third parties, products that compete
directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more
likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours, which
may cause collaborators to cease to devote resources to the commercialization of our product candidates;
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a collaborator with marketing and distribution rights to one or more of our product candidates
that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of such product or products;
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disagreements with collaborators, including disagreements over proprietary rights, contract interpretation
or the preferred course of development, might cause delays or termination of the research, development or commercialization of
product candidates, might lead to additional responsibilities for us with respect to product candidates, or might result in litigation
or arbitration, any of which would be time-consuming and expensive;
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collaborators may not properly maintain or defend our intellectual property rights or may use our
proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or
proprietary information or expose us to potential litigation;
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collaborators may infringe the intellectual property rights of third parties, which may expose
us to litigation and potential liability;
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collaborations may be terminated for the convenience of the collaborator and, if terminated, we
would potentially lose the right to pursue further development or commercialization of the applicable product candidates;
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collaborators may learn about our technology and use this knowledge to compete with us in the future;
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results of collaborators’ preclinical or clinical trials could produce results that harm
or impair other products using our technology;
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there may be conflicts between different collaborators that could negatively affect those collaborations
and potentially others; and
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the number and type of our collaborations could adversely affect our attractiveness to future collaborators
or acquirers.
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If any collaborations we
enter into do not result in the successful development and commercialization of our products or if one of our collaborators terminates
its agreement with us, we may not receive any future research and development funding or milestone or royalty payments under the
collaboration. If we do not receive the funding we expect under these agreements, our continued development of our product candidates
could be delayed and we may need additional resources to develop additional product candidates. All of the risks relating to our
product development, regulatory approval and commercialization also apply to the activities of our collaborators and there can
be no assurance that our collaborations will produce positive results or successful products on a timely basis or at all.
Additionally, subject to
its contractual obligations to us, if a collaborator of ours is involved in a business combination or otherwise changes its business
priorities, the collaborator might deemphasize or terminate the development or commercialization of any product candidate licensed
to it by us. If one of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators
and our perception in the business and financial communities and our stock price could be adversely affected.
We may in the future determine
to collaborate with additional pharmaceutical and biotechnology companies for development and potential commercialization of therapeutic
products. We face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for
collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms
and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If we are
unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may not be able to
access therapeutic payloads that would be suitable to development with our platform, have to curtail the development of a product
candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization
or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization
activities at our own expense. If we elect to fund and undertake development or commercialization activities on our own, we may
need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If
we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and commercialization
activities, we may not be able to further develop our product candidates or bring them to market or continue to develop our product
platform and our business may be materially and adversely affected.
We rely, and expect to continue to rely,
on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet
deadlines for the completion of such trials.
Currently, we rely on third-party
CROs to conduct our ongoing clinical trials and do not plan to independently conduct clinical trials of our other product candidates.
We expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical institutions and
clinical investigators, to conduct and manage our clinical trials. These agreements might terminate for a variety of reasons, including
a failure to perform by the third parties. If we need to enter into alternative arrangements, that would delay our product development
activities.
Our reliance on these third
parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibilities.
For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with regulatory standards, commonly referred
to as good clinical practices (“GCPs”), for conducting, recording and reporting the results of clinical trials to assure
that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants
are protected. Other countries’ regulatory agencies also have requirements for clinical trials with which we must comply.
We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored
database, ClinicalTrials.gov, within specified timeframes. Failure to do so can result in fines, adverse publicity and civil and
criminal sanctions. Furthermore, these third parties may also have relationships with other entities, some of which may be our
competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct
our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be
delayed in obtaining marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to,
successfully commercialize our product candidates.
We expect to rely on other
third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors
could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing
additional losses and depriving us of potential product revenue.
We contract with third parties for the
manufacture of our product candidates for preclinical and clinical testing and expect to continue to do so for the foreseeable
future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates
or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization
efforts.
We do not have any manufacturing
facilities that meet the FDA’s current cGMP requirements for the production of any product candidates used in humans. We
rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical and clinical
testing, as well as for the commercial manufacture if any of our product candidates once they receive marketing approval. This
reliance on third parties increases the risk that we may not have sufficient quantities of our product candidates on a timely basis
or at all or products or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development
or commercialization efforts.
We may be unable to establish
any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements with
third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
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failure of third-party manufacturers to comply with regulatory requirements and maintain quality
assurance;
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breach of the manufacturing agreement by the third party;
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failure to manufacture our product according to our specifications;
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failure to manufacture our product according to our schedule or at all;
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misappropriation of our proprietary information, including our trade secrets and know-how; and
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termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient
for us.
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Third-party manufacturers
may not be able to comply with cGMP regulations or similar regulatory requirements outside the United States Our failure, or the
failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us,
including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation,
seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly
and adversely affect supplies of our products.
Our product candidates
and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities.
There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for
us.
Any performance failure
on the part of our existing or future manufacturers could delay clinical development or marketing approval. We do not currently
have arrangements in place for redundant supply or a second source for required raw materials used in the manufacture of our product
candidates, including our lead product candidate bertilimumab. If our contract manufacturer cannot perform as agreed, we may be
required to replace such manufacturer and we may be unable to replace them on a timely basis or at all.
Our current and anticipated
future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profit
margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.
Risks Related to Our Intellectual Property
Our ability to protect our intellectual
property rights will be critically important to the success of our business, and we may not be able to protect or enforce these
rights in the United States or abroad.
We own or hold licenses
to a number of issued United States patents and United States pending patent applications, as well as foreign patents and patent
applications. Our success depends in part on our ability to obtain patent protection both in the United States and in other countries
for our product candidates, as well as the methods for treating patients in the product indications using these product candidates.
Our ability to protect our product candidates from unauthorized or infringing use by third parties depends in substantial part
on our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability,
validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our
ability to obtain, maintain and enforce patents is uncertain and involves complex legal and factual questions. Even if our product
candidates, as well as methods for treating patients for prescribed indications using these product candidates are covered by valid
and enforceable patents and have claims with sufficient scope, disclosure and support in the specification, the patents will provide
protection only for a limited amount of time. Accordingly, rights under any issued patents may not provide us with sufficient protection
for our product candidates or provide sufficient protection to afford us a commercial advantage against competitive products or
processes.
In addition, we cannot
guarantee that any patents issued from any pending or future patent applications owned by or licensed to us. Even if patents have
issued or will issue, we cannot guarantee that the claims of these patents are or will be valid or enforceable or will provide
us with any significant protection against competitive products or otherwise be commercially valuable to us. The laws of some foreign
jurisdictions do not protect intellectual property rights to the same extent as in the United States and many companies have encountered
significant difficulties in protecting and defending such rights in foreign jurisdictions. Furthermore, different countries have
different procedures for obtaining patents, and patents issued in different countries offer different degrees of protection against
use of the patented invention by others. If we encounter such difficulties in protecting or are otherwise precluded from effectively
protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.
The patent positions of
biotechnology companies, including our patent position, involve complex legal and factual questions, and, therefore, validity and
enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated, or circumvented.
Our patents can be challenged by our competitors who can argue that our patents are invalid, unenforceable, lack utility, or sufficient
written description or enablement, or that the claims of the issued patents should be limited or narrowly construed. Patents also
will not protect our product candidates if competitors devise ways of making or using these product candidates without legally
infringing our patents. The Federal Food, Drug, and Cosmetic Act and FDA regulations and policies create a regulatory environment
that encourages companies to challenge branded drug patents or to create non-infringing versions of a patented product in order
to facilitate the approval of abbreviated new drug applications for generic substitutes. These same types of incentives encourage
competitors to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor,
providing a less burdensome pathway to approval.
The degree of future protection
afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately
protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
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Others may be able to make compounds that are similar to our product candidates but that are not
covered by the claims of the patents that we own or have exclusively licensed.
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We or our licensors or strategic partners might not have been the first to make the inventions
covered by the issued patent or pending patent application that we own or have exclusively licensed.
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We or our licensors or strategic partners might not have been the first to file patent applications
covering certain of our inventions.
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Others may independently develop similar or alternative technologies or duplicate any of our technologies
without infringing on our intellectual property rights.
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It is possible that our pending patent applications will not lead to issued patents.
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Issued patents that we own or have exclusively licensed may not provide us with any competitive
advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.
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Our competitors might conduct research and development activities in countries where we do not
have patent rights and then use the information learned from such activities to develop competitive products for sale in our major
commercial markets.
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We may not develop additional proprietary technologies that are patentable.
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The patents of others may have an adverse effect on our business.
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Should any of these events
occur, they could significantly harm our business, results of operations and prospects.
We will be able to protect
our proprietary rights from unauthorized use by third parties only to the extent that our technologies, product candidates, and
any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets and we have the
funds to enforce our rights, if necessary.
The expiration of our owned
or licensed patents before completing the research and development of our product candidates and receiving all required approvals
in order to sell and distribute the products on a commercial scale can adversely affect our business and results of operations.
In addition, the laws of
certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States
If we fail to apply for intellectual property protection or if we cannot adequately protect our intellectual property rights in
these foreign countries, our competitors may be able to compete more effectively against us, which could adversely affect our competitive
position, as well as our business, financial condition and results of operations.
Filing, prosecuting and
defending patents on all of our product candidates throughout the world would be prohibitively expensive. Competitors may use our
technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export
otherwise infringing products to territories where we have patent protection, but where enforcement is not as strong as that in
the United States These products may compete with our products in jurisdictions where we do not have any issued patents and our
patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.
Litigation regarding patents, patent
applications and other proprietary rights may be expensive and time consuming. If we are involved in such litigation, it could
cause delays in bringing product candidates to market and harm our ability to operate.
Our success will depend
in part on our ability to operate without infringing the proprietary rights of third parties. The pharmaceutical industry is characterized
by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain patents in the future
and allege that the use of our technologies infringes these patent claims or that we are employing their proprietary technology
without authorization.
Litigation relating to
the ownership and use of intellectual property is expensive, and our position as a relatively small company in an industry dominated
by very large companies may cause us to be at a significant disadvantage in defending our intellectual property rights and in defending
against claims that our technology infringes or misappropriates third party intellectual property rights. However, we may seek
to use various post- grant administrative proceedings, including new procedures created under the America Invents Act, to invalidate
potentially overly-broad third-party rights. Even if we are able to defend our position, the cost of doing so may adversely affect
our ability to grow, generate revenue or become profitable. Although we have not yet experienced any patent litigation, we may
in the future be subject to such litigation and may not be able to protect our intellectual property at a reasonable cost, or at
all, if such litigation is initiated. The outcome of litigation is always uncertain, and in some cases could include judgments
against us that require us to pay damages, enjoin us from certain activities or otherwise affect our legal or contractual rights,
which could have a significant adverse effect on our business.
In addition, third parties
may challenge or infringe upon our existing or future patents. Proceedings involving our patents or patent applications or those
of others could result in adverse decisions regarding the patentability of our inventions relating to our product candidates and/or
the enforceability, validity or scope of protection offered by our patents relating to our product candidates.
Even if we are successful
in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which
could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required
to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly
and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we
do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have
infringed patents declared invalid, we may:
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incur substantial monetary damages;
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encounter significant delays in bringing our product candidates to market; and/or
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be precluded from participating in the manufacture, use or sale of our product candidates or methods
of treatment requiring licenses.
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Our commercial success
depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount
of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including
Patent Office administrative proceedings, such as inter-party reviews, and reexamination proceedings before the USPTO or oppositions
and revocations and other comparable proceedings in foreign jurisdictions. Numerous United States and foreign issued patents and
pending patent applications, which are owned by third parties, exist in the fields in which we are developing product candidates.
As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates
may give rise to claims of infringement of the patent rights of others.
Despite safe harbor provisions,
third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents,
of which we are currently unaware, with claims to materials, formulations, methods of doing research or library screening, methods
of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications
can take many years to issue, there may be published patent applications, which may later result in issued patents that our product
candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes
upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process
of any of our product candidates, any molecules formed during the manufacturing process or any final product itself, the holders
of any such patents may be able to block our ability to commercialize such product candidate unless we obtain a license under the
applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly,
if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture
or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block
our ability to develop and commercialize the applicable product candidate unless we obtain a license, limit our use, or until such
patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available
to us on commercially reasonable terms or at all.
Parties making claims against
us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize
one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation
expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement
against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement,
obtain one or more licenses from third parties, limit our use, pay royalties or redesign our infringing product candidates, which
may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available
at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may
need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We may
fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable
to further develop and commercialize one or more of our product candidates, which could harm our business significantly.
Many companies have encountered
significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain
countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection,
particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents
or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in
foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
Third-party claims of intellectual property
infringement may prevent or delay our drug discovery and development efforts.
Confidentiality agreements
with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may
not adequately protect our intellectual property, which could limit our ability to compete. Because we operate in a highly technical
field of research and development of small molecule drugs, we rely in part on trade secret protection in order to protect our proprietary
trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will
not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements
with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors, to protect our trade
secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to
third parties all confidential information developed by the party or made known to the party by us during the course of the party’s
relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by the party
in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may
not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade
secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the
United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection
could adversely affect our competitive position.
We license patent rights from third-party
owners. Such licenses may be subject to early termination if we fail to comply with our obligations in our licenses with third
parties, which could result in the loss of rights or technology that are material to our business.
We are a party to licenses
that give us rights to third-party intellectual property that is necessary or useful for our business, and we may enter into additional
licenses in the future. Under these license agreements we are obligated to pay the licensor fees, which may include annual license
fees, milestone payments, royalties, a percentage of revenues associated with the licensed technology and a percentage of sublicensing
revenue. In addition, under certain of such agreements, we are required to diligently pursue the development of products using
the licensed technology. If we fail to comply with these obligations and fail to cure our breach within a specified period of time,
the licensor may have the right to terminate the applicable license, in which event we could lose valuable rights and technology
that are material to our business. If the licensor retains control of prosecution of the patents and patent applications licensed
to us, we may have limited or no control over the manner in which the licensor chooses to prosecute or maintain its patents and
patent applications and have limited or no right to continue to prosecute any patents or patent applications that the licensor
elects to abandon. The loss of any such rights provided under our license agreements could materially harm our financial condition
and operating results.
We may be unable to adequately prevent
disclosure of trade secrets and other proprietary information.
We rely on trade secrets
to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However,
trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside
scientific collaborators, sponsored researchers, and other advisors to protect our trade secrets and other proprietary information.
These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the
event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets
and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our
proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
If we are unable to obtain licenses needed
for the development of our product candidates, or if we breach any of the agreements under which we license rights to patents or
other intellectual property from third parties, we could lose licensing rights that are important to our business.
If we are unable to maintain
and/or obtain licenses needed for the development of our product candidates in the future, we may have to develop alternatives
to avoid infringing on the patents of others, potentially causing increased costs and delays in drug development and introduction
or precluding the development, manufacture, or sale of planned products. Some of our licenses provide for limited periods of exclusivity
that require minimum license fees and payments and/or may be extended only with the consent of the licensor. We can provide no
assurance that we will be able to meet these minimum license fees in the future or that these third parties will grant extensions
on any or all such licenses. This same restriction may be contained in licenses obtained in the future.
Additionally, we can provide
no assurance that the patents underlying any licenses will be valid and enforceable. To the extent any products developed by us
are based on licensed technology, royalty payments on the licenses will reduce our gross profit from such product sales and may
render the sales of such products uneconomical. In addition, the loss of any current or future licenses or the exclusivity rights
provided therein could materially harm our business financial condition and our operations.
If any of our trade secrets, know-how
or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly
impaired and our business and competitive position would suffer.
Our success also depends
upon the skills, knowledge and experience of our scientific and technical personnel and our consultants and advisors, as well as
our licensors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to
obtain, we rely on trade secret protection and confidentiality agreements. Unlike some of our competitors, we maintain our proprietary
libraries for ourselves as we believe they have proven to be superior in obtaining strong binder product candidates. To this end,
we require all of our employees, consultants, advisors and contractors to enter into agreements, which prohibit the disclosure
of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries
and inventions important to our business. These agreements may not provide adequate protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such
information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets,
know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.
From time to time we may need to license
patents, intellectual property and proprietary technologies from third parties, which may be difficult or expensive to obtain.
We may need to obtain licenses
to patents and other proprietary rights held by third parties to successfully develop, manufacture and market our drug products.
As an example, it may be necessary to use a third party’s proprietary technology to reformulate one of our drug products
in order to improve upon the capabilities of the drug product. If we are unable to timely obtain these licenses on reasonable terms,
our ability to commercially exploit such drug products may be inhibited or prevented.
Risks Related to Our Business and Industry
We are heavily dependent on the success
of our technologies and product candidates, and we cannot give any assurance that any of our product candidates will receive regulatory
approval, which is necessary before they can be commercialized.
To date, we have invested
a significant portion of our efforts and financial resources in the acquisition and development of our product candidates. We have
not demonstrated our ability to perform the functions necessary for the successful acquisition, development or commercialization
of the technologies we are seeking to develop. As an early stage company, we have limited experience and have not yet demonstrated
an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly
evolving fields, particularly in the biopharmaceutical area. Our future success is substantially dependent on our ability to successfully
develop, obtain regulatory approval for, and then successfully commercialize such product candidates. Our product candidates are
currently in preclinical development or in clinical trials. Our business depends entirely on the successful development and commercialization
of our product candidates, which may never occur. We currently generate no revenues from the sale of any drugs, and we may never
be able to develop or commercialize a marketable drug.
The successful development,
and any commercialization, of our technologies and any product candidates would require us to successfully perform a variety of
functions, including:
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developing our technology platform;
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identifying, developing, manufacturing and commercializing product candidates;
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entering into successful licensing and other arrangements with product development partners;
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participating in regulatory approval processes;
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formulating and manufacturing products; and
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conducting sales and marketing activities.
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Our operations have been
limited to organizing our company, acquiring, developing and securing our proprietary technology and identifying and obtaining
early preclinical data or clinical data for various product candidates. These operations provide a limited basis for you to assess
our ability to continue to develop our technology, identify product candidates, develop and commercialize any product candidates
we are able to identify and enter into successful collaborative arrangements with other companies, as well as for you to assess
the advisability of investing in our securities. Each of these requirements will require substantial time, effort and financial
resources.
Each of our product candidates
will require additional preclinical or clinical development, management of preclinical, clinical and manufacturing activities,
regulatory approval in multiple jurisdictions, obtaining manufacturing supply, building of a commercial organization, and significant
marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote any of our product
candidates before we receive regulatory approval from the FDA, or comparable foreign regulatory authorities, and we may never receive
such regulatory approval for any of our product candidates. In addition, our product development programs contemplate the development
of companion diagnostics by our third-party collaborators. Companion diagnostics are subject to regulation as medical devices and
must themselves be cleared or approved for marketing by the FDA or certain other foreign regulatory agencies before we may commercialize
our product candidates.
Clinical drug development involves a lengthy and expensive
process with an uncertain outcome, and results of earlier studies and 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 results of later-stage clinical trials. 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. It is not uncommon
for companies in the biopharmaceutical industry to suffer significant setbacks in advanced clinical trials due to lack of efficacy
or adverse safety profiles, notwithstanding promising results in earlier trials. Our future clinical trial results may not be successful.
Product candidate development
risk is heightened by any changes in the planned clinical trials compared to the completed clinical trials. As product candidates
are developed through preclinical to early and late stage clinical trials towards approval and commercialization, it is customary
that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way
in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product
candidates for late stage clinical trials, approval and commercialization, such changes do carry the risk that they will not achieve
these intended objectives.
We have not previously
initiated or completed a corporate-sponsored clinical trial. Consequently, we may not have the necessary capabilities, including
adequate staffing, to successfully manage the execution and completion of any clinical trials we initiate, in a way that leads
to our obtaining marketing approval for our product candidates in a timely manner, or at all.
In the event we are able
to conduct a pivotal clinical trial of a product candidate, the results of such trial may not be adequate to support marketing
approval. Because our product candidates are intended for use in life- threatening diseases, in some cases we ultimately intend
to seek marketing approval for each product candidate based on the results of a single pivotal clinical trial. As a result, these
trials may receive enhanced scrutiny from the FDA. For any such pivotal trial, if the FDA disagrees with our choice of primary
endpoint or the results for the primary endpoint are not robust or significant relative to control, are subject to confounding
factors, or are not adequately supported by other study endpoints, including possibly overall survival or complete response rate,
the FDA may refuse to approve a BLA or an NDA based on such pivotal trial. The FDA may require additional clinical trials as a
condition for approving our product candidates.
Delays in clinical testing could result
in increased costs to us and delay our ability to generate revenue.
Although we are planning
for certain clinical trials relating to bertilimumab, we may experience delays in our clinical trials and we do not know whether
planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all.
