The Credit Agreement provided that the outstanding principal balance of the Term Loan, plus accrued and unpaid interest, plus the Upfront Fee, plus the Commitment Fee and all other non-contingent obligations would mature on the earlier of an event of default under the Credit Agreement or the effective date of the Company’s plan of reorganization. The Maturity Date was deemed to occur simultaneously with the Effective Date and, accordingly, on June 30, 2016, 2,350,480 shares of common stock were issued to the Lenders in repayment of the Company’s debt obligations under the Credit Agreement, including 201,436 shares to BHC, 470,096 shares to BHCMF, 503,708 shares to Cheval, 940,192 shares to Nomis and 235,048 shares to Cortleigh Limited (“Cortleigh”). Pursuant to the terms of the Credit Agreement, the Company also paid $405,145$406,285 to BHC in payment of its fees and expenses and $283,132$285,000 to Nomis in payment of its fees and expenses.
The consummation of the transactions contemplated by the SPA were contingent on, among other things, the funding of the Term Loan, the approval of the Bankruptcy Court of the Company’s plan of reorganization, and the simultaneous closing of the Company’s transaction with Savant, as described below.Savant. In addition, the closing of the transactions under the SPA were contingent upon the board of directors of the Company, upon the effectiveness of the confirmed plan of reorganization, consisting of (i) one director to be designated by Nomis; (ii) one director to be jointly designated by BHC, BHCF, and Cheval; (iii) the Chief Executive Officer of the Company to be designated jointly and unanimously by the Lenders; and (iv) two independent directors to be designated jointly and unanimously by the Lenders.
The issuance of the shares contemplated by the SPA was consummated on the Effective Date, and the Company issued to the Purchasers an aggregate of 7,147,035 shares of common stock for an aggregate purchase price of $11,000,000, including 612,501 612,501 shares to BHC, 1,429,407 1,429,407 shares to BHCMF, 1,531,610 1,531,610 shares to Cheval, 2,858,814 shares to Nomis and 714,703 shares to Cortleigh.Cortleigh. Pursuant to the terms of the SPA, the Company paid $427,383 to BHC in payment of its fees and expenses and $240,773$303,886 to Nomis in payment of its fees and expenses.
On the Effective Date, the Plan became effective and the Company emerged from its Chapter 11 bankruptcy proceedings.
On the Effective Date, in accordance with the terms of the Plan, in addition to shares issued to the Lenders and the Purchasers under the Credit Agreement and SPA, respectively, and shares issued in connection with the Settlement Stipulation, the Company reserved for issuance 300,000 shares to the plaintiffs in a class action lawsuit related to the events surrounding the Company’s former Chairman and Chief Executive Officer, and the Company became obligated to issue 3,750 shares to Marek Biestek, a former director, in satisfaction of claims by Mr. Biestek against the Company. In addition, on the Effective Date, the Company reserved for issuance shares of common stock in connection with certain other claims and interests as set forth in the Plan in an amount as yet to be determined.
In accordance with the Plan, on the Effective Date, the Company became obligated to issue promissory notes (the “Notes”) in the estimated aggregate principal amount of approximately $1.3$1.2 million to certain holders of allowed general unsecured claims in the Company’s bankruptcy proceedings. The Notes are unsecured, bear interest at a rate of 10% per annum and mature on June 30, 2019.
In addition, any material transaction between Mr. Shkreli or his associates and the Company, or relating to the Governance Agreement, cannot be taken without the prior approval of the Company’s Board.
The Governance Agreement provides for a mutual release between the Company and Mr. Shkreli of all claims and liabilities existing as of the date of execution.
On August 25 and August 26, 2016, Mr. Shkreli sold all of his shares of the Company to third party investors in private transactions.
Stock Issuance
On May 24, 2016, the board of directors approved a one-time equity award (the “Equity Award”) to each of Cameron Durrant, Ronald Barliant and David Moradi. On the Effective Date, in accordance with the Plan, the Company became obligated to issue an aggregate 323,155 shares of common stock under the Equity Award.