Clinical trials can be delayed for a variety of reasons, including delays related to:
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reaching agreement on acceptable terms with prospective CROs, and clinical trial sites, the terms
of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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obtaining IRB, approval at each site;
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recruiting suitable patients to participate in a trial;
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clinical sites deviating from trial protocol or dropping out of a trial;
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having patients complete a trial or return for post-treatment follow-up;
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developing and validating companion diagnostics on a timely basis, if required;
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adding new clinical trial sites;
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manufacturing sufficient quantities of product candidate for use in clinical trials; or
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Patient enrollment, a significant factor in the timing of clinical trials, is affected by many
factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria
for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions
as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that
may be approved for the indications we are investigating.
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Furthermore, we intend
to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and we intend to have agreements
governing their committed activities, for which we will have limited influence over their actual performance. We could encounter
delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted,
by the Data Safety Monitoring Board (“DSMB”), for such trial or by the FDA or other regulatory authorities. Such authorities
may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance
with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or
other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects,
failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate
funding to continue the clinical trial. If we 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. 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 our business, financial condition and prospects significantly. In addition,
many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead
to the denial of regulatory approval of our product candidates.
Competition for patients in conducting
clinical trials may prevent or delay product development and strain our limited financial resources.
Many pharmaceutical companies
are conducting clinical trials in patients with the disease indications that our potential drug products target. As a result, we
must compete with them for clinical sites, physicians and the limited number of patients who fulfill the stringent requirements
for participation in clinical trials. Also, due to the confidential nature of clinical trials, we do not know how many of the eligible
patients may be enrolled in competing studies and who are consequently not available to us for our clinical trials. Our clinical
trials may be delayed or terminated due to the inability to enroll enough patients. Patient enrollment depends on many factors,
including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and
the eligibility criteria for the study. The delay or inability to meet planned patient enrollment may result in increased costs
and delays or termination of the trial, which could have a harmful effect on our ability to develop products.
The regulatory review and approval processes
of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately
unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
The time required to obtain
approval from the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement
of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition,
review and approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during
the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory
approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we
may seek to develop in the future will ever obtain regulatory approval.
Our product candidates could fail to receive
regulatory approval for many reasons, including the following:
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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation
of our clinical trials;
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we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory
authorities that a product candidate is safe and effective for its proposed indication;
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the results of clinical trials may not meet the level of statistical significance required by the
FDA or comparable foreign regulatory authorities for approval;
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the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data
from preclinical studies or clinical trials;
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the data collected from clinical trials of our product candidates may not be sufficient to support
the submission of an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;
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the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes
or facilities of third-party manufacturers with which we contract for clinical and commercial supplies;
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the FDA or comparable foreign regulatory authorities may fail to approve the companion diagnostics
we contemplate developing with partners; and
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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may
significantly change in a manner rendering our clinical data insufficient for approval. This lengthy approval process as well as
the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product
candidates, which would significantly harm our business, results of operations and prospects.
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In addition, even if we
were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications
than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance
of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims
necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially
harm the commercial prospects for our product candidates.
Other than with respect
to Ceplene, we have not previously submitted a BLA or an NDA to the FDA or similar drug approval filings to comparable foreign
authorities for any product candidate, and we cannot be certain that any of our product candidates will be successful in clinical
trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful
in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.
Even if we successfully obtain regulatory approvals to market one or more of our product candidates, our revenues will be dependent,
in part, upon our collaborators’ ability to obtain regulatory approval of the companion diagnostics to be used with our product
candidates, as well as the size of the markets in the territories for which we gain regulatory approval and have commercial rights.
If the markets for patients that we are targeting for our product candidates are not as significant as we estimate, we may not
generate significant revenues from sales of such products, if approved.
We plan to seek regulatory
approval to commercialize our product candidates both in the United States, the European Union and in additional foreign countries.
While the scope of regulatory approval is similar in other countries, to obtain separate regulatory approval in many other countries
we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy and governing,
among other things, clinical trials and commercial sales, pricing and distribution of our product candidates, and we cannot predict
success in these jurisdictions.
Healthcare reform measures could hinder or prevent our product
candidates’ commercial success.
In both the United States
and certain foreign jurisdictions, there have been and we expect there will continue to be a number of legislative and regulatory
changes to the health care system that could impact our ability to sell our products profitably. The U.S. government and other
governments have shown significant interest in pursuing healthcare reform. In particular, the Medicare Modernization Act of 2003
revised the payment methodology for many products under the Medicare program in the United States. This has resulted in lower rates
of reimbursement. In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation
Act, collectively the Affordable Care Act (“PPACA”), was enacted. The PPACA substantially changes the way healthcare
is financed by both governmental and private insurers. Further, The Tax Cuts and Jobs Act of 2017 repealed the requirement that
individuals maintain health insurance coverage or face a penalty (known as the “individual mandate”). The removal of
this provision, coupled with the threat of the repeal of other PPACA provisions, may increase instability of the insurance marketplace
and may have consequences for the coverage and accessibility of prescription drugs. President Trump and HHS Secretary Azar have
announced support for regulatory provisions that would limit the PPACA and number of healthcare reform programs initiated under
the Obama administration. Such government-adopted reform measures may adversely impact the pricing of healthcare products and services
in the U.S. or internationally and the amount of reimbursement available from governmental agencies or other third-party payors.
Legislative changes to
or regulatory changes under the ACA remain possible under the current administration. The American Health Care Act of 2017 (“AHCA”),
which would repeal and replace key portions of the ACA, was passed by the U.S. House of Representatives but ultimately was not
passed by the U.S. Senate. In addition, in January 2017, President Trump signed an Executive Order directing federal agencies with
authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision
of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers
of pharmaceuticals or medical devices. More recently, the Senate Republicans introduced and then updated a bill to replace the
ACA known as the Better Care Reconciliation Act of 2017. The Senate Republicans also introduced legislation to repeal the ACA without
companion legislation to replace it, and a "skinny" version of the Better Care Reconciliation Act of 2017. Each of these
measures was rejected by the full Senate. In December 2017, tax reform legislation was signed into law that eliminates the individual
insurance mandate provisions of the ACA. Congress will likely consider other legislation to replace elements of the ACA. We expect
that the ACA, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted
in the future could have a material adverse effect on our industry generally and on our ability to successfully commercialize our
products.
We expect that the ACA,
as well as other healthcare reform measures that have and may be adopted in the future, may result in more rigorous coverage criteria
and in additional downward pressure on the price that we receive for products and could seriously harm our future revenues. Any
reduction in reimbursement from Medicare, Medicaid, or other government programs may result in a similar reduction in payments
from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able
to generate revenue, attain profitability or commercialize our products.
There have been, and likely
will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability
of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future.
The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services
to contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we may obtain regulatory
approval, as well as our ability to set satisfactory prices for our products, to generate revenues, and to achieve and maintain
profitability.
In addition, President
Trump has indicated that reducing the price of prescription drugs will be a priority of his administration. The implementation
of any price controls or caps on prescription drugs, whether at the federal level or state level, could adversely affect our business,
operating results and financial condition.
The effect of comprehensive U.S. tax
reform legislation on us, whether adverse or favorable, is uncertain at this time.
On December 22, 2017, President
Trump signed into law H.R. 1, "An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution
on the budget for fiscal year 2018" (informally titled the "Tax Cuts and Jobs Act"). Among a number of significant
changes to the U.S. federal income tax rules, the Tax Cuts and Jobs Act (the "Act") reduces the marginal U.S. corporate
income tax rate from 35% to 21%, limits the deduction for net interest expense, limits the deduction for net operating losses and
eliminates net operating loss carrybacks, modifies or repeals many business deductions and credits, shifts the United States toward
a more territorial tax system, and imposes new taxes to combat erosion of the U.S. federal income tax base. Our net deferred tax
assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in our tax
expense in the year of enactment. We continue to examine the impact this tax reform legislation may have on our business. However,
the effect of the Tax Cuts and Jobs Act on us and our affiliates, whether adverse or favorable, is uncertain, and may not become
evident for some period of time.
We may expand our business through the
acquisition of companies or businesses or by entering into collaborations or in-licensing product candidates that could disrupt
our business and harm our financial condition.
We may in the future seek
to expand our pipeline and capabilities by acquiring one or more companies or businesses, entering into collaborations or in-licensing
one or more product candidates. Acquisitions, collaborations and in-licenses involve numerous risks, including:
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potentially dilutive issuance of equity securities;
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substantial cash expenditures;
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incurrence of debt and contingent liabilities, some of which may be difficult or impossible to
identify at the time of acquisition;
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difficulties in assimilating the operations and technology of the acquired companies;
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potential disputes regarding contingent consideration;
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the assumption of unknown liabilities of the acquired businesses;
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diverting our management’s attention away from other business concerns;
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entering markets in which we have limited or no direct experience; and
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potential loss of our key employees or key employees of the acquired companies or businesses.
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Our experience in making
acquisitions, entering collaborations and in-licensing product candidates is limited. We cannot assure you that any acquisition,
collaboration or in-license will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth
of an acquired company or business or in-licensed product candidate. In addition, our future success would depend in part on our
ability to manage the rapid growth associated with some of these acquisitions, collaborations and in-licenses. We cannot assure
you that we would be able to successfully combine our business with that of acquired businesses, manage a collaboration or integrate
in-licensed product candidates or that such efforts would be successful. Furthermore, the development or expansion of our business
or any acquired business or company or any collaboration or in-licensed product candidate may require a substantial capital investment
by us. We may use our securities as payment for all or a portion of the purchase price or acquisitions. If we issue significant
amounts of our equity securities for such acquisitions, this would result in substantial dilution of the equity interests of our
stockholders.
Risks Related to the Commercialization of
Our Product Candidates
Even if any of our product candidates
(other than Ceplene) receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients,
third-party payors and others in the medical community necessary for commercial success.
Other than Ceplene, which
has been approved for sale in the European Union, if any of our product candidates receives marketing approval, it may nonetheless
fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For
example, current cancer treatments like chemotherapy and radiation therapy are well established in the medical community, and physicians
may continue to rely on these treatments. In addition, many new drugs have been recently approved and many more are in the pipeline
for the same diseases for which we are developing our product candidates. If our product candidates do not achieve an adequate
level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance
of our product candidates, if approved for commercial sale, will depend on a number of factors, including:
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efficacy, safety and other potential advantages compared to alternative treatments;
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ability to offer products for sale at competitive prices;
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convenience and ease of administration compared to alternative treatments;
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willingness of the target patient population to try new therapies and of physicians to prescribe
these therapies;
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strength of marketing and distribution support;
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availability of third-party coverage and adequate reimbursement for our product candidates;
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prevalence and severity of their side effects;
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any restrictions on the use of our products together with other medications;
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interactions of our products with other medicines patients are taking; and
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inability of certain types of patients to take the product.
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If we are unable to establish effective
sales, marketing and distribution capabilities or enter into agreements with third parties with such capabilities, we may not be
successful in commercializing our product candidates if and when they are approved.
We do not have a sales
or marketing infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve
commercial success for any product for which we obtain marketing approval, we will need to establish a sales and marketing organization
or make arrangements with third parties to perform sales and marketing functions.
In the future, we expect
to build a focused specialty sales and marketing infrastructure to market or co-promote some of our product candidates in the United
States and potentially elsewhere, if and when they are approved. There are risks involved with establishing our own sales, marketing
and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming and could delay
any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing
capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization
expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors that may inhibit
our efforts to commercialize our products on our own include:
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our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
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the inability of sales personnel to obtain access to or educate physicians on the benefits of our
products;
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the lack of complementary products to be offered by sales personnel, which may put us at a competitive
disadvantage relative to companies with more extensive product lines;
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·
|
unforeseen costs and expenses associated with creating an independent sales and marketing organization;
and
|
|
·
|
inability to obtain sufficient coverage and reimbursement from third-party payors and governmental
agencies.
|
Outside the United States,
we expect to rely on third parties to sell, market and distribute our product candidates. We may not be successful in entering
into arrangements with such third parties or may be unable to do so on terms that are favorable to us. In addition, our product
revenues and our profitability, if any, may be lower if we rely on third parties for these functions than if we were to market,
sell and distribute any products that we develop ourselves. We likely will have little control over such third parties, and any
of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish
sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will
not be successful in commercializing our product candidates.
We face substantial competition, which
may result in others discovering, developing or commercializing competing products before or more successfully than we do.
The development and commercialization
of new drug products is highly competitive. We face competition with respect to our current product candidates and will face competition
with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies,
specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology
companies that currently market and sell products or are pursuing the development of products for the treatment of the disease
indications for which we are developing our product candidates. Some of these competitive products and therapies are based on scientific
approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors
also include academic institutions, government agencies and other public and private research organizations that conduct research,
seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.
Many of the companies against
which we are competing or against which we may compete in the future have significantly greater financial resources, established
presence in the market and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology
industries may result in even more resources being concentrated among a smaller number of our competitors.
Smaller and other early
stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established
companies. These third parties compete with us in recruiting and retaining qualified scientific, sales and marketing and management
personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies
complementary to, or necessary for, our programs.
Our commercial opportunity
could be reduced or eliminated if our competitors develop and commercialize products that are more effective, have fewer or less
severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may
obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result
in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete
may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products. Major competing
products to our lead drug, bertilimumab, such as Remicade and Humira are expected to become available on a generic basis over the
coming years. If our product candidates achieve marketing approval, we expect that they will be priced at a significant premium
over competitive generic products. Multiple other new drugs will be launched prior to bertilimumab in its various target indications
but may limit its potential market acceptance. NanomAbs are competing with other ligand nanoparticle conjugates developed by well-funded
companies such as BIND Therapeutics and Merrimack. They are also competing with other types of Bio-Conjugates including antibody
drug conjugates developed by Seattle Genetics and Immunogen. Insufficient funding or inability to secure timely corporate partnerships
will prevent us from successfully developing the commercial opportunity with NanomAbs.
Even if we are able to commercialize
any product candidates (other than Ceplene), the products may become subject to unfavorable pricing regulations, third-party reimbursement
practices or healthcare reform initiatives, which would harm our business.
The regulations that govern
marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and
future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays
in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries,
the pricing review period begins after marketing or product-licensing approval is granted. In some foreign markets, prescription
pharmaceutical pricing remains subject to continuing governmental control, including possible price reductions, even after initial
approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject
to price regulations that delay our commercial launch of the product, possibly for lengthy period of time, and negatively impact
the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability
to recoup our investment in one or more product candidates, even if our product candidates obtain marketing approval.
Our ability to commercialize
any product candidates successfully also will depend in part on the extent to which coverage and reimbursement for these products
and related treatments will be available from government health administration authorities, private health insurers and other organizations.
Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which
medications they will pay for and establish reimbursement levels. A primary trend in the United States healthcare industry and
elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage
and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies
provide them with predetermined discounts from list prices and are challenging the prices charged for drugs. Coverage and reimbursement
may not be available for any product that we commercialize and, even if these are available, the level of reimbursement may not
be sufficient to generate a profit. Reimbursement may affect the demand for, or the price of, any product candidate for which we
obtain marketing approval. Obtaining and maintaining adequate reimbursement for our products may be difficult. We may be required
to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement relative to other
therapies. If coverage and reimbursement are not available or reimbursement is available only to limited levels, we may not be
able to successfully commercialize any product candidate for which we obtain marketing approval.
There may be significant
delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug
is approved for by the FDA or similar regulatory authorities outside the United States Moreover, eligibility for reimbursement
does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture,
sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs
and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which
it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments
for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs
or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be
sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations
in setting their own reimbursement policies. Our inability to promptly obtain coverage and adequate reimbursement rates from both
government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating
results, our ability to raise capital needed to commercialize products and our overall financial condition.
Product liability lawsuits against us
could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk
of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater
risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our
product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome,
liability claims may result in:
|
·
|
decreased demand for any product candidates or products that we may develop;
|
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·
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injury to our reputation and significant negative media attention;
|
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·
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withdrawal of clinical trial participants;
|
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·
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significant costs to defend the related litigation;
|
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·
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substantial monetary awards to trial participants or patients;
|
|
·
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reduced resources of our management to pursue our business strategy; and
|
|
·
|
the inability to commercialize any products that we may develop.
|
We currently hold $5.0
million in clinical trial liability insurance coverage in the aggregate and per incident, which may not be adequate to cover all
liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials or if we commence
commercialization of our product candidates. Insurance coverage is increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.
Risks Related to Employee Matters and Managing
Growth and Other Risks Related to Our Business
Our future success depends on our ability
to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent
on the principal members of our management, scientific and clinical team. Although we have entered into employment letter agreements
with our executive officers, each of them may terminate their employment with us at any time. We do not maintain “key person”
insurance for any of our executives or other employees.
Recruiting and retaining
qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. The loss
of the services of our executive officers or other key employees could impede the achievement of our research, development and
commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing
executive officers and key employees may be difficult and may take an extended period of time because of the limited number of
individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval
of and commercialize products. We do not carry any “key man” insurance that would provide us with proceeds in the event
of the death or disability of any key members of senior management, our investment team, or senior marketing personnel. Competition
to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable
terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience
competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely
on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development
and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments
under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue
to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
A variety of risks associated with operating
internationally could materially adversely affect our business.
In addition to our United
States operations, we have operations in Israel through our wholly-owned subsidiary, Immune Pharmaceuticals Ltd. We face risks
associated with our operations in Israel, including possible unfavorable regulatory, pricing and reimbursement, legal, political,
tax and labor conditions, which could harm our business. We are also conducting and in the future plan to continue to conduct clinical
trials of product candidates in Israel. We are subject to numerous risks associated with international business activities in Israel
and elsewhere, including:
|
·
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compliance with differing or unexpected regulatory requirements for our products;
|
|
·
|
compliance with Israeli laws with respect to our wholly owned subsidiary, Immune Ltd.;
|
|
·
|
difficulties in staffing and managing foreign operations;
|
|
·
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foreign government taxes, regulations and permit requirements;
|
|
·
|
United States and foreign government tariffs, trade restrictions, price and exchange controls and
other regulatory requirements;
|
|
·
|
economic weakness, including inflation, natural disasters, war, events of terrorism or political
instability in particular foreign countries;
|
|
·
|
fluctuations in currency exchange rates, which could result in increased operating expenses and
reduced revenues;
|
|
·
|
compliance with tax, employment, immigration and labor laws, regulations and restrictions for employees
living or traveling abroad;
|
|
·
|
changes in diplomatic and trade relationships; and
|
|
·
|
challenges in enforcing our contractual and intellectual property rights, especially in those foreign
countries that do not respect and protect intellectual property rights to the same extent as the United States.
|
These and other risks associated
with our international operations in Israel and elsewhere may materially adversely affect our business, financial condition and
results of operations.
Our business and operations would suffer
in the event of system failures.
Despite the implementation
of security measures, our internal computer systems and those of our current and future contractors and consultants are vulnerable
to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures.
While we are not aware of any such material system failure, accident or security breach to date, if such an event were to occur
and cause interruptions in our operations, it could result in a material disruption of our development programs and our business
operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our
regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties
to manufacture our product candidates and conduct clinical trials, and similar events relating to their computer systems could
also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss
of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur
liability and the further development and commercialization of our product candidates could be delayed.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In February 2015, we signed
a lease agreement with ARE-EAST RMR Science Park, LLC, New York, NY, for corporate headquarters space at the Alexandria Center
in New York City. In August 2015, we signed an amendment to the Alexandria Center lease agreement for an additional 1,674 square
feet to be used for lab space and additional offices. Effective May 1, 2017, we terminated the lease agreement with ARE-EAST RMR
Science Park, LLC, and forfeited a security deposit in the amount of $177,000 and relocated our headquarters to 550 Sylvan Avenue,
Englewood Cliffs, NJ 07632 under a lease agreement with 550 Sylvan Avenue, LLC. Lease expense is approximately $2,950 per month.
The lease may be terminated upon two months’ written notice to the landlord.
On February 26, 2018, we
entered into a six-year lease agreement with Bridge Plaza Realty Associates L.L.C. for approximately 3,000 square feet of office
space at One Bridge Plaza, Fort Lee, New Jersey, to commence on April 1, 2018 at a fixed basic rent of approximately $9,000 per
month. Also, on that date, we provided written notice to the landlord of 550 Sylvan Avenue, LLC of our intention to vacate those
premises.
Our oncology subsidiary,
Cytovia, Inc., occupies shared office space on a month to month basis at 12 E 49th Street, New York, NY 10017. Immune Ltd. occupies
shared office space on a month to month basis in offices in Tel-Aviv and Jerusalem, Israel
We recorded rent expense
of $0.1 million and $0.6 million for the years ended December 31, 2017 and 2016, respectively.
ITEM 3. LEGAL PROCEEDINGS
Immune Pharmaceuticals
Inc. was the defendant in litigation involving a dispute with the plaintiffs Kenton L. Cowley and John A. Flores. The complaint
alleges breach of contract, breach of covenant of good faith and fair dealing, fraud and rescission of contract with respect to
the development of a topical cream containing ketamine and butamben, known as EpiCept NP-2. A summary judgment in Immune’s
favor was granted in January 2012 and the plaintiffs filed an appeal in the United States Court of Appeals for the Ninth Circuit
in September 2012. A hearing on the motion occurred in November 2013. In May 2014, the court scheduled the trial in November 2014
and a mandatory settlement conference in July 2014. In July 2014, the parties failed to reach a settlement at the mandatory settlement
conference. The case was tried by a jury, which rendered a decision on March 23, 2015, in favor of us on all causes of action.