Board Changes
On the Effective Date, in accordance with the Plan, Cameron Durrant, current Chief Executive Officer of the Company, as joint designee of BHCMF, BHC and Cheval (the "Black Horse Entities") and Nomis, continued as a director, Ronald Barliant, current member of the Board, continued as a director as the designee of the Black Horse Entities, Dale Chappell became a director as a designee of Nomis, and Timothy Morris and Ezra Friedberg became directors as joint designees of the Black Horse Entities and Nomis.
Stock Option Grant
On September 13, 2016, the Company issued stock options to its Chief Executive Officer to purchase 1,043,022 shares of the Company’s common stock at an exercise price of $3.38, the closing price on the date of issuance. The options will vest and become exercisable in 12 equal quarterly installments beginning on December 13, 2016.
Amendment to 2012 Equity Incentive Plan
On September 13, 2016, the Board of Directors of the Company approved an amendment to the Company’s 2012 Equity Incentive Plan to increase the number of shares of the Company’s common stock available for issuance under the Plan by 3,000,000 shares and to increase the annual maximum aggregate number of shares subject to stock option awards that may be granted to any one person under the Plan from 125,000 to 1,100,000.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read the following discussion and analysis in conjunctiontogether with our financial statements and accompanyingthe notes to those statements included elsewhere in this Quarterly Report on Form 10-Q10‑Q and the financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and our2015. This Quarterly ReportsReport on Form 10-Q for the quarterly periods ended March 31, 2015 and June 30, 2015. This discussion contains forward-looking statements that involve involve risksdiscuss that discuss future events or expectations, projections of results of operations or financial condition, trends in our business, business prospects and uncertainties. We usestrategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words such aslike “may,” “will,” “expect,“should,” “anticipate,“expects,” “estimate,“plans,” “intend,“anticipates,” “plan,“believes,” “predict,“estimates,” “potential,“predicts,” “believe,“intends,” “should”“potential” or “continue” or the negative of those words and similar expressionsother comparable words. These statements may relate to, identify forward-looking statements, including statements related toamong other things, our expectations regarding the scope, progress, expansion, and costs of researching, developing and commercializing our product candidates,candidates; our anticipatedintent to in-license or acquire additional product candidates; our opportunity to benefit from various regulatory incentives and the application of our Responsible Pricing Model; expectations for our financial results, revenue, operating expenses and condition, and our anticipated expenses related to development activities, our clinical trialsother financial measures in future periods; and the development and potential commercializationadequacy of our product candidates. sources of liquidity to satisfy our working capital needs, capital expenditures, and other liquidity requirements. Actual events or results may differ materially due to known and unknown risks, uncertainties and other factors such as:
| · | the uncertainties inherent in the development and launch of any new pharmaceutical product; |
| · | our ability to successfully and timely complete clinical trials for our drug candidates in clinical development; |
| · | our ability to obtain the necessary U.S. and international regulatory approvals for our drug candidates and to qualify for or benefit from various regulatory incentives; |
| · | the scope and validity of intellectual property and other competitive protection for our drug candidates; |
| · | our ability to identify, in-license and acquire additional product candidates or to form partnerships for the sale, licensing, collaborative development or marketing of our existing product candidates; |
| · | our ability to maintain or engage third-party manufacturers to manufacture, supply, store and distribute supplies of our drug candidates for our clinical trials; |
| · | our lack of profitability and the need for additional capital to operate our business; and |
| · | the success of any product. |
These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on theseonly some of the factors that may affect the forward-looking statements which apply only as ofcontained in this annual report. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth underforward-looking statements, see “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. However, we operate in a competitive and throughoutrapidly changing environment and new risks and uncertainties emerge, are identified or become apparent from time to time. It is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Reportannual report. You should be aware that the forward-looking statements contained in this annual report are based on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. Except as required by law, wecurrent views and assumptions. We undertake no obligation to updaterevise or revise publiclyupdate any forward-looking statements whether as a result of new information, futuremade in this annual report to reflect events or otherwisecircumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law. The forward-looking statements in this Quarterly Report on Form 10-Q.annual report are intended to be subject to protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Overview
We are a biopharmaceutical company focused on developing medicines for patients with neglected and rare diseases, with an ancillary focus on pediatric conditions, and on executing our Responsible Pricing Model in the commercialization of our products that may be approved. Our lead product candidate is benznidazole for the treatment of Chagas disease, a parasitic illness that can lead to long-term heart, intestinal and neurological problems. We are developing one of our proprietary monoclonal antibodies, lenzilumab (formerly known as KB003), for the treatment of chronic myelomonocytic leukemia, or CMML, and potentially for the treatment of juvenile myelomonocytic leukemia, or JMML, both of which are rare hematologic cancers with high unmet medical need. We are exploring development of another of our proprietary monoclonal antibodies, ifabotuzumab (formerly known as KB004), for the treatment of certain rare solid and hematologic cancers. With a focus on neglected, rare and orphan diseases, we believe we have the opportunity to benefit from various regulatory incentives, such as orphan drug exclusivity, breakthrough therapy designation, fast track designation, accelerated approval, priority review and priority review vouchers, or PRVs, where available, that provide for certain periods of exclusivity, expedited review and/or other benefits.