In April 2015, the plaintiffs
filed a motion for a new trial, which was heard by the Court on June 8, 2015. In October 2015, the court denied the plaintiff’s
motion for a new trial. On October 9, 2015, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the
Ninth Circuit. On February 13, 2018, the Appellate Court affirmed the district court’s judgment in our favor.
During the years ended
December 31, 2017 and 2016, in connection with this litigation matter, we incurred legal costs of approximately $0.1 million and
$0.1 million, respectively.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1. Business Description
Immune Pharmaceuticals
Inc., together with its subsidiaries (collectively, “Immune” or the “Company”, or “us”, “we”,
“our”) is a clinical stage biopharmaceutical company specializing in the development of novel targeted therapeutic
agents in the fields of immuno-inflammation, dermatology and oncology.
Our lead product candidate
is bertilimumab, a first-in-class, fully human antibody, currently in phase 2 clinical trials. Bertilimumab targets eotaxin-1,
a key regulator of inflammation. Also, we are developing a topical nano-encapsulated formulation of cyclosporine-A, which we refer
to as “NanoCyclo”, for the treatment of atopic dermatitis (“AD”) and psoriasis, and a nano-encapsulated
formulation of AmiKet, a topical analgesic cream containing amitriptyline and ketamine, which we refer to as “AmiKet Nano”,
for the treatment of postherpetic neuralgia (“PHN”) and diabetic peripheral neuropathy (“DPN”).
Our oncology portfolio
includes Ceplene, which is approved in the European Union for the maintenance of remission in patients with Acute Myeloid Leukemia
(“AML”) and Azixa and crolibulin, two clinical-stage, vascular disrupting agents (“VDA”) which have demonstrated
encouraging preliminary proof of concept study results. In addition, we have two oncology platform assets, consisting of a bispecific
antibody platform and a nanotechnology combination platform, which we refer to as “NanomAbs”.
In April 2017, we
announced a corporate restructuring with the objective of prioritizing and segregating our research and development efforts
and strengthening our financial position. In addition, we announced our plan to pursue a spin-off of Cytovia Inc., our
oncology focused subsidiary (“Cytovia”), into a separate, stand-alone company. Cytovia will focus on the
development and commercialization of novel oncology and hematology therapeutics, including Ceplene, Azixa, crolibulin,
NanomAbs and our bispecific antibody platform.
As of December 31,
2017, we did not have any self-developed or licensed products approved for sale by the United States Food and Drug Administration
(“FDA”). There can be no assurance that our research and development efforts will be successful, that any of our products
will obtain necessary United States or foreign government regulatory approval or that any approved products will be commercially
viable.
Our common stock is
listed on the Nasdaq Capital Market (“NASDAQ”) under the symbol IMNP. On April 12, 2017, we announced a reverse stock
split of our shares of common stock at a ratio of 1-for-20. Our common stock began trading on a post-split basis on NASDAQ beginning
with the opening of trading on April 13, 2017. Our shareholders ratified the effectiveness of the April 2017 reverse stock split
at our Annual Meeting of Stockholders, held and adjourned on February 15, 2018, and reconvened on February 23, 2018. All share
and per share amounts in this Form 10-K have been reflected on a post-split basis.
Note 2. Going Concern
These consolidated
financial statements are presented on the basis that we will continue as a going concern. The going concern concept
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our ability to continue
as a going concern despite insufficient available cash as of the date of this filing to fund the anticipated level of operations
for at least the next 12 months from the issuance of this report is dependent on our ability to raise capital and monetize assets
through the sale or licensing of drug candidates under development.
We have limited capital
resources and our operations have been funded by the proceeds of equity and debt offerings. We have devoted substantially all of
our cash resources to research and development (“R&D”) programs and have incurred significant general and administrative
expenses to enable us to finance and grow our business and operations. We have not generated any significant revenue to date, and
may not generate any revenue for a number of years, if at all. If we are unable to raise additional funds in the future on acceptable
terms, or at all, we may be forced to curtail our drug development activities or cease operations.
We have generated losses
from operations since inception and we anticipate that we will continue to generate significant losses from operations for the
foreseeable future. We had negative working capital of approximately $2.2 million and an accumulated deficit of $113.5 million
as of December 31, 2017. Our net loss was $17.9 million and $32.7 million for the fiscal years ended December 31, 2017 and 2016,
respectively. Cash used in operations was $11.6 and $12.3 million for the years ended December 31, 2017 and 2016, respectively.
We had approximately $6.8 million in cash as of December 31, 2017.
We will require additional
financing in fiscal 2018 to continue at our expected level of operations. We may be forced to delay, scale back, sell or out-license
or eliminate some or all of our R&D programs if we fail to obtain the needed capital on a timely basis. There is no assurance
that we will be successful in any capital-raising efforts that we may undertake to fund operations during 2018. We anticipate continuing
to issue equity and/or debt securities as a source of liquidity, until we begin to generate positive cash flow to support our operations.
Any future sales of securities to finance operations will dilute existing stockholders' ownership. We cannot guarantee when or
if we will generate positive cash flow.
The forgoing factors,
among others, raise substantial doubt about our ability to continue as a going concern.
Note 3. Summary of Significant
Accounting Policies
Basis of Presentation and Principles
of Consolidation
The accompanying consolidated
financial statements include the accounts of Immune and its subsidiaries: Immune Pharmaceuticals Ltd. (“Immune Ltd.”),
Immune Pharmaceuticals USA Corp., Maxim Pharmaceuticals, Inc., Cytovia, Inc. and Immune Oncology Pharmaceuticals Inc. All material
inter-company transactions and balances have been eliminated in consolidation.
The accompanying consolidated
financial statements were prepared in accordance with accounting principles generally accepted in the United States of America
(“United States GAAP”) and instructions to Form 10-K.
Use of Estimates
In preparing consolidated
financial statements in conformity with United States GAAP, management is required 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 and expenses during the reported periods. Significant estimates include impairment of long lived assets (including intangible
assets and In-Process R&D (“IPR&D”), amortization period of intangible assets, fair value of stock based compensation,
fair value of warrants and derivative liabilities, and valuation of deferred tax assets and liabilities. Actual results could differ
from those estimates.
Cash and Cash Equivalents
We consider investments
with original maturities of three months or less to be cash equivalents. Restricted cash primarily represents cash not available
to us for immediate and general use. We maintain cash accounts with certain major financial institutions in the United States and
Israel. Our cash on deposit may exceed United States federally insured limits at certain times during the year.
Intangible Assets
We account for the
purchases of intangible assets in accordance with the provisions of
Accounting Standards Classification (“ASC”)
350, Intangibles.
We recognize intangible assets based on their acquisition cost. Intangible assets determined to have indefinite
lives are not amortized, but rather tested for impairment at least annually or more frequently if events or changes in circumstances
indicate that the carrying amount may no longer be recoverable. If any of our intangible assets are considered to be impaired,
the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value. Intangible assets
with definitive lives are reviewed for impairment only if indicators exist in accordance with
ASC 360, Property, Plant and Equipment
,
and are amortized or depreciated over the shorter of their estimated useful lives or the statutory or contractual term, and in
the case of patents, on a straight-line basis.
We perform an analysis
annually to determine whether an impairment of intangible assets has occurred. In particular, we evaluated the AmiKet IPR&D
as of December 31, 2017 and 2016 for impairment. We determined that it is more likely than not that the AmiKet IPR&D was impaired
as of December 31, 2016. There was no impairment as of December 31, 2017. See In-Process Research and Development below for a further
discussion regarding the valuation of the AmiKet IPR&D.
Property and Equipment
Property and equipment
are carried at cost, less accumulated depreciation. Depreciation is recognized using the straight-line method over the useful live
of the related asset. Expenditures for maintenance and repairs that do not improve or extend the expected useful life of the assets
are expensed to operations while major repairs are capitalized.
|
|
|
Method
|
|
|
Estimated Useful
Life (Years)
|
Computers and accessories
|
|
|
Straight-line
|
|
|
3 - 5
|
Equipment
|
|
|
Straight-line
|
|
|
3 - 5
|
Furniture and fixtures
|
|
|
Straight-line
|
|
|
3 - 7
|
Property and equipment
consisted of the following ($ in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Computers and software
|
|
$
|
-
|
|
|
$
|
103
|
|
Equipment
|
|
|
-
|
|
|
|
284
|
|
Furniture and fixtures
|
|
|
-
|
|
|
|
94
|
|
|
|
|
-
|
|
|
|
481
|
|
Less accumulated depreciation
|
|
|
-
|
|
|
|
(165
|
)
|
|
|
$
|
-
|
|
|
$
|
316
|
|
During the year ended
December 31, 2017, we disposed of property and equipment of approximately $325,000. This was comprised of the disposal of lab related
property and equipment of approximately $267,000 upon the termination of the lease agreement in May 2017 and the disposal of financial
software not placed in service of approximately $58,000. Depreciation expense amounted to approximately $19,000 and $88,000 for
the years ended December 31, 2017 and 2016, respectively.
In-Process Research and Development
IPR&D represents
the estimated fair value assigned to R&D projects acquired in a purchased business combination that have not been completed
at the date of acquisition and which have no alternative future use. IPR&D assets acquired in a business combination
are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment
of the associated R&D efforts. During the period prior to completion or abandonment, these acquired indefinite-lived assets
are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that
the asset might be impaired.
We recorded an asset,
IPR&D, with an initial book value of $27.5 million, related to the acquisition of AmiKet in August 2013 as part of the merger
with Epicept. We completed an impairment analysis of the IPR&D as of December 31, 2016 and concluded that the following factors
indicate that the IPR&D asset was impaired: a decision by management to delay indefinitely any further development of AmiKet;
the failure to sell or license AmiKet to a third party; and the significant reduction in our market capitalization. We recorded
an impairment charge of $12.5 million in our consolidated statement of operations, which represents the excess of the IPR&D
asset’s carrying value over its estimated fair value for the year ended December 31, 2016. The estimated fair value of the
IPR&D asset as of December 31. 2016 was based upon the value ascribed to AmiKet in an arm’s length agreement, which we
negotiated with an unrelated third party.
In the fourth quarter
of 2017, we decided to apply the nano-encapsulation technology to AmiKet and develop Amiket Nano as a next generation, improved
formulation of AmiKet. Previously, we had considered developing Amiket Nano but temporarily abandoned the project to focus on other
development programs. Current management has decided to renew AmiKet Nano development activities based on the results of the BNS
research. Additionally, the incorporation of the nano technology with AmiKet provides significant new patent protection for AmiKet
Nano.
Segment Information
We operate in one reportable
segment: acquiring, developing and commercializing prescription drug products. Accordingly, we report the accompanying consolidated
financial statements in the aggregate, including all of our activities in one reportable segment. Approximately 8% and 9% of our
assets were located outside of the United States as of December 31, 2017 and 2016, respectively,
Research and Development
R&D expenses consist
primarily of payroll and related costs for our drug development and scientific personnel, clinical trials costs, manufacturing
costs, and costs of outsourced R&D services. R&D costs are expensed as incurred.
Translation into United States dollars
The United States dollar
is our functional currency. We conduct certain transactions in foreign currencies, particularly, the Israeli Shekel and the Euro,
which are recorded at the exchange rate as of the transaction date. All exchange gains and losses from re-measurement of monetary
balance sheet items denominated in non-dollar currencies are nominal and reflected as non-operating income or expense in the statements
of operations, as they arise.
Stock-based Compensation
We recognize compensation
expense for all equity-based payments. Stock based compensation issued to employees is accounted for under
ASC 718, Compensation
– Share Compensation
(“ASC 718”). We utilize the Black-Scholes valuation method to recognize compensation
expense over the vesting period. The Black-Scholes valuation model requires the use of certain assumptions as inputs, including
the expected life, volatility, risk-free interest rate and anticipated forfeiture of the stock options. We utilize the short cut
method per the provisions of ASC 718 to calculate the expected life of the options. We base the risk-free interest rate on the
rates paid on securities issued by the United States Treasury with a term approximating the expected life of the options. We estimate
expected stock price volatility for our common stock by taking the average historical price volatility for industry peers combined
with the our historical data based on daily price observations. Estimates of pre-vesting option forfeitures are based on our experience.
We adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ,
or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment
in the period of change and impacts the amount of compensation expense to be recognized in future periods.
We account for stock-based
transactions with non-employees based upon the fair value of the equity instruments issued, in accordance with
ASC 505-50, Equity-Based
Payments to Non-Employees
. Significant factors that affect the expense related to equity-based payments to non-employees include
the estimated fair market value of the common stock underlying the stock options and the estimated volatility of such fair market
value. The value of non-employee options is re-measured every quarter until performance is complete. Income or expense is recognized
during the vesting terms. Accounting for equity-based payments to non-employees requires fair value estimates of the equity instrument
grant, which we estimate based upon the value of our common stock at the date of grant.
Reverse Stock Split
On April 12, 2017,
we announced a reverse stock split (the “Reverse Split”) of our shares of common stock (“Common Stock”)
at a ratio of 1-for-20. Beginning with the opening of trading on April 13, 2017, our common stock began trading on a post-split
basis on the Nasdaq Capital Market (“NASDAQ”). Every twenty shares of issued and outstanding Common Stock were automatically
combined into one issued and outstanding share of Common Stock. Our shareholders ratified the effectiveness of the Reverse Split
at our Annual Meeting of Stockholders, held and adjourned on February 15, 2018, and reconvened on February 23, 2018.
The Reverse Split
affected all issued and outstanding shares of Common Stock, as well as Common Stock underlying stock options, warrants and convertible
instruments outstanding immediately prior to the effectiveness of the Reverse Split. The Reverse Split reduced the total number
of shares of Common Stock outstanding from approximately 194.3 million to approximately 9.7 million and was reflected on our Statement
of Financial Position by a reduction in Common Stock of approximately $15.6 million and a corresponding increase in Additional
Paid-in Capital of the same amount because the par value per share of our Common Stock did not change.
No fractional shares
were issued in connection with the Reverse Split. Any fractional share of common stock that would otherwise have resulted from
the Reverse Split was rounded up to the nearest whole share.
All share and per
share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the Reverse
Split, including reclassifying an amount equal to the reduction in par value to Additional Paid-in Capital.
Income Taxes
We account for income
taxes in accordance with ASC 740 “Income Taxes.” We are required to file income tax returns in the appropriate foreign,
U.S. federal, state and local jurisdictions, including New Jersey, New York State, New York City and Israel. Since we had losses
in the past, all prior years that generated net operating loss carry-forwards are open and subject to audit examination.
Income taxes are accounted
for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized
based upon the differences arising from carrying amounts of our assets and liabilities for tax and financial reporting purposes
using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on the deferred tax
assets and liabilities of a change in tax rates is recognized in the period when the change in tax rates is enacted. A valuation
allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets
will not be realized. A full valuation allowance has been applied against our net deferred tax assets as of December 31, 2017 and
2016, due to projected losses and because it is not more likely than not that we will realize future benefits associated with these
deferred tax assets. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component
of income tax expense. ASC 740 prescribes how a company should recognize, measure, present and disclose in its financial statements
uncertain tax positions that a company has taken or expects to take on a tax return. Additionally, for tax positions to qualify
for deferred tax benefit recognition under ASC 740, the position must have at least a “more likely than not” chance
of being sustained upon challenge by the respective taxing authorities, which criteria is a matter of significant judgment. We
had gross liabilities recorded of $70,000 and $60,000 for the years ended December 31, 2017 and 2016, respectively, to account
for potential state income tax exposure. Our policy is to record interest and penalty related to the underpayment of income taxes
or unrecognized tax benefits as a component of its income tax provision, of which such amounts were immaterial for the years ended
December 31, 2017 and 2016.
Patents
We charge external
patent costs, such as filing fees and associated attorney fees and costs associated with maintaining and defending our patents
subsequent to their issuance, to expense as and when incurred.
Clinical Trial Accruals
We outsource the conduct
of our pre-clinical and clinical trials to third party contract research organizations (CROs) and clinical investigators. Our clinical
supplies are manufactured by third party contract manufacturing organizations (CMOs). Invoicing from these third parties may be
monthly based upon services performed or periodically based upon milestones achieved. We accrue these expenses based upon our assessment
of the status of each clinical trial and the work completed, and upon information obtained from the CROs and CMOs. Our estimates
are dependent upon the timeliness and accuracy of data provided by the CROs and CMOs regarding the status and cost of the studies,
and may not match the actual services performed by the organizations. Discrepancies could result in adjustments to our research
and development expenses recorded in future periods. We have not had any significant adjustments to date.
Recently Issued Accounting Standards
New accounting standards
which have been adopted
In March 2016, the
FASB issued
Accounting Standards Update No. 2016-09, "Compensation-Stock Compensation"
(ASU 2016-09). The new
standard was effective for us on January 1, 2017. Among other provisions, the new standard requires that excess tax benefits and
tax deficiencies that arise upon vesting or exercise of share-based payments be recognized as income tax benefits and expenses
in the income statement. Previously, such amounts were recorded to additional paid-in-capital. This aspect of the new guidance
was required to be adopted prospectively. Adoption of ASU 2016-09 did not have a material impact on the income tax provision for
the year ended December 31, 2017.
In January 2017, the
FASB issued
Accounting Standards Update No. 2017-01, “Business Combinations” (ASU 2017-01)
. ASU 2017-01 provides
guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The
guidance provides a screen to determine when an integrated set of assets and activities (a “set”) does not qualify
to be a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of)
is concentrated in an identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is
not met, the guidance requires a set to be considered a business to include, at a minimum, an input and a substantive process that
together significantly contribute to the ability to create outputs and removes the evaluation as to whether a market participant
could replace the missing elements. During the year ended December 31, 2017, we early adopted ASU 2017-11. The
acquisition of the Ceplene rights, did not meet the definition of a business in accordance with ASU 2017-01 (see Note 7).
In July 2017, the FASB
issued
Accounting Standards Update ("ASU") No. 2017-11, Earnings Per Share
(Topic 260), Distinguishing Liabilities
from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features,
II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception ("ASU 2017-11"). ASU 2017-11 revises the guidance
for instruments with down round features in Subtopic 815-40, Derivatives and Hedging - Contracts in Entity’s Own Equity,
which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative
accounting. An entity still is required to determine whether instruments would be classified in equity under the guidance in Subtopic
815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round
features are no longer classified as liabilities. ASU 2017-11 is effective for annual and interim periods beginning after December
15, 2018, and early adoption is permitted, including adoption in an interim period. During the year ended December 31, 2017, we
early adopted ASU 2017-11. The impact of this adoption is that the down-round provisions within our warrants issued with the April
2017 Convertible Notes qualify for a scope exception from derivative accounting and were recorded in equity. ASU 2017-11 provides
that upon adoption, an entity may apply this standard retrospectively to outstanding financial instruments with a down round feature
by means of a cumulative-effect adjustment to the opening balance of retained earnings in the fiscal year and interim period of
adoption. We did not have any other outstanding instruments with down round provisions and therefore no cumulative-effect adjustment
was made to retained earnings.
New accounting standards
which have not yet been adopted
In January 2016,
the FASB issued
Accounting Standards Update No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities”.
ASU 2016-01 changes accounting for equity investments,
financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. ASU
2016-01 does not apply to equity investments in consolidated subsidiaries or those accounted for under the equity method of accounting.
In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting
from unrealized losses on available-for-sale debt securities. Equity investments with readily determinable fair values will be
measured at fair value with changes in fair value recognized in net income. Companies have the option to either measure equity
investments without readily determinable fair values at fair value or at cost adjusted for changes in observable prices minus impairment.
The ASU enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement,
presentation and disclosure. ASU 2016-01 will be effective for us beginning in the first quarter of 2018. We do not expect the
adoption of ASU 2016-01 to have a material effect on our consolidated financial statements as we do not hold any publicly traded
equity investments.
In February 2016, the
FASB issued
Accounting Standards Update No. 2016-02, "Leases"
(ASU 2016-02). ASU 2016-02 provides accounting guidance
for both lessee and lessor accounting models. Among other things, lessees will recognize a right-of-use asset and a lease liability
for leases with a duration of greater than one year. For income statement purposes, ASU 2016-02 will require leases to be classified
as either an operating or finance lease. Operating leases will result in straight-line expense while finance leases will result
in a front-loaded expense pattern. The new standard will be effective for us on January 1, 2019. We expect the implementation of
this standard to have an impact on our consolidated financial statements and related disclosures as we expect to have aggregate
future minimum lease payments under future non-cancelable leased office space.
In August 2016, the
FASB issued
Accounting Standards Update No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments"
(ASU 2016-15). ASU 2016-15 clarifies how companies present and classify certain cash receipts
and cash payments in the statement of cash flows where diversity in practice exists. ASU 2016-15 is effective for us in our first
quarter of fiscal 2018. We do not expect any changes to the presentation of our Consolidated Statement of Cash Flows upon adoption
of the standard.
In October 2016, the
FASB issued
Accounting Standards Update No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventoy”
(ASU
2016-16). ASU 2016-16 requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized
as current period income tax expense or benefit and removes the requirement to defer and amortize the consolidated tax consequences
of intra-entity transfers. ASU 2016-16 is effective for us in our first quarter of fiscal 2018. We do not expect the adoption of
ASU 2016-16 to have a material effect on our consolidated financial statements as we do not anticipate any intra-entity transfers
of assets.
In November 2016, the
FASB issued
Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cas”
. The
amendments of ASU No. 2016-18 were issued to address the diversity in classification and presentation of changes in restricted
cash and restricted cash equivalents on the statement of cash flows which is currently not addressed under Topic 230. The ASU would
require an entity to include amounts generally described as restricted cash and restricted cash equivalents with cash and cash
equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. ASU 2016-18
is effective for us in our first quarter of fiscal 2018. We expect the adoption of ASU 2016-18 to result in reclassification of
restricted cash in the consolidated statements of cash flows for the year ended December 31, 2017.
In August 2017, the
FASB issued
Accounting Standards Update No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvments to Accounting
for Hedging Activities
”. ASU 2017-12 provides guidance for improving and more closely aligning a company’s financial
reporting of its hedging relationships with the objective of a company’s risk management activities. Among other provisions,
the new standard (1) eliminates the separate measurement and reporting of hedge ineffectiveness and (2) permits an entity to recognize
in earnings the initial value of an excluded component under a systematic and rational method over the life of the derivative instrument.
The new standard will be effective for us on January 1, 2019. We do not expect the adoption of ASU 2017-12 to have a material effect
on our consolidated financial statements as we do not anticipate engaging in any hedging activities.
Note 4. Derivative Financial Instruments
We account for derivative
financial instruments in accordance with
ASC 815-40, “Dervative and Hedging – Contracts in Entity’s Own Equity”
(“ASC 815-40”). Instruments that do not have fixed settlement provisions are deemed to be derivative instruments.
Hercules Warrants
On July 29, 2015, the
Company and Immune Pharmaceuticals USA Corp., a wholly-owned subsidiary of the Company entered into a Loan and Security Agreement
(“Loan Agreement”) with Hercules Capital (“Hercules”) pursuant to which we borrowed $4.5 million from Hercules.
In connection with the execution of the Loan Agreement, we issued to Hercules five-year warrants (“Hercules Warrants”)
to purchase an aggregate of 10,743 shares of our common stock at an exercise price of $34.00 per share, subject to certain adjustments,
including, the effective price of any financing occurring six months after the issuance date at a price lower than the strike price
of the Hercules Warrants.
We determined the fair
value of the Hercules Warrants to be $0.3 million on July 29, 2015 using the Binomial Lattice pricing model and recorded that amount
as part of debt discount in our consolidated balance sheets because the Hercules Warrants were considered part of the cost of the
financing. We amortized the debt discount over the life of the Loan Agreement using the effective interest method. The Hercules
Warrants were re-measured at each balance sheet date until the expiration of the anti-dilution provision on January 29, 2016. For
the year ended December 31, 2016, we recorded a gain on the change in the estimated fair value of the Hercules Warrants of $38,000,
which was recorded as non-operating income in our consolidated statements of operations. Upon the expiration of the anti-dilution
provision on January 29, 2016, the remaining balance of $46,000 of the derivative liability associated with the Hercules Warrant
was reclassified to additional paid-in-capital in our consolidated balance sheets.
Discover Series D Convertible Preferred
Stock
In 2015, we issued
Series D Redeemable Convertible Preferred Stock (“Series D Preferred Stock”) to Discover Growth Fund (“Discover”)
, with a conversion price of $50.00 per share. We received total gross proceeds of $12.0 million in connection with the issuance
of the Series D Preferred Stock to Discover after taking into account a 5% original issue discount.
Discover
could convert at any time and at conversion Discover receives a conversion premium equal to the amount of dividends it would
have received with respect to the Series D Preferred Stock if the Series D Preferred Stock had been held to the term of
agreement of 6.5 years. The Series D Preferred Stock dividend rate included an adjustment feature that fluctuated inversely
to the changes in the value of our common stock price. The conversion premium and dividends are redeemed upon conversion of
the Series D Preferred Stock. We determined that the conversion premium and dividends with the features described above
required liability accounting. Accordingly, the conversion premium and the dividend feature were bifurcated from the Series
D Preferred Stock on our consolidated balance sheet and were recorded as a derivative liability at fair value. Changes in
the fair value of the derivative liability are recognized in our consolidated statement of operations for each reporting
period. For the year ended December 31, 2016, Discover converted its remaining 963 shares of our Series D Preferred Stock
outstanding.
We recorded a loss
of $8.7 million on the change in the estimated fair value of the Discover derivative liability for the year ended December 31,
2016. The loss was recorded as a non-operating expense in our consolidated statements of operations. The fair value of the Discover
derivative liability as of December 31, 2016 was $0.
2017 Derivative Liabilities
On July 17, 2017, we
entered into an agreement in principle with Carmelit 9 Nehassim Ltd (“Carmelit”) for the sale of original issue discount
convertible notes (the “Carmelit Notes”) (See Note 9). Also, the holder is entitled to receive 75,000 shares of our
common stock subject to approval by our shareholders. We accounted for the obligation to issue Carmelit 75,000 shares as a derivative
under ASC 815 because shareholder approval is not within our control and failure to obtain the approval would trigger net-cash
settlement. Therefore and because shareholder approval has not been obtained to date, we classified the obligation as a derivative
liability with an offset to debt discount on the debt in our consolidated financial statements, recorded at fair value and subject
to mark to market until the shares are issued upon shareholder approval. We recorded the derivative liability of $207,750 at inception
based on the closing price of our shares on that date. As of December 31, 2017, the fair value of these shares was $42,750 based
on the closing price of our shares and we recorded the change in fair value of $165,000.
On October 27, 2017,
we entered into an agreement with a consultant in which the consultant is entitled to receive 50,000 shares. We accounted for the
obligation as a derivative because the issuance of the shares were subject to approval by our board of directors and were not issued
as of December 31, 2017. We recorded the derivative liability of $40,500 at inception based on the closing price of our shares
on that date. As of December 31, 2017, the fair value of these shares was $28,500 based on the closing price of our shares and
we recorded the change in fair value of $12,000.
Note 5. Fair Value Measurements
Financial Instruments and Fair Value
We account for financial
instruments in accordance with
ASC 820, “Fair Value Measurements and Disclosures”
. ASC 820 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and
the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
·
|
Level 1 –
Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities;
|
|
·
|
Level 2 –
Quoted prices in markets that are not active or financial instruments for
which all significant inputs are observable, either directly or indirectly; and
|
|
·
|
Level 3
– Prices or valuations that require inputs that are both significant to the
fair value measurement and unobservable.
|
The financial instruments
recorded in our consolidated balance sheets consist primarily of cash, restricted cash, notes payable and accounts payable. The
carrying amounts of our cash and accounts payable approximate fair value due to their short-term nature. The fair value of our
debt approximates its carrying value of approximately $4.7 million as it related to the long-term portion of the Ceplene asset
acquisition payable which was recorded at its present value using our borrowing rates (see Notes 7 and 9). We had no other
financial liabilities or assets that were measured at fair value as of December 31, 2017 or 2016.
Hercules Warrants
The following table
sets forth a summary of changes in the estimated fair value of our Hercules Warrant derivative liability for the periods presented
($ in thousands):
|
|
Fair Value Measurements of
Hercules
Common Stock Warrants
Using Significant
Unobservable Inputs (Level 3)
|
|
Balance at January 1, 2016
|
|
$
|
84
|
|
Change in estimated fair value of liability classified warrants
|
|
|
(38
|
)
|
Reclassification from liability to additional paid-in capital
|
|
|
(46
|
)
|
Balance at December 31, 2016
|
|
$
|
-
|
|
Series D Preferred Stock
The following table
sets forth a summary of changes in the estimated fair value of our Series D Preferred Stock derivative liability for the periods
presented ($ in thousands):
|
|
Fair Value Measurements of
Series D Preferred Stock
Derivative Liability
Using Significant
Unobservable Inputs (Level 3)
|
|
Balance at January 1, 2016
|
|
$
|
6,529
|
|
Change in estimated fair value of Series D Preferred Stock derivative liability
|
|
|
8,694
|
|
Series D Preferred Stock conversions
|
|
|
(15,223
|
)
|
Balance at December 31, 2016
|
|
$
|
-
|
|
Note 6. Licensing Agreements
Bertilimumab
iCo Therapeutics Inc.
In December 2010, iCo
Therapeutics Inc. (“iCo”) granted Immune Ltd. an option to sub-license the use of bertilimumab from iCo, which obtained
certain exclusive license rights to intellectual property relating to bertilimumab pursuant to a license agreement with Cambridge
Antibody Technology Group Plc, and to which Immune Ltd. became a party. In June 2011, Immune Ltd. exercised its option and obtained
a worldwide license from iCo for the use and development of bertilimumab for all human indications, other than ocular indications,
pursuant to a product sub-license agreement (the “iCo License”). iCo retained the worldwide exclusive right to the
use of bertilimumab for all ocular applications.
Under the agreement,
Immune Ltd. paid an initial consideration of $1.7 million comprised of (i) $0.5 million in cash, (ii) 30,000 ordinary shares issued
by Immune Ltd, which were valued at approximately $1.0 million and (iii) 10,000 warrants, which were valued at approximately $0.2
million.
Pursuant to the iCo
License, iCo is entitled to receive up to $32.0 million in development and commercialization milestones plus sales based royalties.
The license term with respect to each separate Licensed Product, expires, on a country-by-country basis, on the later to occur
of (a) the tenth anniversary of the First Commercial Sale of such Licensed Product in the applicable country or (b) the expiration
date in such country of the last to expire of any issued iCo Patent that includes at least one Valid Claim that claims the particular
Licensed Product or its manufacture or use (aa capitalized terms as defined in the iCo License”).
No milestones triggering
a payment obligation were reached during the years ended December 31, 2017 or 2016.
Lonza Sales AG
On May 2, 2012, Lonza
Sales AG (“Lonza”) granted us a sub-licensable, non-exclusive worldwide license under certain know-how and patent rights
to use, develop, manufacture, market, sell, offer, distribute, import and export bertilimumab, as it is produced through the use
of Lonza’s system of cell lines, vectors and know-how. We are not obligated to manufacture bertilimumab through the use of
Lonza’s system.
We agreed to pay Lonza
(i) a royalty of 1% of the net selling price of bertilimumab manufactured by Lonza; or (ii) an annual payment of approximately
$0.1 million (first payable upon commencement of phase 2 clinical trials) plus a royalty of 1.5% of the net selling price of bertilimumab
if it is manufactured by us or one of our strategic partners; or (iii) an annual payment of approximately $0.5 million (first payable
upon commencement of the relevant sublicense) plus a royalty of 2% of the net selling price of bertilimumab if it is manufactured
by any party other than Lonza, us or one of our strategic partners. The royalties are subject to a 50% reduction based on the lack
of certain patent protections, including the expiration of patents, on a country-by-country basis. Unless earlier terminated, the
license agreement continues until the expiration of the last enforceable valid claim to the licensed patent rights, which began
to expire in 2014 and continued to expire between 2015 and 2016, or for so long as the System Know How (as defined in the License)
is identified and remains secret and substantial, whichever is later. We considered the System Know How as secret and substantial
as of December 31, 2017 and accordingly, the license remains in effect as of that date.
For the year ended
December 31, 2017 there were no payments due related to this license.
NanoCyclo
-
BioNanoSim Ltd
In January 2016, we,
through our wholly owned subsidiary, Immune Ltd., entered into a definitive research and license agreement with BioNanoSim Ltd.
(“BNS”), a Yissum spin-off company. We obtained from BNS an exclusive worldwide sublicense, with a right to further
sublicense, for the development, manufacturing and commercialization of certain inventions and research results regarding Yissum’s
patents in connection with nanoparticles for topical delivery of cyclosporine-A (Nanocyclo) for all topical skin indications. As
consideration for the grant of the license, we are required to pay the following consideration:
|
·
|
an annual maintenance fee of $30,000, commencing on January 1, 2021,
which will increase by 30% each year up to a maximum annual maintenance fee of $0.1 million and may be credited against royalties
or milestone payments payable in the same calendar year;
|
|
·
|
a license fee in the amount of $0.5 million, paid in 2016;
|
|
·
|
royalties on net sales of products (as such term is defined in the
License) by us of up to 5%, subject to certain possible reductions in certain jurisdictions;
|
|
·
|
sublicense fees in the amount of 18% of any non-sales related consideration
received by us from a sublicense or an option to receive a sublicense for the products and/or the licensed technology (as such
terms are defined in the license); and
|
|
·
|
milestone payments of up to approximately $4.5 million and 250,000
shares of our common stock (12,500 shares after giving effect to the April 2017 Reverse Stock Split) upon the achievement of certain
regulatory, clinical development and commercialization milestones. In the event that we receive consideration from a sublicensee
for any such milestones, we will pay to BNS the higher of either (a) the amount of the particular milestone payment or (b) the
amount of the sublicense fees that are due for such sublicensee consideration paid to us.
|
In addition, we are
obligated to reimburse BNS within 60 days for expenses relating to patent fees and will sponsor a 12-month research program to
prepare the program for IND submission.
In November 2017, we
issued 250,000 shares valued at $225,000 to BNS without giving effect to the impact of the April 2017 Reverse Stock Split because
we decided that the importance of the NanoCyclo program and the need to maintain a positive working relationship with BNS warranted
ignoring the impact of the Reverse Split and instead issuing 250,000 Shares to BNS as if the Reverse Split had not occurred.
For the year ended
December 31, 2016, we paid a license fee of $0.5 million and approximately $0.2 million in research fees. For the year ended December
31, 2017, we paid approximately $0.3 million in research fees.
Amiket and AmiKet Nano
Yissum
In June 2015, we entered
into a definitive research and license agreement with Yissum. We obtained an exclusive, worldwide license from Yissum, with certain
sublicensing rights, to make commercial use of certain of Yissum’s patents and know-how in connection with a topical nano-formulated
delivery of AmiKet for the development, manufacturing, marketing, distribution and commercialization of products based on the technology.
As consideration for the grant of the license, we are required to pay the following consideration:
|
·
|
an annual maintenance fee of $30,000 commencing on June 25, 2020, which maintenance fee shall increase
by 30% each year, up to a maximum annual maintenance fee of $0.1 million and may be credited against royalties or milestone payments
payable in the same calendar year;
|
|
·
|
royalties on net sales of products (as such term is defined in the license) by us in the amount
of up to 3%, subject to certain possible reductions in certain jurisdictions;
|
|
·
|
milestones payments of up to approximately $4.5 million upon the achievement of certain regulatory,
clinical development and commercialization milestone; and
|
|
·
|
reimbursement of related patent fees
|
In addition, we agreed
to fund an annual research program in the amount of approximately $0.4 million annually, plus VAT and any applicable taxes, commencing
on October 1, 2015 (or such other time as mutually agreed between the parties). The results of the research, including any patents
or patent applications will automatically be licensed to us.
For the year ended
December 31, 2016, we paid research fees of approximately $0.1 million. As of December 31, 2017, $250,000 is due to Yissum for
research fees.
Dalhousie University
In July 2007, we entered
into a license agreement with Dalhousie University (“Dalhousie”) under which we obtained an exclusive license to certain
patents for the topical use of tricyclic anti-depressants and N-methyl-D-aspartate (“NMDA”) receptor antagonists as
topical analgesics for neuralgia. These and other patents cover the combination treatment consisting of amitriptyline and ketamine
in AmiKet. We obtained worldwide rights to make, use, develop, sell and market products utilizing the licensed technology in connection
with passive dermal applications. We are obligated to make payments to Dalhousie upon achievement of specified milestones and royalties
based on annual net sales derived from the products incorporating the licensed technology. In April 2014, we entered into a Waiver
and Amendment to the license agreement pursuant to which Dalhousie agreed to irrevocably waive our obligation to pay maintenance
fees. In exchange, we agreed to pay Dalhousie royalties of 5% of net sales of licensed technology in countries in which patent
coverage is available and 3% of net sales in countries in which data protection is available. Also, we agreed to amend the timing
and increase the amounts of the milestone payments payable under the license agreement.
Oncology
Ceplene
- Pint Pharma International
S.A.
On July 10, 2017, Cytovia
entered into an exclusive licensing agreement (the “Licensing Agreement”) with Pint Pharma International S.A. (“Pint”)
a specialty pharmaceutical company focused on Latin America and other markets, for the marketing, commercialization and distribution
of Ceplene throughout Latin America (the “Territory”, as more fully defined in the Licensing Agreement) through Pint
and one or more of its affiliates. Pursuant to the Licensing Agreement, Cytovia is entitled to (i) 35% of Ceplene net sales in
the Territory (ii) a milestone payment of $0.5 million when net sales of Ceplene in the Territory reach $10.0 million in
any calendar year and (iii) a milestone payment of $1.25 million when net sales of Ceplene in the Territory reach $25.0
million in any calendar year (collectively, the “Ceplene Payments”). Cytovia further granted Pint and its affiliates
certain sublicensing rights to Ceplene, and a right of first refusal on any new products of Cytovia within the Territory during
the term of the Licensing Agreement. With regard to any regulatory approvals and filings related to the commercialization of Ceplene
within the Territory, Pint shall be the applicant, holder of such regulatory approvals and will be responsible for the content
of such regulatory submissions, as well as all costs and expenses related to, among other items delineated in the Licensing Agreement,
the fees, filings, compliance, registration and maintenance of such required regulatory approval matters. Cytovia shall be responsible
for providing (or if in the control of a third party, to ensure such third party provides) all appropriate documentation, samples
and other information in support of Pint in connection with its regulatory submissions, compliance and maintenance matters in the
Territory concerning the Ceplene product(s).
Additionally, in connection
with the Licensing Agreement, the parties agreed that Pint Gmbh, an affiliate of Pint, will separately enter into an investment
agreement, pursuant to which Pint Gmbh will make an investment of $4.0 million at series A valuation into Cytovia in exchange
for an equity interest in Cytovia. Dr. Massimo Radaelli, Executive Chairman of Pint, will also join the board of Cytovia upon completion
of the investment and effective spin off of Cytovia from us, if and as consummated.
NanomAbs
- Yissum
In April 2011, We entered
into a license agreement with Yissum, which includes patents, research results and know-how developed by Professor Simon Benita
related to the NanomAbs technology. Yissum granted us an exclusive license, with a right to sub-license, to make commercial use
of the licensed technology in order to develop, manufacture, market, distribute or sell products derived from the license. As consideration
for the grant of the license, we are required to pay the following consideration:
|
·
|
royalties in the amount of up to 4.5% of net sales;
|
|
·
|
beginning on the sixth anniversary, an annual license maintenance
fee between $30,000 for the first year and up to a maximum of $0.1 million thereafter;
|
|
·
|
research fees of at least $0.3 million for the first year and at
least $0.1 million from the second year through the sixth year (but, not to exceed $1.8 million in the aggregate);
|
|
·
|
milestone payments of up to $8.6 million, based on the attainment
of certain milestones, including IND application submission, patient enrollment in clinical trials, regulatory approval and commercial
sales;
|
|
·
|
sub-license fees in amounts up to 18% of any sub-license consideration;
and
|
|
·
|
equity consideration in the amount of 8% of our shares of common
stock on a fully diluted basis.
|
The license expires,
on a country-by-country basis, upon the later of the expiration of (i) the last valid licensed patent, (ii) any exclusivity
granted by a governmental or regulatory body on any product developed through the use of the licensed technology or (iii) the
15-year period commencing on the date of the first commercial sale of any product developed through the use of the licensed technology.
Upon the expiration of the license, we will have a fully paid, non-exclusive license to the licensed technology.
For the year ended
December 31, 2017 we paid research fees of approximately $0.1 million.
Bispecific Antibodies
- SATT Sud-Est
In January 2017, we
entered into an exclusive patent sub-license agreement with SATT Sud-Est, (“SATT”) a French technology transfer office
of the five universities of the Provence-Alpes-Cote-d’Azur and Corsica regions in France, relating to certain patents covering
the development, use, manufacture and commercialization of monoclonal and bispecific antibodies targeting components of the tumor
microenvironment and angiogenic factors. In addition, SATT agreed to grant us an exclusive option relating to the pro-angio vascular
endothelial growth factor (“VEGF”) invention to be filed as a patent application during the term of the agreement.
We will have a month after the filing of the patent to exercise the option. In consideration of the sub-license and option agreement,
we agreed to pay an upfront payment of approximately $0.2 million, with $0.1 million payable in January 2017 and the remainder
payable in three equal quarterly payments thereafter beginning in March 2017. As of December 31, 2017, we have not made any payments.
In addition, we agreed to certain milestone and royalty payments for each monoclonal and bispecific product developed.
Bispecific Antibodies
- Atlante Biotech
SAS
In December 2015, we
entered into an exclusive license with Atlante Biotech SAS (“Atlante”) relating to the patents and know-how for a new
format of bispecific antibody platform. The technology, the result of a collaborative European consortium led by Dr. Jean Kadouche
and funded by a European grant, developed the novel platform for the production of tetravalent IgG1-like bispecific antibodies.