Upon approval of any of our products, we intend to apply our Responsible Pricing Model, which focuses on affordability for patients and payers, transparency for all stakeholders, and delivery of a reasonable return in recognition of the risks we are taking in our development efforts.
Benznidazole is an oral small molecule antiprotozoal for the treatment of Chagas disease, which is also known as American trypanosomiasis. Benznidazole has undergone numerous clinical trials and studies that show efficacy against Chagas disease and we believe is the current preferred treatment for Chagas disease in the countries where it is approved. No treatments for Chagas disease are approved by the United States Food and Drug Administration, or FDA, for use in the United States. We recently acquired certain worldwide rights relating to benznidazole for human use from Savant Neglected Diseases, LLC, or Savant, and we are focused on the development necessary to seek and obtain FDA approval of benznidazole. We believe benznidazole as a treatment for Chagas disease could qualify for priority review and potentially other FDA regulatory incentives, and to receive a PRV if FDA approves the drug for marketing.
Lenzilumab is a recombinant monoclonal antibody, or mAb, that neutralizes soluble granulocyte-macrophage colony-stimulating factor, or GM-CSF, a critical cytokine for the growth of certain hematologic malignancies and solid tumors. Consistent with our strategic focus on neglected and rare diseases, in July 2016, we initiated dosing in a Phase 1 clinical trial in patients with CMML to identify the maximum tolerated dose, or MTD, or recommended Phase 2 dose of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity.
Ifabotuzumab is an anti-EphA3 mAb that has the potential to offer a novel approach to treating both solid tumors and hematologic malignancies. EphA3 is aberrantly expressed on the tumor cell surface of certain cancers. We have completed the Phase 1 dose escalation portion of a Phase 1/2 clinical trial in ifabotuzumab in multiple hematologic malignancies and are evaluating whether to conduct further studies of ifabotuzumab in rare solid tumors such as glioblastoma, other brain cancers in children and rare hematologic cancer indications. We also have an additional drug candidate, KB001-A, a recombinant, PEGylated, anti‑Pseudomonas PcrV high‑affinity Fab antibody that we are no longer developing, but which is being considered for partnering or out-licensing.
Lenzilumab, ifabotuzumab and KB001-A were each developed with our proprietary, patent-protected Humaneered® technology, which consists of methods for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use, typically for chronic conditions.
Our strategy also involves identifying, acquiring, developing and supporting the commercialization of additional treatments for neglected and rare diseases. We believe the treatment of neglected and rare diseases represents an opportunity to enter underserved patient populations and serve specialty markets. We also believe our focus on neglected and rare diseases provides us the opportunity to benefit from various regulatory incentives referenced above. The potential opportunities afforded by these regulatory programs provide an important incentive to support our efforts to develop medicines for patients with neglected and rare diseases and to apply our Responsible Pricing Model for any of our approved products.
We have incurred significant losses and had an accumulated deficit of $200.5$219.0 million as of September 30, 2015.March 31, 2016. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our development activities and seek regulatory approvals. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.