A prototype bispecific antibody utilizing the platform was shown to retain effector functions and mediate redirect killing of target
cells by cytokine induced killer T cells. Moreover, the bispecific antibody demonstrated direct in-vitro and in-vivo anti-cancer
effects in tumor models and improved survival in a mouse xenograft model of disseminated leukemia.
MabLife SAS
In March 2012, we
acquired from MabLife SAS (“MabLife”), a biotechnology company specializing in research and development of antibody-based
therapeutics for the treatment of cancers, autoimmune and inflammatory disorders. We acquired all rights, title and interest in
and to the patent rights, technology and deliverables related to the anti-Ferritin monoclonal antibody (“AMB8LK”),
including its nucleotide and protein sequences, its ability to recognize human acid and basic ferritins, or a part of its ability
to recognize human acid and basic ferritins. The consideration was: $0.6 million payable in six equal installments (total
payments to date totaled $0.2 million) and royalties of 0.6% of net sales of any product containing AMB8LK or the manufacture,
use, sale, offering or importation of which would infringe on the patent rights with respect to AMB8LK. We are required to
assign the foregoing rights back to MabLife if we fail to make any of the required payments, are declared insolvent or bankrupt
or terminate the agreement.
In February 2014, we
acquired from MabLife all rights, titles and interests in and to the secondary patent rights related to the use of anti-ferritin
monoclonal antibodies in the treatment of some cancers, Nucleotide and protein sequences of an antibody directed against an epitope
common to human acidic and basic ferritins, monoclonal antibodies or antibody-like molecules comprising these sequences.
Shire BioChem Inc.
In connection with
the Merger, we acquired a license agreement for the rights to the MX2105 series of apoptosis inducer anti-cancer compounds from
Shire BioChem Inc. (“Shire BioChem”), (formerly known as BioChem Pharma, Inc.). Under the license agreement, we are
required to pay Shire BioChem a portion of any sublicensing payments we receive if we relicense the series of compounds or make
milestone payments to Shire BioChem totaling up to $26.0 million and pay a royalty on product sales if we develop the compounds
internally for the treatment of a cancer indication.
Dr. Jean Kadouche and Alan Razafindrastita
In December 2011,
Dr. Jean Kadouche sold, assigned and transferred to us the entire right, title and interest for all countries, in and to any and
all patents and inventions related to mice producing human antibodies and a method of preparation of human antibodies (the “Human
Antibody Production Technology Platform”) for 40,000 shares of our common stock and $20,000 (paid to Dr. Kadouche and Alan
Razafindrastita). Through the Human Antibody Production Technology Platform and additional laboratory work, human immune
systems and specific cell lines were introduced in mice, enabling the mice to produce human monoclonal antibodies.
LidoPAIN -
Endo Pharmaceuticals Inc.
In
December 2003, EpiCept entered into a license agreement (“License Agreement”) with
Endo Pharmaceuticals
Inc.
(“Endo”) under, which EpiCept granted Endo (and its affiliates) the exclusive
(including as to EpiCept and its affiliates) worldwide right to commercialize LidoPAIN, adhesive-backed, lidocaine-based patch
for the treatment of acute lower back pain. EpiCept also granted Endo worldwide rights to use certain of EpiCept’s
patents
for the development of certain other non-sterile, topical lidocaine patches, including Lidoderm, Endo’s
non-sterile topical lidocaine-containing patch for the treatment of chronic lower back pain. We assumed the License Agreement upon
the Merger.
Under
the License Agreement, we are entitled to receive milestone payments of up to $52.5 million upon the achievement of various milestones
relating to product development, regulatory approval and sales based royalties on sales of LidoPAIN and Endo’s own back
pain product, if covered by our patents. Royalties are payable until generic equivalents to the LidoPAIN product are available
or until expiration of the patents covering LidoPAIN, whichever is sooner. Also, we are eligible to receive milestone payments
from Endo of up to $30 million upon the achievement of specified regulatory and net sales milestones of Lidoderm, Endo’s
chronic lower back pain product candidate, if covered by our patents. The License Agreement terminates upon the later of the conclusion
of the royalty term, on a country-by-country basis, and the expiration of the last applicable EpiCept patent covering licensed Endo product
candidates on a country-by-country basis. Either party may terminate the agreement upon an uncured material breach by the
other or, subject to the relevant bankruptcy laws, upon a bankruptcy event of the other.
In
July 2015, we amended the License Agreement. We transferred to Endo its previously licensed patents related to the use of topical
lidocaine in acute and chronic back pain and Endo granted to us a royalty-free, non-exclusive, fully transferable license to those
patents. Endo will make undisclosed milestone payments to us if Endo receives approval for a back pain indication for a lidocaine-based
product. We regained full exclusive rights to develop, commercialize and license LidoPAIN.
Note 7. Intangible Assets
Our intangible assets
consist of licenses and patents relating to our bertilimumab and oncology programs, and were determined by management to have useful
lives ranging between seven and fifteen years. We amortize these intangible assets on a straight-line basis.
On June 15, 2017,
we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Meda Pharma SARL, a Mylan N.V. company
(“Meda”) to repurchase assets relating to Ceplene (histamine dihydrochloride) including the right to commercialize
Ceplene in Europe and to register and commercialize Ceplene in certain other countries, for a fixed consideration of $5.0 million
payable in installments over a three-year period. We treated the acquisition as an asset acquisition in accordance with
ASC
805, “Business Combinations”.
We recorded the purchase
price for the underlying patents as intangible assets and recorded the present value of the future payments due under the Asset
Purchase Agreement of $4.2 million as a corresponding liability. The present value of future payments due under the Asset Purchase
Agreement is determined by using our current borrowing rate of 15% as the relevant discount rate for present value calculations.
As of December 31, 2017, the amount due to Meda on a present value basis, classified as current and long term notes and loans payable
is $3.0 million and $1.4 million, respectively. The estimated useful life of these intangible assets is seven years.
The value of our amortizable
intangible assets including gross asset value and carrying value is summarized below ($ in thousands):
|
|
Bertilimumab
iCo
|
|
|
NanomAbs
Yissum
|
|
|
Human
Antibodies
Kadouche
|
|
|
Anti-ferritin
Antibody
MabLife
|
|
|
Ceplene
Acquisition
Intangibles
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2016
|
|
$
|
1,753
|
|
|
$
|
475
|
|
|
$
|
475
|
|
|
$
|
408
|
|
|
$
|
-
|
|
|
$
|
3,111
|
|
Amortization
|
|
|
(167
|
)
|
|
|
(46
|
)
|
|
|
(47
|
)
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
(305
|
)
|
Balance as of December 31, 2016
|
|
$
|
1,586
|
|
|
$
|
429
|
|
|
$
|
428
|
|
|
$
|
363
|
|
|
$
|
-
|
|
|
$
|
2,806
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,310
|
|
|
|
4,310
|
|
Amortization
|
|
|
(167
|
)
|
|
|
(46
|
)
|
|
|
(47
|
)
|
|
|
(45
|
)
|
|
|
(334
|
)
|
|
|
(639
|
)
|
Balance, December 31, 2017
|
|
$
|
1,419
|
|
|
$
|
383
|
|
|
$
|
381
|
|
|
$
|
318
|
|
|
$
|
3,976
|
|
|
$
|
6,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross asset value
|
|
$
|
2,509
|
|
|
$
|
694
|
|
|
$
|
700
|
|
|
$
|
547
|
|
|
$
|
4,310
|
|
|
$
|
8,760
|
|
Accumulated Amortization
|
|
|
(1,090
|
)
|
|
|
(311
|
)
|
|
|
(319
|
)
|
|
|
(229
|
)
|
|
|
(334
|
)
|
|
|
(2,283
|
)
|
Balance, December 31, 2017
|
|
$
|
1,419
|
|
|
$
|
383
|
|
|
$
|
381
|
|
|
$
|
318
|
|
|
$
|
3,976
|
|
|
$
|
6,477
|
|
Management determined
that our amortizable intangible assets have a useful life of between 7 and 15 years. Amortization expense amounted to $639,000
and $305,000 for the years ended December 31, 2017 and 2016, respectively.
Estimated amortization
expense for each of the five succeeding years, based upon intangible assets owned at December 31, 2017 is as follows ($ in thousands):
Period Ending December 31,
|
|
Amount
|
|
2018
|
|
$
|
921
|
|
2019
|
|
|
921
|
|
2020
|
|
|
921
|
|
2021
|
|
|
907
|
|
2022
|
|
|
905
|
|
Thereafter
|
|
|
1,902
|
|
Total
|
|
$
|
6,477
|
|
Note 8. Accrued Expenses
Accrued expenses
consist of the following ($ in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Professional fees
|
|
$
|
284
|
|
|
$
|
414
|
|
Consulting fees
|
|
|
691
|
|
|
|
-
|
|
License fees
|
|
|
421
|
|
|
|
-
|
|
Dividends
|
|
|
216
|
|
|
|
-
|
|
Salaries and employee benefits
|
|
|
105
|
|
|
|
930
|
|
Advances and fees
|
|
|
-
|
|
|
|
340
|
|
Financing costs
|
|
|
-
|
|
|
|
616
|
|
Other
|
|
|
403
|
|
|
|
320
|
|
Total
|
|
$
|
2,120
|
|
|
$
|
2,620
|
|
Note 9. Notes and Loans Payable
We are party to loan
agreements as follows ($ in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loan Agreement, net of original issue discount of $0 and $0.4 million, respectively
(1)
|
|
$
|
—
|
|
|
$
|
2,857
|
|
July 2017 Senior Secured Convertible Promissory Note, net of original issue discount, debt issuance cost and debt discount
(2)
|
|
|
—
|
|
|
|
—
|
|
April 2017 Convertible Notes
(3)
|
|
|
—
|
|
|
|
—
|
|
May 2017 Convertible Notes, net of original issue discount, debt issuance cost and debt discount
(4) (11)
|
|
|
—
|
|
|
|
—
|
|
July 2017 Convertible Notes, net of original issue discount, debt issuance cost and debt discount
(5) (11)
|
|
|
—
|
|
|
|
—
|
|
August 2017 Convertible Notes, net of original issue discount, debt issuance cost and debt discount
(6) (11)
|
|
|
—
|
|
|
|
—
|
|
September 2017 Convertible Notes, net of original issue discount, debt issuance cost and debt discount
(7) (11)
|
|
|
—
|
|
|
|
—
|
|
Mablife Notes Payable
(8)
|
|
|
394
|
|
|
|
387
|
|
Asset Acquisition Payable, net of discount of $0.6 million
(9)
|
|
|
4,359
|
|
|
|
—
|
|
Convertible Notes, net of original issue discount, debt issuance cost and debt discount of $0 and $0.1 million
(10)
|
|
|
—
|
|
|
|
937
|
|
Total notes and loans payable
|
|
$
|
4,753
|
|
|
$
|
4,181
|
|
|
|
|
|
|
|
|
|
|
Notes and loans payable, net of debt discount, current portion
|
|
$
|
3,296
|
|
|
$
|
2,739
|
|
Notes and loans payable, noncurrent portion
|
|
|
1,457
|
|
|
|
1,442
|
|
Total notes and loans payable, net of original issue discount, debt issuance cost and debt discount of $0.6 million and $0.5 million
|
|
$
|
4,753
|
|
|
$
|
4,181
|
|
Repayments under our existing debt agreements
consist of the following ($ in thousands):
Period Ending December 31,
|
|
Amount
|
|
2018
|
|
$
|
3,367
|
|
2019
|
|
|
1,000
|
|
2020
|
|
|
1,020
|
|
Total
|
|
$
|
5,387
|
|
Loan and Security Agreement (1)
On July 29, 2015, the
Company and Immune Pharmaceuticals USA Corp., a wholly-owned subsidiary of the Company, entered into a Loan and Security Agreement
(“Loan Agreement”) pursuant to which Hercules agreed to lend $4.5 million to us with an option to borrow an additional
$5.0 million prior to June 15, 2016, subject to the achievement of certain clinical milestones and other conditions. As of June
15, 2016, we had not met certain of the milestones described in the Loan Agreement required in order to borrow an additional $5.0
million and as a result the option expired. The Loan Agreement is collateralized by a first priority perfected security interest
in all tangible and intangible assets of the Company and its subsidiaries. The Loan Agreement is senior in priority to all other
Company indebtedness. The interest rate on the Hercules Loan is calculated at the greater of 10% or the prime rate plus 5.25%.
We may prepay the Hercules Loan at any time, subject to certain prepayment penalties. Hercules may optionally convert up to $1.0
million of the unpaid principal balance of the loan in any subsequent institutionally led Company financing on the same terms,
conditions and pricing applicable to such subsequent financing. This option to convert the loan to equity would be at the then
fair value of our equity. Because the option to convert will be at the same terms and pricing as the new investors will be paying
in the subsequent Company financing, the option is deemed to have minimal value for financial reporting purposes. The Hercules
Loan’s matures on September 1, 2018 and includes an interest-only payment period for the first nine months following initial
funding of the loan, after which escalating principal payments of $0.1 million per month began on April 1, 2016. Interest expense
for the year ended December 31, 2016 was $0.4 million. As of December 31, 2016, we had made $1.2 million in principal repayments.
The Loan Agreement
includes an end of term charge of $0.5 million payable on the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date
that Borrower prepays the outstanding secured obligations under the Loan Agreement in full, or (iii) the date that the secured
obligations under the Loan Agreement become due and payable in full (as described in the Loan Agreement). We accrue a portion of
the end of term charge for each reporting period and will accrue up to the full $0.5 million charge over the 37-month term of the
Hercules Loan because this charge is deemed a cost of the debt. For the year ended December 31, 2016, we had recorded a charge
of approximately $0.2 million, in interest expense in our consolidated statements of operations related to the Loan Agreement.
We recorded $1.3 million
in debt issuance costs relating to placement agent fees, legal fees, closing costs and the fair value of the placement agent warrants
in its consolidated balance sheets upon execution of the Loan Agreement. We early adopted ASU 2015-03 Simplifying the Presentation
of Debt Issuance Costs, ASU 2015-03 amends existing guidance to require the presentation of debt issuance costs in the balance
sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. We amortized the debt
issuance costs over the term of the Loan Agreement. For the year ended December 31, 2016, we recorded $0.6 million in interest
expense related to the amortization of the debt issuance costs. At December 31, 2016, we had approximately $0.4 million in debt
issuance costs remaining to be amortized which is presented net of the debt balance in our consolidated balance sheets.
We repaid $1.2 million
in principal through December 31, 2016 and another $0.9 million in principal in 2017. As more fully described below (see Note 9
(2)), pursuant to an Assignment and Exchange Agreement that we executed in July 2017, we repaid the full principal balance of the
Hercules Loan of $2.4 million and early termination fees of $0.6 million and the Hercules Loan was extinguished.
For the year ended
December 31, 2017, interest expense was $423,000 related to the Loan Agreement, of which $143,000 was based on the interest rate,
$202,000 was for the amortization of debt issuance costs and $78,000 was for the end of term charge.
Assignment and Exchange Agreement
(July 2017 Senior Secured Convertible Promissory Note) (2)
On July 7, 2017, Immune
and Immune Pharmaceuticals USA Corp. (together, the “Borrower”), Hercules and certain subsidiaries of our subsidiaries,
as guarantors, entered into an Assignment Agreement (the “Assignment Agreement”) with MEF I, L.P. (the “Investor”)
whereby Hercules assigned to the Investor the existing amount outstanding under the Loan Agreement. Also on the Closing Date, we
entered into an Exchange Agreement with the Investor (the “Exchange Agreement”) whereby we issued to the Investor a
senior secured convertible promissory note with a principal amount of $2,974,159 (the “Exchange Note”) in exchange
for the Hercules Loan.
The Exchange Note is
convertible, at the option of the holder, into shares of our common stock, par value $0.001 per share, at a per share price of
$2.95 (the “Fixed Conversion Price”) subject to adjustment as provided in the Exchange Note, but in no event to a conversion
price lower than $1.00 per share and subject to a total beneficial ownership limitation of 4.99% of our issued and outstanding
common stock. The Exchange Note is due one year from the issue date.
The Exchange Note is
repayable through equal monthly amortization payments during the term of the Exchange Note, in cash or in shares of common stock
at the Amortization Conversion Price (as defined in the Exchange Note). The holder has the option to accelerate each amortization
payment in up to three separate payments and demand such payments in shares of our common stock.
We concluded that the
assignment and debt exchange should be accounted for as an extinguishment of debt because we were released of our obligation to
Hercules and issued new debt to the Investor. We calculated the fair value of the new debt at the date of assignment of July 7,
2017 to be $3.4 million based on the principal of the new debt of approximately $3.0 million plus guaranteed interest of $0.4 million.
The conversion price is equal to the lower of $2.80 per share or 83.5% of the lowest trading price of our common stock during the
15 trading days immediately preceding conversion. The fair value of the conversion discount was calculated to be $0.6 million,
which was recorded as loss on extinguishment and additional paid in capital. We recorded the difference between the fair value
of the new debt of $3.4 million and the net carrying amount of the extinguished debt of $2.5 million as a loss on extinguishment
of $0.9 million in the consolidated statements of operations during the year ended December 31, 2017.
During the year ended
December 31, 2017, the Investor converted approximately $2.2 million of aggregate principal and accrued interest into 1,991,864
shares of our common stock. In October 2017, we paid the Investor $1.4 million in cash, representing the remaining aggregate principal
and accrued interest on the Exchange Note of $1.2 million and a cash redemption fee of $0.2 million.
For the year ended
December 31, 2017, interest expense was $236,000 related to the July 2017 Senior Secured Convertible Promissory Note for the amortization
of original issue discount.
April 2017 Convertible Notes (3)
On April 10, 2017,
we entered into a securities purchase agreement with EMA Financial, LLC (“EMA”) pursuant to which EMA purchased an
aggregate principal amount of $525,000 of Convertible Notes for an aggregate purchase price of $450,000 (the “April 2017
Convertible Notes”). The April 2017 Convertible Notes included a 5% origination fee of $25,000 and a 10% original issue discount
of $50,000 that was added to the face amount of the April 2017 Convertible Notes.
The April 2017 Convertible
Notes bear interest at a rate of 6.0% per annum, payable in arrears on the maturity date of April 10, 2018 (the “Maturity
Date”). The April 2017 Convertible Notes are convertible into shares of our common stock, after the effectiveness of a Registration
Statement, at a conversion price equal to the lower of $2.80 or seventy-five percent (75%) of the lowest trading price of our common
stock during 15 trading days immediately preceding conversion (“Conversion Date”). We calculated the fair value of
this conversion feature as $175,000 and recorded that amount as interest expense with an offset to additional paid-in capital.
We issued to EMA 83,333
warrants with an exercise price of $4.00 per share (subject to adjustment) which may be exercisable on a cashless basis in accordance
with the terms of the warrants. The warrants contain a provision whereby if we complete a transaction with an effective price per
share lower than the exercise price of the warrants, then the exercise price is reduced and the number of warrant shares issuable
is increased such that the aggregate exercise price payable after taking into account the decrease in the exercise price is equal
to the aggregate exercise price prior to such adjustment. We calculated the fair value of these warrants using the Monte Carlo
model. We allocated the proceeds from the issuance of the April 2017 Convertible Notes between the debt and the warrants using
the allocated fair value method and the value assigned to the warrants of $180,000 was recorded as interest expense with an offset
to additional paid-in capital.
On May 3, 2017, we
signed a Waiver Letter with EMA whereby we agreed to prepay a portion of the April 2017 Convertible Notes and EMA agreed to participate
in the May 2017 Convertible Notes financing transaction described below. Additionally, we amended the April 2017 Convertible Notes
to provide that the notes are convertible into shares of our common stock after the effectiveness of the Registration Statement
at a conversion price equal to the lower of $2.80 or sixty-five percent (65%) of the lowest trading price of our common stock during
15 trading days immediately preceding a Conversion Date. On May 4, 2017, EMA converted outstanding notes with a principal balance
of $123,000 plus a prepayment premium of $31,000, for a total of $154,000, and applied that amount to the purchase of May 2017
Convertible Notes (see below). We determined that the amendment of the April 2017 Convertible Notes constituted an extinguishment
of debt and reissuance. We calculated a fair value of $105,000 for the conversion feature inherent in the amended April 2017 Convertible
Notes and recorded that amount as interest expense with an offset to additional paid-in capital. Additionally, the unamortized
debt discount associated with the April 2017 Notes prior to the amendment was written off and charged to interest expense.
On May 30, 2017, we
amended the Registration Rights Agreement with EMA dated as of April 10, 2017 to change the filing date of the registration statement
to June 30, 2017 and we agreed to prepay $97,000 towards the principal amount outstanding on the April 2017 Convertible Notes at
a prepayment price of $122,000, which included a prepayment premium of $25,000. We recorded the premium as interest expense. We
filed the S-1 Registration Statement on June 30, 2017.