We will require substantial additional capital to support our business efforts, including obtaining regulatory approvals for benznidazole or other product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. We anticipate that in the future we will seek additional financing from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all.
On January 13, 2016, our common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the ticker symbol KBIOQ. On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of our common stock, and the delisting was effective on February 5, 2016.
If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern. The Condensed Consolidated Financial Statements for the quarter ended September 30, 2015March 31, 2016 were prepared on the basis of a going concern, which contemplates that we will be able to realize our assets and discharge liabilities in the normal course of business. Our ability to meet our liabilities and to continue as a going concern is dependent upon the availability of future funding. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Our company has undergone a significant transformation subsequent to the quarter ended September 30, 2015. As a result of challenges facing us at the time, on December 29, 2015, we filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On June 30, 2016, our Second Amended Plan of Reorganization, dated May 9, 2016, as amended, or the Plan, became effective and we emerged from our Chapter 11 bankruptcy proceedings. For further information on our bankruptcy and emergence from bankruptcy, see Note 102 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, valuation of financing derivative, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.
We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
There were no significant and material changes in our critical accounting policies and use of estimates during the three and nine months ended September 30, 2015,March 31, 2016, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our 20142015 Annual Report on Form 10-K (File No. 001-35798), filed with the SEC on March 16, 2015.September 1, 2016.
Results of Operations
General
We have not generated net income from operations, except for the year ended December 31, 2007 during which we recognized a one-time license payment from Novartis. At September 30, 2015,March 31, 2016, we had an accumulated deficit of $200.5$219.0 million, primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates may never be successfully developed or commercialized and we may therefore never realize revenue from any product sales, particularly because most of our product candidates are at an early stage of development and may never be successfully developed or commercialized.development. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.
Our operations during the quarter ended March 31, 2016 primarily related to our status as a debtor in possession and other matters in connection with our Chapter 11 bankruptcy proceedings, in addition to our efforts to obtain certain rights related to our lead product candidate benznidazole. Accordingly, comparisons of our operations and results for the quarter ended March 31, 2016 to our prior year operations and results may only provide a limited benefit, and similarly should not be relied on as an indicator of our future operations or results.
Research and Development Expenses
Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We track external research and development costs incurred by project for each of our clinical programs. We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. Our external research and development costs consist primarily of:
| · | expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities; |
| · | the cost of acquiring and manufacturing clinical trial and other materials; and |
| · | other costs associated with development activities, including additional studies. |
Other research and development costs consist primarily of internal research and development costs, such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock‑based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project. The lenzilumab expenses relating to the nine months ended September 30, 2015 below reflect a $312,000 benefit relating to an out-of-period adjustment.
The following table shows our total research and development expenses for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014, and for the period from January 1, 2008 to September 30, 2015:March 31, 2016:
| | For the | | For the | | For the Period from | |
| | Three Months Ended | | Nine Months Ended | | January 1, 2008 to | |
| | September 30, | | September 30, | | September 30, 2015 | |
| (in thousands) | 2015 | | 2014 | | 2015 | | 2014 | | | | |
| External Costs: | | | | | | | | | | | | | | | |
| KB001-A | | | 47 | | | | 1,640 | | | | 1,262 | | | | 4,663 | | | | 33,842 | |
| Lenzilumab | | | 68 | | | | 290 | | | | 318 | | | | 3,494 | | | | 40,481 | |
| Ifabotuzumab | | $ | 2,131 | | | $ | 1,063 | | | $ | 5,611 | | | $ | 4,522 | | | $ | 37,251 | |
| Internal Costs | | | 1,599 | | | | 2,092 | | | | 5,891 | | | | 6,817 | | | | 69,967 | |
| Total research and development | | $ | 3,845 | | | $ | 5,085 | | | $ | 13,082 | | | $ | 19,496 | | | $ | 181,541 | |
| | | | | | | | | For the Period from | |
| | | Three Months Ended March 31, | | | January 1, 2008 to | |
| (In thousands) | | 2016 | | | 2015 | | | March 31, 2016 | |
| External costs: | | | | | | | | | |
| KB001 | | $ | 5 | | | $ | 1,014 | | | $ | 33,761 | |
| Lenzilumab | | | 77 | | | | 313 | | | | 40,580 | |
| Ifabotuzumab | | | 115 | | | | 2,011 | | | | 36,954 | |
| Benznidazole | | | 847 | | | | - | | | | 847 | |
| Internal costs | | | 660 | | | | 2,567 | | | | 74,742 | |
| Total research and development | | $ | 1,704 | | | $ | 5,905 | | | $ | 186,884 | |
General and Administrative Expenses
General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development.