In July 2017, EMA assigned
the April 2017 Convertible Notes to the Investor described above for approximately $0.4 million. We concluded that the EMA assignment
should be accounted for as an extinguishment of debt because we were released of our obligation to EMA and issued new debt to the
Investor. We calculated the fair value of the new debt on the date of the assignment based on the purchase price of $0.4 million
paid by the Investor for the April 2017 Convertible Notes. We recorded $0.1 million as expense from extinguishment of debt, which
is the difference between the fair value of the assigned debt of $0.4 million and the net carrying amount of the extinguished debt
of $0.3 million.
On August 24, 2017,
we agreed to reduce the minimum Conversion Price of the April 2017 Convertible Notes from $1.00 to $0.75 in exchange for the waiver
of certain rights held by the Investor and the consent of the Investor to allow us to issue and sell the August 2017 Convertible
Notes (described below). In 2017, the remaining principal balance of the April 2017 Convertible Notes were converted into 462,323
shares of our common stock.
For the year ended
December 31, 2017, interest expense was $607,000 related to the April 2017 Convertible Notes, of which $280,000 was for the conversion
premium, $180,000 was for the fair value of the warrants, $85,000 was for the original issue discount, origination fees and attorney’s
fees, $55,000 for the prepayment premium of 25% and interest expense of approximately $7,000 was based on the 6% per annum interest
rate.
May 2017 Convertible Notes (4)
On May 4, 2017, we
entered into a securities purchase agreement (the “May 2017 Purchase Agreement”), with several institutional investors
(the “Investors”) regarding a multi-tranche private placement of up to $3.4 million of principal amount of convertible
notes (the “May 2017 Convertible Notes”). The first tranche, consisting of the sale of convertible notes with a principal
balance of $2.0 million and the issuance of 361,455 shares of our common stock closed on May 9, 2017. The second tranche, consisting
of the sale of convertible notes with a principal balance of $360,000 and the issuance of 60,000 shares of our common stock closed
on May 22, 2017.
The May 2017 Convertible
Notes are due and payable upon the earlier of (a) November 9, 2017 and (b) the closing of one or more subsequent financings with
gross proceeds equal to at least $5,000,000 in the aggregate. The holders of the May 2017 Convertible Notes have the option to
extend the maturity date of the notes through February 7, 2018.
We recorded the issuance
of the shares as original issue discount relating to the convertible notes and used the allocated fair value method to determine
the amount of discount. The fair value of the shares of common stock at time of issuance was $0.6 million.
On June 29, 2017, we
entered into a letter agreement with the Investors whereby we waived the right to issue the remaining May 2017 Convertible Notes
issuable in the subsequent tranches and the Investors agreed to amend the May 2017 Convertible Notes to provide that the Issuable
Maximum (as defined in the May 2017 Convertible Notes) shall not exceed 9.99% (rather than 19.99%) of the number of shares of common
stock outstanding on the trading day immediately preceding the date of the May 2017 Purchase Agreement.
Pursuant to the May
2017 Purchase Agreement, the May 2017 Convertible Notes are immediately due at the Mandatory Default Amount, which is 140% of the
outstanding principal amount of the note, plus all accrued interest and unpaid interest, and all other amounts, costs, expenses
and liquidated damages due if we have not filed a S-1 registration statement for a follow-on offering by June 3, 2017. Additionally,
interest on the May 2017 Convertible Notes would accrue daily at an interest rate of 2% per month on the then outstanding principal
amount. Also, the holder may to elect to convert all or any portion of the remaining principal amount into shares of common stock
at price per share equal to the lowest daily VWAP for the 15 days prior to conversion but in no event, at a conversion price below
$1.00. We filed the S-1 Registration Statement on June 30, 2017 and recorded the Mandatory Default Amount of $1.0 million as interest
expense, of which $0.9 million represents an additional 40% of principal and $60,000 represents interest at a rate of 2% per month
on the outstanding principal balance (including the additional 40%).
On August 24, 2017,
we agreed to reduce the conversion price of the May 2017 Convertible Notes from $2.89 to $1.30 in exchange for the waiver of certain
rights held by the holders and their consent to our sale of the August 2017 Convertible Notes described below. We concluded that
the amendment should be accounted for as an extinguishment of debt and reissuance. We calculated the fair value of the new debt
on the date of the amendment based on a fair value determination of $3.8 million and recorded the difference between the fair value
of the new debt and the net carrying amount of 3.1 million of the May 2017 Convertible Notes as a loss on extinguishment of $0.7
million
During the year ended
December 31, 2017, the holders of the May 2017 Convertible Notes converted approximately $1.86 million of aggregate principal and
accrued interest into 1,409,946 shares of our common stock. In November 2017, we paid the holders of the May 2017 Convertible Notes
$0.5 million in cash, representing the remaining aggregate principal and accrued interest on the May 2017 Convertible Notes.
For the year ended
December 31, 2017, interest expense was $1,186,000 related to the May 2017 Convertible Notes for the amortization of original issue
discount. An additional $938,000 was paid in liquidated damages for the Mandatory Default Amount noted above.
July 2017 Convertible Notes (5)
On July 17, 2017, we
entered into an agreement in principle with Carmelit 9 Nehassim Ltd (“Carmelit”) for the sale of $0.3 million of original
issue discount convertible notes (the “Carmelit Notes”) for net proceeds of $0.25 million ($50,000 original issue discount)
which are convertible into shares of our common stock upon shareholder approval. The proposed terms of the notes are as follows:
the notes are convertible into an aggregate of 101,695 shares of our common stock based upon a conversion price of $2.95 per share,
subject to adjustment but in no event below $1.00 per share. The Carmelit Notes are due and payable upon the earlier of (a) January
17, 2018 and (b) the closing of one or more subsequent financings with gross proceeds equal to at least $5,000,000 in the aggregate.
The holder has the option to extend the maturity date of the notes through October 17, 2018. Also, the holder is entitled to receive
75,000 shares of our common stock subject to approval by our shareholders. The transaction was consummated on August 24, 2017.
We repaid the Carmelit Notes in full in November 2017.
We accounted for the
obligation to issue Carmelit 75,000 shares as a derivative under ASC 815 because shareholder approval is not within our control
and failure to obtain the approval would trigger net-cash settlement. Therefore, we classified the obligation as a liability with
an offset to debt discount on the debt in our consolidated financial statements, recorded at fair value and subject to mark to
market until the shares are issued upon shareholder approval. The 75,000 shares had a fair value of $0.2 million on July 17, 2017
based on the closing price of our shares on that date. As of December 31, 2017, the 75,000 shares had a fair value of $43,000 based
on the closing price of our shares.
For the year ended
December 31, 2017, interest expense was $263,000 related to the July 2017 Convertible Notes for the amortization of original issue
discount.
August 2017 Convertible Notes (6)
On August 24, 2017,
we entered into a securities purchase agreement with certain institutional investors for the sale of $858,000 in aggregate principal
amount of original issue discount convertible notes (the “August 2017 Convertible Notes”) with net proceeds of $515,000
(original issue discount of $343,000) which are convertible into shares of our common stock upon shareholder approval. The notes
are convertible into shares of our common stock at a conversion price of $1.75 per share, subject to adjustment, subject to adjustment
but in no event below $1.00 per share. The transaction was consummated on August 30, 2017. The August Convertible Notes are due
and payable upon the earlier of (a) February 28, 2018 and (b) the closing of one or more subsequent financings with gross proceeds
equal to at least $3.0 million in the aggregate. The holder has the option to extend the maturity date through May 28, 2018. We
repaid the August 2017 Convertible Notes in full in October 2017.
For the year ended
December 31, 2017, interest expense was $343,000 related to the August 2017 Convertible Notes for the amortization of original
issue discount.
September 2017 Convertible Notes (7)
In September 2017,
we entered into a securities purchase agreement with certain institutional investors for the sale of $149,500 in aggregate principal
amount of original issue discount convertible notes (the “September 2017 Convertible Notes”) with net proceeds of $115,000
(original issue discount of $34,500) which are convertible into shares of our common stock upon shareholder approval. The notes
are convertible into shares of our common stock at a conversion price of $1.75 per share, subject to adjustment, but in no event
below $1.00 per share. We repaid the September 2017 Convertible Notes in full in October 2017.
For the year ended
December 31, 2017, interest expense was $35,000 related to the September 2017 Convertible Notes for the amortization of original
issue discount.
MabLife Notes Payable (8)
In March 2012, we acquired
from MabLife SAS (“MabLife”) through an assignment agreement, all rights, titles and interests in and to the patent
rights, technology and deliverables related to the anti-Ferritin mAb, AMB8LK, including its nucleotide and protein sequences and
its ability to recognize human acid and basic ferritins. The consideration was as follows: (i) $0.6 million payable in six annual
installments (one of such installments being an upfront payment made upon execution of the agreement), and (ii) royalties of 0.6%
of net sales of any product containing AMB8LK or the manufacture, use, sale, offering or importation of which would infringe on
the patent rights with respect to AMB8LK. In February 2014, the parties revised the payment arrangement for the purchase of the
original assignment rights to provide that the remaining payments of $0.1 million per year would be due each year in 2016 and 2017.
We did not make those payments on a timely basis.
In February 2014, we
acquired from MabLife, through an assignment agreement, all rights, titles and interests in and to the patent rights, technology
and deliverables related to the use of anti-ferritin monoclonal antibodies in the treatment of some cancers, nucleotide and protein
sequences of an antibody directed against an epitope common to human acidic and basic ferritins, monoclonal antibodies or antibody-like
molecules comprising these sequences. As full consideration for the secondary patent rights, we agreed to pay a total of $150,000
of which $15,000 and $25,000 was paid in 2014 and 2013, respectively, and $25,000 would be paid on the second through fourth anniversary
of the agreement and an additional $35,000 on the fifth anniversary of the agreement. We did not make those payments on a timely
basis.
For the years ended
December 31, 2017 and 2016, interest expense was $0 and $49,000, respectively.
During the first quarter
of 2015, MabLife informed us that it had filed for bankruptcy. On May 30, 2017, we received a summons from the bankruptcy court-liquidator
to appear before the commercial court of Evry, France on September 19, 2017. In December 2017, we reached an agreement with the
bankruptcy court-liquidator to settle all amounts due to Mablife for a payment of approximately $205,000. We paid the settlement
amount in January 2018 and are awaiting confirmation by the commercial court.
Asset Acquisition Note Payable (9)
In conjunction with
the Asset Purchase Agreement with Meda described in Note 7, we agreed to pay a fixed consideration of $5.0 million, payable in
installments over a three-year period as follows: (i) $1.5 million on the earlier of: (1) the successful transfer to us of all
of the marketing authorizations for the product or (2) the date which is six months after the Completion Date (as defined in the
Asset Purchase Agreement); (ii) $1.5 million on the first anniversary of the Completion Date; (iii) $1.0 million on the second
anniversary of the Completion Date; and (iv) $1.0 million on the third anniversary of the Completion Date. We recorded current
and long-term debt of $3.0 million and $1.4 million, respectively, representing the amount due to Meda calculated on a present
value basis. For the year ended December 31, 2017, interest expense was $141,000. See Note 15 for discussion of our default on
this debt.
HLHW Convertible Notes (10)
On November 17, 2016,
we entered into a securities purchase agreement with HLHW IV, LLC (“HLHW”), pursuant to which HLHW purchased an aggregate
principal amount of $1,050,000 of Subordinated Convertible Notes for an aggregate purchase price of $1,000,000 (“Convertible
Notes”), representing a principal amount of the Notes of $1,000,000 plus an original issue discount of 5% which is $50,000.
The Convertible Notes
bear interest at a rate of 7.0% per annum, payable in arrears on the maturity date of November 17, 2017. The Notes are convertible
into shares of our common stock at any time from the date of issuance of the Notes, at a conversion price equal to eighty percent
(80%) of the lowest intraday bid price on the date of conversion (“conversion date”); provided the lowest intraday
bid price on such conversion date is above the lowest closing bid price on the closing date (“Market Price”). In the
event on the conversion date, the lowest intraday bid price is less than the Market Price, then in that instance, the conversion
price on that conversion date will be equal to the lowest intraday bid price.
On the maturity date,
we have the option to pay the amount being redeemed; including accrued but unpaid interest, in cash, shares or any combination
of cash and shares of our common stock. In addition, if at any time the lowest intraday bid price falls below $5.00 per share,
the holder may elect to redeem up to $350,000 of the outstanding principal, interest and any amounts due under the Convertible
Notes; provided, however, we may only use the proceeds from the sale of common stock pursuant to the terms of the Common Stock
Purchase Agreement, dated November 17, 2016 (“CS Purchase Agreement”) entered into with HLHW to redeem the Convertible
Notes. The Convetible Notes are subordinated to the Loan Agreement with Hercules Capital. This redemption process may be repeated
once every five business days, at the election of Holder, until the Convertible Notes are fully satisfied. The foregoing notwithstanding,
HLHW may convert any or all of these Convertible Notes into shares of our common stock at any time.
The Convertible Notes
also includes certain of events of defaults which at any time after HLHW becomes aware of may require the redemption of all or
any portion of the Convertible Notes by delivery of a written notice to us. Each portion of the Convertible Notes subject to redemption
shall be redeemed at a price equal to the greater of 18% per annum or the maximum rate permitted under applicable law of the conversion
amount being redeemed, together with liquidated damages of $250,000. As part of the agreement, we paid approximately $0.1 million
in debt issuance costs and discount.
On December 16, 2016,
we entered into Amendment No. 1 to the Purchase Agreement, which amended the Purchase Agreement to provide that in no circumstance
shall the conversion price be lower than $2.00 per share of our common stock. As of December 31, 2016, the principal outstanding
on the Convertible Notes was approximately $1.0 million. We incurred $0.1 million in transaction costs. For the year ended December
31, 2016, we recognized $25,000 in interest expense, amortization of debt discount and debt issuance costs which was recorded in
interest expense in our consolidated statement of operations.
On February 3, 2017,
we entered into Amendment No. 2 to the Purchase Agreement, which amended the Convertible Notes to provide that we would redeem
the Convertible Notes for $1.35 million by March 1, 2017, reflecting a redemption premium of 120% of the face amount of the HLHW
Convertible Notes plus accrued interest. We recorded $0.3 million in interest expense as the redemption premium during the first
quarter of 2017 related to Amendment No. 2 to the Convertible Note. We repaid the HLHW Convertible Notes in full in the second
quarter of 2017.
For the year ended
December 31, 2017, interest expense was $404,000 related to the HLHW Convertible Notes, of which $300,000 was for the redemption
premium during the first quarter of 2017 related to Amendment No. 2 to the Convertible Note and $104,000 was for the amortization
of debt discount, debt issuance costs and original issue discount.We also paid $825,000 of liquidated damages.
Revolving Line of Credit
In April 2014, we entered
into a three-year, $5.0 million revolving line of credit with Melini Capital Corp., a stockholder related to Daniel Kazado, our
former Chariman of the Board until October 19, 2016 and a member of our Board of Directors. Borrowings under the revolving line
of credit incur interest at a rate of 12% per year, payable quarterly. The revolving line of credit is unsecured and subordinated
to the Hercules Loan Agreement. On November 30, 2016, the revolving line of credit expired with no amounts having been drawn.
Note 10. Stockholders’ Equity
(a) Stock options and stock award
activity
The following table
illustrates the common stock options granted for the years ended December 31, 2017 and 2016:
Title
|
|
Grant date
|
|
No. of
options
|
|
|
Weighted average
exercise
price
|
|
|
Weighted average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-Scholes
option pricing model
|
Management, Directors and Employees
|
|
January – December 2017
|
|
|
366,500
|
|
|
$
|
2.60
|
|
|
$
|
2.40
|
|
|
0 to 3.0 years
|
|
Volatility
|
|
109.42% -114.20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
2.01%-2.53%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
6.00-10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
|
|
Grant date
|
|
No. of
options
|
|
|
Weighted average
exercise
price
|
|
|
Weighted average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-Scholes
option pricing model
|
Management, Directors and Employees
|
|
January – December 2016
|
|
|
138,500
|
|
|
$
|
11.20
|
|
|
$
|
7.20
|
|
|
0 to 3.0 years
|
|
Volatility
|
|
91.55% -107.35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
1.35%-2.06%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
6.00-10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants
|
|
January – December 2016
|
|
|
24,250
|
|
|
$
|
6.20
|
|
|
$
|
4.60
|
|
|
0 to 1.0 years
|
|
Volatility
|
|
91.55% - 102.12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
1.39% -1.56%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.00%
|
The following table
illustrates the stock awards granted for the years ended December 31, 2017 and 2016:
Title
|
|
Grant date
|
|
No. of
stock
awards
|
|
|
Weighted average
grant date
fair value
|
|
|
Vesting
terms
|
Consultant
|
|
January - December 2017
|
|
|
250,000
|
|
|
$
|
0.90
|
|
|
Immediately
|
Consultant
|
|
January - December 2016
|
|
|
45,000
|
|
|
$
|
8.80
|
|
|
Immediately
|
The following table
summarizes information about stock option activity for the years ended December 31, 2017 and 2016:
|
|
Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Exercise Price
|
|
|
Grant Date
|
|
|
Value
|
|
|
|
of Options
|
|
|
Price
|
|
|
Range
|
|
|
Fair Value
|
|
|
(000)s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
|
249,450
|
|
|
$
|
31.20
|
|
|
|
$0.80-80.00
|
|
|
$
|
39.40
|
|
|
$
|
-
|
|
Granted
|
|
|
162,750
|
|
|
$
|
9.20
|
|
|
|
$5.40-14.60
|
|
|
$
|
6.80
|
|
|
|
-
|
|
Exercised
|
|
|
(23,835
|
)
|
|
$
|
0.80
|
|
|
|
$0.80
|
|
|
$
|
33.60
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(17,608
|
)
|
|
$
|
24.60
|
|
|
|
$8.00-71.60
|
|
|
$
|
21.20
|
|
|
|
-
|
|
Outstanding at December 31, 2016
|
|
|
370,757
|
|
|
$
|
23.80
|
|
|
|
$0.80-80.00
|
|
|
$
|
27.60
|
|
|
|
-
|
|
Granted
|
|
|
366,500
|
|
|
|
2.60
|
|
|
|
$1.10-4.00
|
|
|
$
|
2.40
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(218,243
|
)
|
|
$
|
23.20
|
|
|
|
$0.80-71.60
|
|
|
$
|
21.20
|
|
|
|
-
|
|
Outstanding at December 31, 2017
|
|
|
519,014
|
|
|
$
|
9.80
|
|
|
|
$0.80-80.00
|
|
|
$
|
9.40
|
|
|
|
-
|
|
Exercisable at December 31, 2017
|
|
|
345,638
|
|
|
$
|
13.40
|
|
|
|
$0.80-80.00
|
|
|
$
|
13.20
|
|
|
$
|
-
|
|
Stock-based compensation
expense for the years ended December 31, 2017 and 2016 was $0.5 million and $2.0 million, respectively, which has not been tax-effected
due to the recording of a full valuation allowance against net deferred tax assets. As of December 31, 2017, unamortized stock-based
compensation for stock options and stock awards was $0.3 million, with a weighted-average recognition period of approximately 1.7
years, respectively.
(b) Warrants
The following table
summarizes information about warrants outstanding at December 31, 2017 and 2016:
|
|
Number of
|
|
|
Weighted Average
|
|
|
Exercise Price
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Range
|
|
Warrants outstanding at January 1, 2016
|
|
|
534,607
|
|
|
$
|
78.60
|
|
|
$
|
33.20-1,312
|
|
Warrants issued (1)
|
|
|
64,911
|
|
|
$
|
14.80
|
|
|
$
|
9.40-20.00
|
|
Expired
|
|
|
(19,128
|
)
|
|
$
|
404.40
|
|
|
$
|
28.00-1,312
|
|
Warrants outstanding at December 31, 2016
|
|
|
580,390
|
|
|
$
|
60.80
|
|
|
$
|
9.40-200.00
|
|
Warrants issued (2)
|
|
|
18,116,507
|
|
|
$
|
1.20
|
|
|
$
|
4.00-10.00
|
|
Expired
|
|
|
(1,220
|
)
|
|
$
|
188.40
|
|
|
$
|
170-200
|
|
Warrants outstanding at December 31, 2017
|
|
|
18,695,677
|
|
|
$
|
3.00
|
|
|
$
|
9.40-200.00
|
|
Warrants exercisable at December 31, 2017
|
|
|
18,695,577
|
|
|
$
|
3.00
|
|
|
$
|
9.40-200.00
|
|
|
1)
|
Includes warrants to purchase an aggregate of 25,000 shares of our common stock, at an exercise
price of $20.00 per share, exercisable immediately and expiring five years after the issuance date, issued in connection with the
July 29, 2016 securities purchase agreement with certain institutional investors for issuance and sale of 158,730 shares of our
common stock, for aggregate gross proceeds of $1.0 million as discussed below.
|
|
2)
|
Includes the 83,333 warrants issued with the April 2017 Convertible Notes valued using the Monte
Carlo model, which is a pricing model that incorporates all of the required inputs of a Black-Scholes model and Monte Carlo simulation
process that capture additional features of the warrant related to its fair value estimate, but are outside of the Black-Scholes
model. The warrants contain a provision whereby if we complete a transaction with an effective price per share lower than the exercise
price of the warrants then the exercise price shall be reduced and the number of warrant shares issuable shall be increased such
that the aggregate exercise price payable after taking into account the decrease in the exercise price, shall be equal to the aggregate
exercise price prior to such adjustment. The allocated fair value of the warrant of $180,000 is the mean of the present value of
the future cash flows resulting from the Monte Carlo simulation process. The fair value of $180,000 was calculated using the Monte
Carlo model and the allocated value of $180,000 was recorded as additional paid-in capital. In 2017, the number of warrants increased
to 387,597 and exercise price lowered to $0.86 due to the above provision.
|
(c) Capital Access Agreements
April 19, 2016 Capital Access Agreement
On April 19, 2016,
we entered into a Capital Access Agreement (“April 2016 Agreement”) with Regatta Select Healthcare, LLC (“Regatta”)
providing for the purchase up to 175,000 shares of our common stock over a twelve month term beginning on the date of the agreement.
The purchase price per share is equal to 83% of the lowest trading price of our common stock on NASDAQ during the five consecutive
trading days immediately following the date of such Put Notice (the “Put Date”) (all as defined in the April 2016 Agreement).
The number of shares that may be purchased under each Put Notice was subject to a ceiling of the lesser of (a) $250,000 in market
value of Purchase Shares or (b) 200% of average daily volume of our shares traded on NASDAQ, computed using the 10 business days
prior to the Put Date multiplied by the average of the daily closing price for the 10 business days immediately preceding the Put
Date. The Purchase Price was additionally subject to a floor price equal to 75% of the average closing bid price for our common
stock for the 10 trading days prior to the Put Date. We sold all 175,000 shares to Regatta during the year ended December 31, 2016
for aggregate gross proceeds of $0.8 million. We incurred approximately $0.1 million in transaction fees related to this transaction.
June 10, 2016 Capital Access Agreement
On June 10, 2016, we
entered into a second Capital Access Agreement (“June 2016 Agreement”) with Regatta providing for the purchase of up
to 185,000 shares of our common stock over a twelve month term beginning on the date of the agreement. The purchase price per share
is equal to 83% of the lowest trading price of our common stock on NASDAQ during the five consecutive trading days immediately
following the date of such Put Notice (the “Put Date”) (all as defined in the June 2016 Agreement). The number of shares
that may be purchased under each Put Notice was subject to a ceiling of the lesser of (a) $250,000 in market value of Purchase
Shares or (b) 200% of average daily volume of our shares traded on NASDAQ, computed using the 10 business days prior to the Put
Date multiplied by the average of the daily closing price for the 10 business days immediately preceding the Put Date. The Purchase
Price was additionally subject to a floor price equal to 75% of the average closing bid price for our common stock for the 10 trading
days prior to the Put Date. We sold all 185,000 shares to Regatta during the year ended December 31, 2016 for aggregate gross proceeds
of $1.1 million. We incurred approximately $0.1 million in transaction fees related to this transaction.
(d) Share Purchase Agreements and Amendments to Share
Purchase Agreements
During the second
quarter of 2016, we entered into share purchase agreements with two investors, CrystalClear Group, Inc. (“Crystal”)
and Dr. Jean-Marc Menat to sell a total of 48,333 restricted shares of our common stock at a price of $7.20 per share for aggregate
gross proceeds of $0.3 million.
On December 16, 2016,
we entered into amendment to the securities purchase agreement (the “SPA Amendment”) with Crystal, effective as of
December 14, 2016. The SPA Amendment amends the Securities Purchase Agreement to adjust the per share purchase price paid by Crystal
to $8.50 per share. Pursuant to the SPA Amendment, the Investor returned 4,248 shares to us in the first quarter of fiscal 2017.
In consideration of
the entering into the SPA Amendment by Crystal, we agreed to issue to the Crystal a five-year warrant to purchase an aggregate
of 9,259 shares at an exercise price of $10.00 per share, which Warrant shall not be exercisable until six months after the date
of issuance.
On December 27, 2016,
the Company and Dr. Jean-Marc Menat (“Dr. Menat”) entered into Amendment No. 1 to the Securities Purchase Agreement
which amends the securities purchase agreement to adjust the per share price paid by Dr. Menat to $8.82 per share. Pursuant to
the SPA Amendment, Dr. Menat returned 3,776 shares to us in the first quarter of fiscal 2017. In consideration of the entering
into of the SPA Amendment with Dr. Menat, we agreed to issue to Dr. Menat a five-year warrant to purchase an aggregate of 6,852
shares at an exercise price of $10.00 per share, which warrant shall not be exercisable until six months after the date of issuance
the warrant.
On July 29, 2016,
we entered into a securities purchase agreement with certain institutional investors for issuance and sale of 158,730 shares of
our common stock, for aggregate gross proceeds of $1.0 million. Under this securities purchase agreement, we also agreed to issue
to the institutional investors warrants to purchase 25,000 shares of common stock. The warrants were sold concurrently with the
sale of the shares of common stock, pursuant to the securities purchase agreement, in a concurrent private placement. The warrants
are exercisable for a period of five years from the date of issuance at an exercise price equal to $20.00 per share. Pursuant to
this securities purchase agreement, we also agreed to pay to the institutional investors a commitment fee of $100,000, in cash
or alternatively, 17,500 shares of common stock. We incurred an additional $40,000 in transaction fees related to this transaction.
The proceeds received for the issuance of the common stock was recorded in stockholder’s equity in our consolidated balance
sheet. Transaction fees and the value of the consideration paid to the institutional investors were recorded as a reduction to
additional paid in capital in our consolidated balance sheets. On January 10, 2017, the Company and the institutional investors
signed an amendment to the securities purchase agreement whereby the institutional investors agreed to give us an additional $238,095,
in exchange for five year warrants to purchase 52,910 shares of common stock at an exercise price of $10.00
On September 6, 2016,
we entered into a stock purchase agreement with an existing stockholder for the sale of 200,000 shares of our common stock for
gross proceeds of $2.0 million. These shares of common stock were issued in a registered direct offering pursuant to a prospectus
supplement filed with the SEC on September 7, 2016, in connection with a takedown from the Registration Statement on Form S-3 (File
No. 333-198647).
(e) Equity Lines
November 2016 Equity Line
On November 17, 2016,
we entered into a Common Stock Purchase Agreement (“CS Purchase Agreement”) with HLHW (“Buyer”), which
provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to sell to Buyer
up to $10.0 million in shares of our common stock.
Beginning on the day
following November 17, 2016, the date that certain closing conditions in the CS Purchase Agreement were satisfied (the “Commencement
Date”), we shall have the right, but not the obligation, to direct Buyer via written notice (a “Purchase Notice”)
to purchase up to a specific number of shares of our common stock (the “Purchase Shares”). The per share purchase will
be equal to: (i) from 9:30am to 4:00pm Eastern Time of the regular session of any trading day, lowest intra-day bid price or (ii)
if after the close of the regular session on any trading day, then such trading day’s closing bid price on Nasdaq. We shall
have the obligation to sell and Buyer shall have the obligation to purchase at the Purchase Price a number of Purchase Shares with
an aggregate value of $2.0 million of Purchase Shares on or before December 31, 2016 which we had met prior to December 31, 2016.
We shall not issue,
and the Buyer shall not purchase any shares of common stock under the CS Purchase Agreement, if such shares proposed to be issued
and sold, when aggregated with all other shares of common stock then owned beneficially (as calculated pursuant to Section 13(d)
of the 1934 Act and Rule 13d-3 promulgated thereunder) by the Buyer and its affiliates would result in the beneficial ownership
by the Buyer and its affiliates of more than 4.99% of the then issued and outstanding shares of common stock of the Company, unless
waived in writing by Buyer. Shares of Common Stock were issued pursuant to our “shelf” registration statement on Form
S-3 (File No. 333-198647), previously filed with the U.S. Securities and Exchange Committee (“SEC”) on September 8,
2014, as amended on October 3, 2014, and that was declared effective by the SEC on October 28, 2014.
At any time after the
Commencement Date, the CS Purchase Agreement may be terminated by the mutual written consent of us and Buyer and upon the meeting
of certain conditions as defined in the CS Purchase Agreement. In addition, at any time after the Commencement Date, we shall have
the option to terminate the CS Purchase Agreement for any reason or for no reason by delivering notice to Buyer electing to terminate
the CS Purchase Agreement without any liability whatsoever except that we must transmit to Buyer a termination fee of $250,000
in cash or shares, at Buyer’s election with such shares to be valued at the Purchase Price, within two (2) Business Days
following delivery of such notice of termination. Net proceeds to uswill depend on the Purchase Price and the frequency of the
our sales of Purchase Shares to Buyer.
As part of the CS Purchase
Agreement, we paid $0.7 million in commitment fees through delivery of shares of its common stock and recorded the fees as a reduction
to additional paid in capital during the fourth quarter of 2016. We also agreed to pay Buyer legal fees related to the CS Purchase
Agreement of $35,000. In addition, we also agreed to pay on each Purchase Date and on each Additional Purchase Date (each as defined
in the CS Purchase Agreement) 1.75% of such aggregate proceeds representing the fees and expenses of Buyer’s advisers, counsel,
accountants and other experts. As of December 31, 2016, the Company sold 625,000 shares of its common stock to Buyer for gross
proceeds of $2.4 million.
During the first quarter
of 2017, we sold 1,100,000 shares of common stock to Buyer for gross proceeds of $4.0 million, of which $0.2 million was received
as an advance during the fourth quarter of 2016, and we paid $70,000 in financing related fees. In June 2017, Buyer returned the
shares of our common stock received as commitment fees and the CS Purchase Agreement was terminated.
February 2017 Equity Line
On February 3, 2017,
we entered into a second Common Stock Purchase Agreement with HLHW (the “February 2017 CS Purchase Agreement”) providing
for the purchase by HLHW of up to $3,057,100 of shares of our common stock. Purchase of stock were contingent on the effectiveness
of a registration statement covering the shares. On March 22, 2017, we filed a prospectus supplement which amended, supplemented
and superseded our prospectus supplement dated February 3, 2017 and its accompanying prospectus dated October 28, 2014 related
to the February 2017 CS Purchase Agreement, dated February 3, 2017 to register the shares to be issued under the February 2017
CS Purchase Agreement.
In March 2017, we were
advised that NASDAQ rules required us to obtain shareholder approval prior to issuing any stock to HLHW pursuant to the February
2017 CS Purchase Agreement because the issuance was “below market” and represented an aggregate amount of shares greater
than 20% of the total number of our common shares outstanding. Accordingly, effective March 22, 2017, we halted all future offers
and sales of common stock under the February 2017 CS Purchase Agreement and reduced the amount of potential future offers and sales
under the February CS Purchase Agreement to zero.
March 2017 Equity Line
On March 22, 2017,
we entered into another Common Stock Purchase Agreement with HLHW (the “March 2017 CS Purchase Agreement”) providing
for the purchase by HLHW of up to $1.6 million of shares of our common stock. We paid HLHW a cash commitment fee of $1.0 million.
The number of shares
that may be purchased under each “Purchase Notice” is subject to a ceiling of up to 25,000 shares or an aggregate purchase
price of $250,000, at a price not below the closing bid price of our common stock on the day preceding the date of execution of
the March 2017 CS Purchase Agreement (“Floor Price”), subject to certain exceptions to the ceiling specified in the
agreement. The shares of common stock were issued pursuant to our “shelf” registration statement on Form S-3 (File
No. 333-198647) filed with the United States Securities and Exchange Committee (“SEC”) on September 8, 2014, as amended
on October 3, 2014, and declared effective by the SEC on October 28, 2014.
We issued a total of
496,895 shares of our common stock for gross proceeds of $1.6 million to HLHW during the year ended December 31, 2017 and paid
$48,000 in financing related fees. Also, we agreed to pay on each Purchase Date and on each Additional Purchase Date (each as defined
in the November 2016 CS Purchase Agreement) 1.75% of the aggregate proceeds as reimbursement to HLHW of professional fees.
(f) Convertible Preferred Stock
Series E Convertible Preferred Stock
On October 23, 2017,
we consummated a public offering of units for gross proceeds of $18,000,000, which excludes underwriting discounts and commissions
and offering expenses. The units, priced at a public offering price of $1,000 per unit, consists of one share of Series E Convertible
Preferred Stock (the “Series E Stock”) and 982 warrants (the “Warrants”) for a total of 18,000 units. Each
Warrant entitles the holder to purchase one share of our common stock for a total of 17,676,000 shares of our common stock. The
Warrants are initially exercisable at an exercise price of $1.10 per share and expire 7 years from the date of issuance.
The Series E Stock
is convertible into shares of common stock by dividing the stated value of the Series E Stock ($1,080) by the Conversion Price.
The “Conversion Price” is as follows: (i) for the first 40 trading days following the closing of the offering, $1.10
per share of common stock (the “Set Price”), and (ii) after such 40 trading days, the lesser of (a) the Set Price and
(b) 87.5% of the lowest volume weighted average price for our common stock during the five trading days prior to the date of the
notice of conversion. The Conversion Price is subject to a floor of $0.66, except in the event of anti-dilution adjustments.
The Conversion Price is subject to appropriate adjustment in the event of recapitalization events, stock dividends, dilutive issuances,
stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our common stock. Further, the
Set Price is subject to full ratchet adjustment if we issue or are deemed to issue additional shares of our common stock at a price
per share less than the then effective Set Price.
Holders of Series E
Stock are entitled to receive cumulative dividends at the rate of 8.0% per annum, payable quarterly on January 1, April 1,
July 1 and October 1, beginning on the first such date after the original issue date and continuing for a period of twenty
four (24) months thereafter.
The securities were
offered pursuant to a registration statement on Form S-1 (File No. 333-220413), which was declared effective by the United States
Securities and Exchange Commission ("SEC") on October 18, 2017.
We accounted for the
Series E Stock and Warrants as permanent equity in accordance with ASC 480 “Distinguishing Liabilities from Equity”.
We performed a valuation of the Series E Stock and Warrants. The Warrants were valued using a Black-Scholes model. Based upon that
valuation, we allocated the net proceeds between the Series E Stock and Warrants of approximately $8,690,000 and $7,355,000, respectively,
based on their relative fair value. In addition, we evaluated the conversion feature of the Series E Stock to assess whether it
met the definition of a beneficial conversion feature (“BCF”). Assuming all 18,000 shares of Series E Stock will convert
into common stock at the $1.10 price, and taking the 8% original issue discount into consideration, we will issue 17,672,727 shares
of common stock, which provides an effective conversion price of $0.28 for accounting purposes. As the fair value of a share of
common stock of $0.94 exceeded the effective conversion price of approximately $0.55 at the issuance date, the Series E Stock contained
a BCF. The intrinsic value of the BCF of approximately $6,864,000 was recorded as a discount to the Series E Stock and a credit
to additional paid in capital. The BCF was immediately recorded as a deemed dividend.
For the year ended
December 31, 2017, 5,809 shares of Series E Stock were converted into 6,922,992 shares of our common stock and dividends of $864
were converted into 786 shares of our common stock.
For the year ended
December 31, 2017, we recorded dividends of $231,698.
Discover Series D Preferred Stock
During 2015, we entered
into Stock Purchase Agreements (the “Purchase Agreements”) with Discover Growth Fund (“Discover”) pursuant
to which we agreed to issue and sell up to an aggregate of 1,263 shares of our Series D Redeemable Convertible Preferred Stock
(“Series D Preferred Stock”), par value $0.0001 per share, which were convertible into shares of our common stock,
at a purchase price of $10,000 per share, for total gross proceeds of $12.0 million after taking into account a 5% original issue
discount which was received in two tranches of $9.0 million on July 28, 2015 and $3.0 million on September 29, 2015.
The Series D Preferred
Stock was convertible at a price of $50.00 per share (“Conversion Price”) and had a six and one half year maturity
term, at which time it would have converted automatically into shares of common stock based on the Conversion Price. The Series
D Preferred Stock bore an accrued annual dividend rate which ranged from 0% to 15%, based on certain adjustments and conditions,
including changes in the volume weighted average price of the our common stock. Upon conversion, we were obligated to pay the holders
of the Series D Preferred Stock being converted a conversion premium equal to the amount of dividends that such shares would have
otherwise been issued if they had been held through the entire 6.5-year term.
The dividends and conversion
premium was payable at our option in shares of common stock with the number of shares issued calculated as follows: (i) if there
was no triggering event (as such term is defined in the Certificate of Designations), 90.0% of the average of the five lowest individual
daily volume weighted average prices during the applicable measurement period, which may be non-consecutive, less $1.00 per share
of common stock, not to exceed 100% of the lowest sales price on the last day of such measurement period, less $1.00 per share
of common stock, or (ii) following a triggering event, 80.0% of the lowest daily volume weighted average price during any measurement
period, less $1.00 per share of common stock, not to exceed 80.0% of the lowest sales price on the last day of any measurement
period, less $1.00 per share of common stock. In addition, in a triggering event the dividend rate would adjust upwards by 10%.
We accounted for the
Series D Preferred Stock as mezzanine equity in accordance with ASC 480 “Distinguishing Liabilities from Equity,” because
upon liquidation, we are required to redeem the outstanding Series D Preferred Stock for cash. The conversion premium and the dividends
associated with the Series D Preferred Stock contained an anti-dilution feature within the dividend rate, which fluctuated inversely
to the changes in the value of our stock price. The conversion premium and dividends with the features noted above were to be redeemed
upon conversion of the Series D Preferred Stock. We analyzed the conversion premium and dividends with the features noted and had
determined that liability treatment was appropriate. Therefore, we bifurcated the conversion premium and the dividends from the
Series D Preferred Stock for financial reporting purposes. Initial and subsequent measurements of this derivative liability were
at fair value, with changes in fair value recognized in our consolidated statement of operations on a quarterly basis.
Upon closing of the
$9.0 million financing, the two co-placement agents received an aggregate of $0.6 million and each received warrants to purchase
13,750 shares of the our common stock at an exercise price of $50.00 per share, exercisable commencing six months following the
issuance date and ending five years following the issuance date. We valued the warrants issued to the placement agents using the
Black-Scholes options-pricing model and calculated a fair value of $0.6 million, which we recorded as a reduction to the Series
D Preferred Stock in the consolidated balance sheet. Upon closing of the additional $3.0 million financing, the co-placement agents
received an aggregate of $0.2 million in cash and each received warrants to purchase 5,700 shares of our common stock at an exercise
price of $50.00 per share, exercisable six months following the issuance date and ending five years following the issuance date.
We valued the warrants issued to placement agents using the Black-Scholes options-pricing model and calculated a fair value of
$0.2 million.
We paid legal fees
of $0.1 million, which were recorded as a reduction of the Series D Preferred Stock in the consolidated balance sheets. Total Series
D Preferred Stock issuance costs of approximately $1.7 million were recorded as a reduction of the Series D Preferred Stock in
the consolidated balance sheets as of December 31, 2015.
During 2015, Discover
converted 300 shares of Series D Preferred Stock into 60,000 of our common stock and the Company issued an additional 165,586 of
common stock to Discover as payment of dividends and conversion premium. We recorded a proportionate amount of the Series D Preferred
Stock as a deemed dividend of $2.4 million upon conversion, which was charged to additional paid-in capital. In addition, during
2015, $3.0 million was credited to additional paid-in capital from the conversion of the 300 shares of Series D Preferred Stock.
During 2016, a triggering
event occurred resulting in an upward adjustment to the dividend rate from 15% to 25%. We recorded a loss on the change in the
estimated fair value of the derivative liability associated with the Series D Preferred Stock of $8.7 million for the year ended
December 31, 2016, which was recorded in non-operating expense in our consolidated statements of operations.
During 2016,
Discover converted all of its remaining 963 shares of Series D Preferred Stock into a total of 192,600 shares of our common
stock and we issued an additional 4,542,989 shares of common stock as payment of dividends and conversion premium. We
recorded a proportionate amount of the Series D Preferred Stock as a deemed dividend of approximately $8.0 million upon
conversion, which was charged to additional paid-in capital in the consolidated balance sheets. As of December 31, 2016, we
had no Series D Preferred Stock outstanding as we had met our obligations under the Purchase Agreements.
Below is the activity
for the Company’s Series D Preferred Stock issuances for the periods presented ($ in thousands, except share amounts):
|
|
Shares
|
|
|
Amount
|
|
Balance at January 1, 2016
|
|
|
963
|
|
|
$
|
1,659
|
|
Accretion of Series D Preferred Stock
|
|
|
-
|
|
|
|
7,973
|
|
Conversion of Series D Preferred Stock
|
|
|
(963
|
)
|
|
|
(9,632
|
)
|
Balance at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
(g) Nasdaq Listing Compliance Matters
On December 1, 2017,
we received a letter from the Listing Qualifications Department of The NASDAQ Stock Market LLC (“NASDAQ”) notifying
us that our common stock did not maintain a minimum closing bid price of $1.00 per share for the preceding 30 consecutive business
days as required by NASDAQ Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The notice has no immediate
effect on the listing or trading of our common stock and the common stock will continue to trade on The NASDAQ Capital Market under
the symbol “IMNP” at this time.