Comparison of Three Months Ended September 30,March 31, 2016 and 2015 and 2014
| | | Three Months Ended September 30, | | | Increase/ (Decrease) | | | Three Months Ended March 31, | | | Increase/ (Decrease) | |
| (in thousands) | | 2015 | | | 2014 | | | in thousands | | | % | | | 2016 | | | 2015 | | | in thousands | | | % | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | | $ | 3,845 | | | $ | 5,085 | | | $ | (1,240 | ) | | | (24 | ) | | $ | 1,704 | | | $ | 5,905 | | | $ | (4,201 | ) | | | -71 | % |
| General and administrative | | | 2,359 | | | | 2,624 | | | | (265 | ) | | | (10 | ) | | | 1,205 | | | | 3,437 | | | | (2,232 | ) | | | -65 | % |
| Loss from operations | | | (6,204 | ) | | | (7,709 | ) | | | (1,505 | ) | | | (20 | ) | | | (2,909 | ) | | | (9,342 | ) | | | (6,433 | ) | | | -69 | % |
| Interest expense | | | (223 | ) | | | (348 | ) | | | (125 | ) | | | (36 | ) | | | - | | | | (280 | ) | | | (280 | ) | | | -100 | % |
| Interest income | | | 3 | | | | 24 | | | | (21 | ) | | | (88 | ) | | | - | | | | 16 | | | | (16 | ) | | | -100 | % |
| Change in fair market value of financing derivative | | | (114 | ) | | | - | | | | 114 | | | | 100 | | |
| Other (expense) income, net | | | (62 | ) | | | (30 | ) | | | 32 | | | | 107 | | |
| Other expense, net | | | | - | | | | (16 | ) | | | (16 | ) | | | -100 | % |
| Reorganization items, net | | | | (2,517 | ) | | | - | | | | 2,517 | | | | 100 | % |
| Net loss | | $ | (6,600 | ) | | $ | (8,063 | ) | | $ | (1,463 | ) | | | (18 | ) | | $ | (5,426 | ) | | $ | (9,622 | ) | | $ | (4,228 | ) | | | -44 | % |
Research and development expenses decreased $1.2$4.2 million, from $5.1$5.9 million for the three months ended September 30, 2014March 31, 2015 to $3.9$1.7 million for the three months ended September 30, 2015.March 31, 2016. The decrease is primarily attributable to a $1.0 million decrease in clinical trial costs primarily resulting from a decrease in KB001-A costs due to the completionsuspension of essentially all development projects until after our Phase 2 study of KB001-A in cystic fibrosis, or CF, patients with chronic Pa infections in the first quarter of 2015, partiallyemergence from bankruptcy on June 30, 2016, offset by increased clinical costsexpenses of $847,000 related to the acquisition of certain rights related to benznidazole and certain other payments made pursuant to the Agreement for ifabotuzumab, including a $0.3 million increase in manufacturing costs primarily due to ifabotuzumab manufacturing activity underway during the third quarterManufacture, Development and Commercialization of 2015. The remainder ofBenznidazole for Human Use, or the decrease was primarily due to $0.8 million in reductions in employee related costs resulting from the restructuring activities undertaken in early 2015 and reduced contractor spend.MDC Agreement, with Savant.
General and administrative expenses decreased $0.3$2.2 million, from $2.6$3.4 million for the three months ended September 30, 2014March 31, 2015 to $2.3$1.2 million for the three months ended September 30, 2015March 31, 2016, due to the restructuring activities that took place primarily in the last quarter of 2015 resulting in, among other things, a decrease of approximately 70% of our workforce.