In accordance with
NASDAQ Listing Rule 5810(c)(3)(A), we have a grace period of 180 calendar days, or until June 2, 2018, to regain compliance with
NASDAQ Listing Rule 5550(a)(2). Compliance can be achieved automatically and without further action if the closing bid price of
our stock is at or above $1.00 for a minimum of 10 consecutive business days at any time during the 180-day compliance period,
in which case NASDAQ will notify us of our compliance and the matter will be closed.
We may be eligible
for additional time to comply if we do not achieve compliance with the Minimum Bid Price Requirement by June 2, 2018. In order
to be eligible for such additional time, we will be required to meet the continued listing requirement for market value of publicly
held shares and all other initial listing standards for The NASDAQ Capital Market, with the exception of the Minimum Bid Price
Requirement, and must notify NASDAQ in writing of our intention to cure the deficiency during the second compliance period.
On February 7, 2018,
the Disciplinary Board of NASDAQ Stockholm informed us that it decided to delist our shares from trading eligibility on NASDAQ
First North effective March 29, 2017. The delisting does not affect our trading status on the NASDAQ Capital Market in the United
States.
The Nasdaq First North
Disciplinary Board noted that we were not in compliance with certain of the regulations of First North Premier over a prolonged
period. The Disciplinary Board acknowledged that we have recently taken measures to insure compliance. However, these measures
are insufficient to rectify the numerous prior breaches of the Rule Book. Consequently, the Disciplinary Committee has decided
to remove our shares from trading on NASDAQ Stockholm.
(h) Performance Based Options
On May 6, 2015, our
Board of Directors, pursuant to the recommendation of the Compensation Committee of the Board of Directors of the Company (“Compensation
Committee”), granted an option to purchase up to 12,500 shares of our common stock to Dr. Daniel G. Teper, our former Chief
Executive Officer, as performance-based compensation. The performance-based options were granted at an exercise price of
$37.40 per share and will vest upon achievement of certain operational, financing and partnership objectives. We recorded a charge
to stock compensation expense of $0.2 million for the year ended December 31, 2016 because we determined that the achievement of
the performance options vesting criteria was deemed to be probable. In April 2017, these options were forfeited in connection with
Dr. Teper’s resignation as Chief Executive Officer as the performance targets were not met.
(i) Equity Incentive Plan
Shareholders approved
our 2015 Equity Incentive Plan (the “2015 Plan) on December 9, 2015 at our Annual Meeting of Stockholders. The 2015 Plan
provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to our employees
and for the grant of non-statutory stock options, restricted stock, restricted stock units, performance-based awards and cash awards
to our employees, directors and consultants. Our Board of Directors determines the terms of grants under the 2015 Plan. A total
of 250,000 shares of our common stock is reserved for issuance pursuant to the 2015 Plan. No 2015 Plan participant may be granted
an option to purchase more than 37,500 shares in any fiscal year. Options issued pursuant to the 2015 Plan have a maximum maturity
of 10 years. The 2015 Plan will expire on November 12, 2025. On December 24, 2015, we filed a Registration Statement on Form
S-8 (Registration No. 333-208754), which registered the 250,000 common shares that may be issued or sold under the plan. On December
20, 2016, an Amended and Restated 2015 Plan was approved at our 2016 Annual Meeting of Stockholders increasing the amount of shares
authorized under the 2015 Plan from 250,000 shares to 750,000 shares.
In May 2017, our Board
of Directors approved a resolution to increase the amount of shares authorized under our 2015 Equity Incentive Plan from 750,000
to 1,250,000 and to increase the share limit on anuual awards to any single participant (whether an employee, director or consultant)
in any fiscal year.
On February 15, 2018,
our shareholders approved an amendment to the 2015 Plan to increase the number of shares issuable under the plan to 3,500,000 and
to eliminate the share limit on annual awards to any single participant (whether an employee, director or consultant) in any fiscal
year.
(j) Employee Stock Purchase Plan
The Employee Stock
Purchase Plan (the “ESPP”) is implemented by offerings of rights to all eligible employees from time to time. Unless
otherwise determined by our Board of Directors, common stock is purchased for accounts of employees participating in the ESPP at
a price per share equal to the lower of (i) 85% of the fair market value of a share of our common stock on the first day of offering
or (ii) 85% of the fair market value of a share of the our common stock on the last trading day of the purchase period. Each offering
period will have six-month duration. There were no shares issued under the ESPP during the years ended December 31, 2017 and 2016,
and no expense has been recorded. A total of 49,902 shares are available for issuance under the ESPP as of December 31, 2017.
Note 11. Loss Per Share
Basic and diluted loss
per share is computed by dividing loss attributable to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted weighted average shares outstanding for the years ended December 31, 2017 and 2016 excludes
shares underlying stock options and warrants and convertible preferred stock, since the effects would be anti-dilutive. Accordingly,
basic and diluted loss per share is the same. Such excluded shares are summarized as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Common stock options
|
|
|
519,014
|
|
|
|
370,757
|
|
Common shares issuable upon conversion of Series E Preferred Stock (not including dividends)
|
|
|
19,948,582
|
|
|
|
-
|
|
Warrants
|
|
|
18,695,677
|
|
|
|
580,390
|
|
Total shares excluded from calculation
|
|
|
39,163,273
|
|
|
|
951,147
|
|
Note 12. Commitments and Contingencies
(a) Leases
In February 2015, we
signed a lease agreement with ARE-EAST RMR Science Park, LLC, New York, NY, for corporate headquarters space at the Alexandria
Center in New York City. In August 2015, we signed an amendment to the Alexandria Center lease agreement for an additional 1,674
square feet to be used for lab space and additional offices. Effective May 1, 2017, we terminated the lease agreement with ARE-EAST
RMR Science Park, LLC, and forfeited a security deposit in the amount of $177,000 and relocated our headquarters to 550 Sylvan
Avenue, Englewood Cliffs, NJ 07632 under a lease agreement with 550 Sylvan Avenue, LLC. Lease expense is $2,950 per month. The
lease may be terminated upon two months’ written notice to the landlord.
Cytovia occupies shared
office space on a month to month basis at 12 E 49th Street, New York, NY 10017 for rent expense of approximately $3,500 per month.
Immune Ltd. occupies shared office space on a month to month basis in offices in Tel-Aviv and Jerusalem, Israel for a combined
rent expense of approximately $2,900 per month.
We recorded rent expense
of $0.1 million and $0.6 million for the years ended December 31, 2017 and 2016, respectively.
(b) Licensing Agreements
We are a party to a
number of research and licensing agreements, including iCo, BNS, Yissum, Dalhousie, MabLife, Lonza, Atlante and Shire Biochem,
which may require us to make payments to the other party upon the other party attaining certain milestones or royalties as defined
in the agreements. We may be required to make future milestone royalty payments under these agreements (see Note 6).
(c) Litigation
Immune Pharmaceuticals
Inc. was the defendant in litigation involving a dispute with the plaintiffs Kenton L. Cowley and John A. Flores. The complaint
alleges breach of contract, breach of covenant of good faith and fair dealing, fraud and rescission of contract with respect to
the development of a topical cream containing ketamine and butamben, known as EpiCept NP-2. A summary judgment in Immune’s
favor was granted in January 2012 and the plaintiffs filed an appeal in the United States Court of Appeals for the Ninth Circuit
in September 2012. A hearing on the motion occurred in November 2013. In May 2014, the court scheduled the trial in November 2014
and a mandatory settlement conference in July 2014. In July 2014, the parties failed to reach a settlement at the mandatory settlement
conference. The case was tried by a jury, which rendered a decision on March 23, 2015, in favor of us on all causes of action.
In April 2015, the
plaintiffs filed a motion for a new trial, which was heard by the Court on June 8, 2015. In October 2015, the court denied the
plaintiff’s motion for a new trial. On October 9, 2015, the plaintiffs filed a notice of appeal to the United States Court
of Appeals for the Ninth Circuit. On February 13, 2018, the Appellate Court affirmed the district court’s judgment in favor
us.
During the years ended
December 31, 2017 and 2016, in connection with this litigation matter, we incurred legal costs of approximately $0.1 million and
$0.1 million, respectively.
From time to time,
we are involved in legal proceedings arising in the ordinary course of business. We believe there is no other litigation pending
that could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition.
Note 13. Income Taxes
The Tax Cuts and Jobs
Act (the "Act") was enacted in December 2017. Among other things, the Act reduces the U.S. federal corporate tax rate
from 34 percent to 21 percent, eliminates the alternative minimum tax (“AMT”) for corporations, and creates a one-time
deemed repatriation of profits earned outside of the U.S. The reduction of the corporate tax rate resulted in a write-down of the
deferred tax liability of approximately $1.8 million, resulting in a deferred income tax benefit. The tax rate reduction also resulted
in a write-down of the gross deferred tax asset of approximately $6.4 million, and a corresponding write-down of the valuation
allowance.
We recorded a deferred
tax liability of $4.1 million and $5.9 million as of December 31, 2017 and 2016, respectively, related to the purchase of the AmiKet
IPR&D. This deferred tax liability was recorded to account for the book vs. tax basis difference related to the IPR&D intangible
asset, which was recorded in connection with the Merger. This deferred tax liability was excluded from sources of future taxable
income, as the timing of its reversal cannot be predicted due to the indefinite life of this IPR&D. As such, this deferred
tax liability cannot be used to offset the valuation allowance. During the year ended December 31, 2016, the AmiKet IPR&D
was written down to $15.0 million resulting in a reduction of the deferred tax liability by $4.9 million (see Note 3).
Deferred income taxes
reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Our deferred tax assets relate primarily to its net operating loss carryforwards
and other balance sheet basis differences. In accordance with ASC 740, “Income Taxes,” we recorded a valuation allowance
to fully offset the gross deferred tax asset, because it is not more likely than not that wewill realize future benefits associated
with these deferred tax assets at December 31, 2017 and 2016.
At December 31, 2017
and 2016, we had deferred tax assets of $27.5 million and $31.1 million, respectively, against which a full valuation allowance
of $27.5 million and $31.1 million, respectively, had been recorded. The determination of this valuation allowance did not take
into account our deferred tax liability for IPR&D assigned an indefinite life for book purposes, also known as a “naked
credit” in the amount of $4.1 million and $5.9 million at December 31, 2017 and 2016, respectively. The change in the valuation
allowance for the year ended December 31, 2017 was a decrease of $3.6 million. The decrease in the valuation allowance for
the year ended December 31, 2017 was mainly attributable to the decrease in the gross deferred tax assets caused by the decrease
in the corporate tax rate, net of increases in net operating losses and accrued liabilities. Significant components of our deferred
tax assets at December 31, 2017 and 2016 are as follows ($ in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Property, plant & equipment
|
|
$
|
81
|
|
|
$
|
5
|
|
Accrued liabilities
|
|
|
2,619
|
|
|
|
3,894
|
|
Losses on debt extinguishment
|
|
|
458
|
|
|
|
45
|
|
Net operating loss carryforwards - U.S.
|
|
|
13,591
|
|
|
|
13,420
|
|
Net operating loss carryforwards - Israel
|
|
|
6,766
|
|
|
|
6,766
|
|
Stock-based compensation
|
|
|
4,014
|
|
|
|
5,435
|
|
Gross deferred tax assets
|
|
|
27,529
|
|
|
|
29,565
|
|
Valuation allowance
|
|
|
(27,529
|
)
|
|
|
(29,565
|
)
|
Gross deferred tax assets after valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Deferred tax liability - AmiKet IPR&D assets
|
|
|
(4,142
|
)
|
|
|
(5,933
|
)
|
Net deferred tax liability
|
|
$
|
(4,142
|
)
|
|
$
|
(5,933
|
)
|
A reconciliation of
the federal statutory tax rate and the effective tax rates for the years ended December 31, 2017 and 2016 is as follows:
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
U.S. federal statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
(5.0
|
)
|
|
|
4.9
|
|
U.S. vs. foreign tax rate differential
|
|
|
(1.3
|
)
|
|
|
(1.0
|
)
|
Impact of tax law change
|
|
|
(32.5
|
)
|
|
|
-
|
|
Deferred tax adjustments
|
|
|
(2.5
|
)
|
|
|
-
|
|
Other
|
|
|
(1.1
|
)
|
|
|
(2.1
|
)
|
Change in valuation allowance
|
|
|
18.3
|
|
|
|
(22.9
|
)
|
Effective tax rate
|
|
|
9.9
|
%
|
|
|
12.9
|
%
|
We had approximately
$127.9 million and $95.0 million of available gross net operating loss (“NOL”) carryforwards (federal, state and Israel)
as of December 31, 2017 and 2016, respectively. Sections 382 and 383 of the Internal Revenue Code, and similar state regulations,
contain provisions that may limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence
of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change
in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that we may utilize in any one year
may be limited. We reduced our tax attributes (NOLs and tax credits) as a result of our ownership changes in 2007, 2009, 2013,
2015, and 2016 and the limitation placed on the utilization of its tax attributes, as a substantial portion of the NOLs and tax
credits generated prior to the ownership changes will likely expire unused. The most significant reduction in tax attributes occurred
in 2013 as a result of the Merger with Epicept. We do not have any material foreign earnings, due to a history of losses in its
foreign subsidiary.
A reconciliation of
our NOLs for the years ended December 31, 2017 and 2016 is as follows ($ in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
U.S. Federal NOLs
|
|
$
|
49,157
|
|
|
$
|
33,953
|
|
U.S. State NOLs
|
|
|
49,341
|
|
|
|
33,940
|
|
Israel NOLs
|
|
|
29,417
|
|
|
|
27,066
|
|
Total NOLs
|
|
$
|
127,915
|
|
|
$
|
94,959
|
|
Our federal and state
NOLs of approximately $49.2 million and $49.3 million, respectively, begin to expire from 2030 through 2037. Our Israel NOL of
$29.4 million does not expire.
We have adopted
guidance on accounting for uncertainty in income taxes which clarified the accounting for income taxes by prescribing the
minimum threshold a tax position is required to meet before being recognized in the financial statements as well as guidance
on de-recognition, measurement, classification and disclosure of tax positions. We have gross liabilities recorded of $70,000
and $60,000 for the years ended December 31, 2017 and 2016, respectively, to account for potential income tax
exposure. We are obligated to file income tax returns in the U.S. federal jurisdiction, Israel and various U.S. states.
However, because we had losses in the past, all prior years that generated NOLs are open and subject to audit examination in
relation to the NOL generated from those years. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows ($ in thousands):
|
|
2017
|
|
|
2016
|
|
Balance at January 1,
|
|
$
|
60
|
|
|
$
|
50
|
|
Additions related to tax positions
|
|
|
10
|
|
|
|
10
|
|
Reductions related to tax positions
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31,
|
|
$
|
70
|
|
|
$
|
60
|
|
Our evaluation of
uncertain tax positions was performed for the tax years ended December 31, 2013 and forward, the tax years which remain subject
to examination by major taxing jurisdictions as of December 31, 2017.
Note 14. Related-Party Transactions
(a) Promissory
Notes issued to Certain Related Parties
Daniel
Kazado
On July 15, 2016, our
Board of Directors approved and we issued a $0.3 million promissory note to Daniel Kazado in exchange for advances made to us.
The note bears interest at a rate of 5% per year and matures one year from the date of issuance. The outstanding balance of the
note may be paid in cash or, at the option of either party, converted into shares of our common stock at a conversion rate of 9.00
per share, the last bid price of our common stock on the date of approval. On August 4, 2016, we exercised our option to pay off
the promissory note in full by issuing 33,333 restricted shares of our common stock. Pursuant to applicable securities laws these
restricted shares may not be transferred or sold at least for a period of six months or unless they have been registered for sale
pursuant to the Securities Act of 1933, as amended.
Daniel Teper
On June 24, 2016, our
Board of Directors approved and we issued a $0.4 million promissory note to Daniel G. Teper, a director and our Chief Executive
Officer at the time. The note bears interest at a rate of 5.0% per year and matures one year from the date of issuance. The outstanding
balance of the note may be paid in cash or, at the option of either party, converted into shares of our common stock at a conversion
rate of $8.20 per share, the last bid price of our common stock on the date of approval. On August 4, 2016, we exercised our option
to pay off the promissory note in full by issuing 43,445 restricted shares of our common stock. Pursuant to applicable securities
laws these restricted shares may not be transferred or sold at least for a period of six months and unless they have been registered
for sale pursuant to the Securities Act of 1933, as amended.
Monica Luchi
On July 15, 2016, our
Board of Directors approved and we issued a $0.4 million promissory note to Monica Luchi, our Chief Medical Officer at the time
in exchange for an advance made to us. The note bears interest at a rate of 5.0% per year and matures one year from the date of
issuance. The outstanding balance of the note may be paid in cash or, at the option of either party, converted into shares of our
common stock at a conversion rate of $9.00 per share, the last bid price of our common stock on the date of approval. On August
4, 2016, we exercised our option to pay off the promissory note in full by issuing 38,889 restricted shares of our common stock.
Pursuant to applicable securities laws these restricted shares may not be transferred or sold at least for a period of six months
and unless they have been registered for sale pursuant to the Securities Act of 1933, as amended.
(b) Daniel Kazado
and Melini Capital Corp.
Daniel Kazado was our
Chairman of the Board until October 19, 2016 and is a member of the Board of Directors. In April 2014, we entered into a $5.0 million
revolving line of credit with Melini Capital Corp (“Melini”), an existing stockholder who is related to Mr. Kazado.
Borrowings under the revolving line of credit incur interest at a rate of 12% per year, payable quarterly. The revolving line of
credit was unsecured and subordinated to the Loan Agreement with Hercules. The revolving line of credit expired on November 30,
2016. No amounts have been drawn from the revolving line of credit.
(c) Other Related-Party
Transactions
During 2016, Dr. Teper,
advanced a total of $0.9 million to us of which we had repaid $0.7 million prior to December 31, 2016 including $0.4 million which
was paid in shares of our common stock as discussed above. The balance of $0.2 million owed to Dr. Teper as of December 31, 2017
has been reflected in advances from related parties in the consolidated balance sheets.
During the first quarter
of 2017, we issued 3,825 shares in settlement of the fourth quarter of 2016 board fees of $14,000 for Daniel Kazado, a member of
our board of directors.
On June 15, 2017, substantially contemporaneous
with the entry into the Asset Purchase Agreement (see Note 9), we entered into a Standby Financing Agreement (the “Standby
Financing Agreement”) with Daniel Kazado (the “Standby Financer”), a member of our Board of Directors and a beneficial
owner of the our capital stock. Currently, we intend to finance the $5.0 million financial obligations contemplated by the Asset
Purchase Agreement through Cytovia on a basis that is on terms that are acceptable to our board of directors and without recourse
to us. The Standby Financer will support the financial obligations of the Company to pay the fixed consideration installments,
in the aggregate amount of $5,000,000, due under and in accordance with the terms of the Asset Purchase Agreement. In the
event that Cytovia has not obtained funding on terms reasonably acceptable to us (including, without limitation, that such funding
be on a basis that is without recourse to us), then, pursuant to the terms of the Standby Financing Agreement, at or prior to each
installment date, the Standby Financer shall lend us or Cytovia (as determined in the discretion of our Board of Directors) an
amount in immediately available funds equal to the fixed consideration installment payment then due and payable under the Asset
Purchase Agreement (the “Standby Commitment”). The loan made by the Standby Financer in respect of such fixed payment
shall be evidenced by a promissory note in an aggregate principal amount equal to the amount of funds lent by the Standby Financer.
The Standby Commitment shall expire on the earliest of (a) satisfaction in full by the Standby Financer of his obligations under
the Standby Financing Agreement, (b) Cytovia having obtained funding on terms reasonably acceptable to us and (c) the Company having
been fully discharged of and released from all liability of all of its obligations under the Asset Purchase Agreement.
Note 15. Subsequent Events
We have evaluated events and transactions
subsequent to December 31, 2017 through the date the consolidated financial statements were included in this Form 10-K and filed
with the SEC.
Asset Purchase Agreement with Meda
We are in default under our agreement for
the acquisition of the European rights to Ceplene. If not cured, we bear significant risk to our business plan regarding Ceplene,
including the loss of such rights. Under an asset purchase agreement between Immune and Meda Pharma SARL (“Meda”),
we were obligated to make a payment to Meda of $1,500,000 (the “First Initial Consideration”) no later than December
15, 2017. Under that agreement, we had a 30-day grace period to make the payment or work out a payment plan with Meda. On
January 31, 2018, Meda delivered to us a default notice under the asset purchase agreement, demanding payment of the First Initial
Consideration no later than February 15, 2018. We have yet to make this payment. Accordingly, Meda could terminate the asset purchase
agreement, and cause the loss by us of certain Ceplene-related assets without consideration to us and cancel our further obligations
under the agreement. If such action were to occur, we would need to either work out a license with Meda or renegotiate terms
of a purchase of the European Ceplene rights from Meda. There can be no guarantee that that we would be able to work out
such a deal. Loss of the Ceplene related assets would materially impair our ability to execute our business plan with respect
to our oncology related assets and have a negative effect on our financial condition.