Reorganization items, net for the three months ended March 31, 2016 were $2.5 million, compared to none for the three months ended March 31, 2016. The reorganization items relate to amounts incurred during the quarter related to our reorganization activities and the bankruptcy plan, including legal fees of $2.5 million and professional fees of $0.2 million, decrease in personnel related costs andoffset by a $0.1 million decrease in consulting costs.net gain on the termination of the lease of our former South San Francisco office of $0.2 million.
Interest expense of $0.3 million recognized for the three months ended September 30, 2014 and $0.2 million recognized for the three months ended September 30,March 31, 2015 was related to the Loan and Security Agreement with MidCap Financial SBIC LP that was entered into by the Company in September 2012, or2012. The loan was paid off in the Loan and Security Agreement.
Interest income and Other (expense) income,expense, net, for the three months ended March 31, 2015 primarily consist of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.
Change in fair market value of financing derivative consists of losses on re-measurement of our financing derivative liability.
Comparison of Nine Months Ended September 30, 2015 and 2014
| | | Nine Months Ended September 30, | | | Increase/ (Decrease) | |
| (in thousands) | | 2015 | | | 2014 | | | in thousands | | | % | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | $ | 13,082 | | | $ | 19,496 | | | $ | (6,414 | ) | | | (33 | ) |
| General and administrative | | | 8,095 | | | | 7,907 | | | | 188 | | | | 2 | |
| Loss from operations | | | (21,177 | ) | | | (27,403 | ) | | | (6,226 | ) | | | (23 | ) |
| Interest expense | | | (755 | ) | | | (898 | ) | | | (143 | ) | | | (16 | ) |
| Interest income | | | 29 | | | | 69 | | | | (40 | ) | | | (58 | ) |
| Change in fair market value of financing derivative | | | (252 | ) | | | - | | | | 252 | | | | 100 | |
| Other (expense) income, net | | | (107 | ) | | | (53 | ) | | | 54 | | | | 102 | |
| Net loss | | $ | (22,262 | ) | | $ | (28,285 | ) | | $ | (6,023 | ) | | | (21 | ) |
Research and development expenses decreased $6.4 million, from $19.5 million for the nine months ended September 30, 2014 to $13.1 million for the nine months ended September 30, 2015. The decrease is primarily attribuable to a $4.0 million decrease in clinical trial expenses, the majority of which related to the KB001-A program and the lenzilumab asthma study, partially offset by increased costs on the ifabotuzumab clinical study in 2015. In addition, there There was a $1.0 million decrease in contract manufacturing costs primarily related to lenzilumab manufacturing costs incurred in 2014, partially offset by increased manufacturing costs incurred in 2015 relating to an ifabotuzumab manufacturing run. The remainder of the decrease was primarily due to reductions in employee related costs resulting from restructuring activities undertaken in early 2015.
General and administrative expenses increased $0.2 million, from $7.9 million for the nine months ended September 30, 2014 to $8.1 million for the nine months ended September 30, 2015. The balance remained relatively flat as the decrease in personnel expense resulting from the reduction in workforce was offset by restructuring costs recorded earlier in the year.
Interest expense of $0.9 million recognized for the nine months ended September 30, 2014 and $0.8 million recognized for the nine months ended September 30, 2015, was related to the Loan and Security Agreement.
no Interest income and Other (expense) income,expense, net, primarily consist of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses onfor the sale of investments.
Change in fair market value of financing derivative consists of losses on re-measurement of our financing derivative liability.three months ended March 31, 2016.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through proceeds from the public offerings of our common stock, private placements of our preferred stock, debt financings, interest income earned on cash and cash equivalents and marketable securities, borrowings against lines of credit, and receipts from agreements with Sanofi and Novartis. At September 30, 2015,March 31, 2016, we had cash and cash equivalents of $7.7 million, as well as restricted cash of $8.0 million, most of which related to capital placed in restricted accounts securing amounts owed to MidCap Financial under the Loan and Security Agreement. In November 2015, we announced a board-approved restructuring plan to reduce costs and extend the cash runway in order to allow us to evaluate strategic alternatives for the products and the Company as a whole. As part of the restructuring plan, we elected to exercise our prepayment right to repay the loan in full and paid MidCap Financial $6.6 million in full settlement of the remaining outstanding principal balance, accrued interest, an exit fee and a reduced prepayment fee of 1%. In addition, the Company undertook a reduction in force that eliminated the positions of 17 employees, or more than 60% of the Company’s workforce, which resulted in restructuring charges of approximately $0.5 million to be recorded in the fourth quarter of 2015.
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:
| | Nine Months Ended | |
| | September 30, | |
| (in thousands) | 2015 | | 2014 | |
| Net cash used in operating activities | | $ | (21,069 | ) | | $ | (29,077 | ) |
| Net cash provided by (used in) investing activities | | | 29,540 | | | | (16,017 | ) |
| Net cash (used in) provided by financing activities | | | (11,744 | ) | | | 2,144 | |
| Net decrease in cash and cash equivalents | | $ | (3,273 | ) | | $ | (42,950 | ) |
| | Three Months Ended | |
| | March 31, | |
| (in thousands) | 2016 | | 2015 | |
| Net cash used in operating activities | | $ | (1,997 | ) | | $ | (9,015 | ) |
| Net cash provided by investing activities | | | 143 | | | | 12,011 | |
| Net cash used in financing activities | | | — | | | | (1,295 | ) |
| Net (decrease) increase in cash and cash equivalents | | $ | (1,854 | ) | | $ | 1,701 | |
Net cash used in operating activities was $21.1$2.0 million and $29.1$9.0 million for the ninethree months ended September 30,March 31, 2016 and 2015, and 2014, respectively. The primary use of cash in each of the periods2015 was to fund our operations related to the development of our product candidates.candidates in 2015, whereas the primary use of cash in 2016 was to fund our operations related to our reorganization activities and the bankruptcy plan. Cash used in operating activities of $21.1$2.0 million for the ninethree months ended September 30,March 31, 2016 primarily related to our net loss of $5.4 million, adjusted for non-cash items, such as a gain on lease termination of $0.2 million and net cash outflows of $3.6 million related to changes in operating assets and liabilities, primarily accounts payable and accrued expenses.
Net cash used in operating activities of $9.0 million for the three months ended March 31, 2015 primarily related to our net loss of $22.3$9.6 million, adjusted for non-cash items, such as $0.9$0.3 million of stock-based compensation expense, $0.9$0.8 million relatingrelated to the fair value of stock options that were modified due to executive retirement and restructuring activities, depreciation and amortization of $0.1 million, noncash expense related to interest and the financing derivative of $0.4 million and other adjustmentsnon-cash items of $0.2 million offset byand net cash outflows of $1.3 million related to changes in operating assets and liabilities. Cash used in operating activities of $29.1 million for the nine months ended September 30, 2014 primarily related to our net loss of $28.3 million, adjusted for non-cash items such as $1.5 million of stock-based compensation expense, depreciation and amortization of $0.3 million, amortization of premium on marketable securities of $0.4 million and other adjustments of $0.1 million offset by net cash outflows of $3.1$0.7 million related to changes in operating assets and liabilities.
Net cash provided by investing activities was $29.5$0.1 million for the ninethree months ended September 30,March 31, 2016, primarily related to the reduction in restricted cash related to the termination of our former office lease in South San Francisco. Net cash provided by investing activities was $12.0 million for the three months ended March 31, 2015, primarily related to proceeds from maturities of marketable securities of $33.4$15.8 million, partially offset by purchases of investments of $3.7 million. Net cash used in investing activities was $16.0 million for the nine months ended September 30, 2014, primarily related to purchases of investments of $49.9 million and purchases of property and equipment of $0.3 million offset by proceeds from maturities of marketable securities of $34.2 million.
Net cash used in financing activities was $11.7$0 for the three months ended March 31, 2016. Net cash used in financing activities was $1.3 million for the ninethree months ended September 30,March 31, 2015, relating to an increase in restricted cash of $8.3 million relating to notes payable obligations and $3.4 million relating to the payments on our borrowings. Net cash provided by financing activities was $2.1 million for the nine months ended September 30, 2014, and consisted primarily of proceeds from issuance of debt of $5.0 million offset by payments on our borrowings of $2.9 million.borrowings.
In connection with our emergence from bankruptcy, on June 30, 2016 we closed an $11 million financing that provided the funds required to enable our exit ourfrom Chapter 11, proceeding as well as to fund our current working capital.capital needs. However, we will require substantial additional capital to support our business efforts, including obtaining regulatory approvals for benznidazole or other product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. The amount of capital we will require and the timing of our need for additional capital will depend on many factors, including:
| · | the type, number, timing, progress, costs, and results of the product candidate development programs that we are pursuing or may choose to pursue in the future; |
| · | the scope, progress, expansion, costs, and results of our pre-clinical and clinical trials; |
| · | the timing of and costs involved in obtaining regulatory approvals; |
| · | our ability to establish and maintain development partnering arrangements and any associated funding; |
| · | the emergence of competing products or technologies and other adverse market developments; |
| · | the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities; |
| · | the resources we devote to marketing, and, if approved, commercializing our product candidates; |
| · | the scope, progress, expansion and costs of manufacturing our product candidates; and |
| · | the costs associated with being a public company. |
We anticipate that in the future we will seek additional financing from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all.
If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern.
On July 13, 2015, we effected a one-for-eight reverse stock split of our outstanding common stock pursuant to an amendment to the Company’s certificate of incorporation. As a result of the reverse stock split, each eight shares of the Company’s common stock were combined into one share of common stock. The reverse stock split was effective with respect to stockholders of record at the close of business on July 13, 2015, and trading of the Company’s common stock on the Nasdaq Global Market began on a split-adjusted basis on July 14, 2015. The reverse stock split was accounted for retroactively and is reflected in the Company’s common stock, warrant, stock option and restricted stock activity as of and for the three and nine months ended September 30, 2015 and 2014. Unless stated otherwise, all share data in this Quarterly Report on Form 10-Q have been adjusted, as appropriate, to reflect the reverse stock split.
On January 13, 2016, our common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the KBIOQ symbol.ticker symbol KBIOQ. On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of our common stock, and the delisting was effective on February 5, 2016. Although our common stock is listed for quotation on the OTC Pink marketplace operated by OTC Markets Group, Inc., trading is limited and an active market for our common stock may never develop in the future, which could harm our ability to raise capital to continue to fund operations.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.
Management’s Evaluation of our Disclosure Controls and Procedures
“Disclosure controls and procedures,” as defined in Rules 13a‑15(e) and 15d‑15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, those designed to ensure that this information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management, including our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation and in light of our inability to timely file this Quarterly Report on Form 10-Q, our Chief Executive Officer and Interim Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of September 30, 2015March 31,2016 to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changesOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a‑15(f) and 15d‑15(f) under the Exchange Act). Our Chief Executive Officer and Interim Chief Financial Officer assessed the effectiveness of our internal control over financial reporting duringas of March 31, 2016. In making this assessment, our fiscal quarter ended September 30, 2015Chief Executive Officer and Interim Chief Financial Officer used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO”, in Internal Control—Integrated Framework. Based on that assessment and using the COSO criteria, our Chief Executive Officer and Interim Chief Financial Officer have materially affected, or are reasonably likely to materially affect,concluded that, as of March 31, 2016, our internal control over financial reporting.reporting was not effective because of the material weaknesses described below.
A material weakness is defined as “a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”
The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which each reflect our limited number of accounting and financial reporting personnel and high levels of turnover in our personnel responsible for performing activities related to our internal control over financial reporting: (i) an inability to complete our financial statement close process in a timely and accurate manner; (ii) an insufficient degree of segregation of duties amongst our accounting and financial reporting personnel; and (iii) a lack of technical competency in review and approval of financial reporting processes.
During 2016, our management intends to work to remediate the material weaknesses identified above, which could include the addition of accounting and financial reporting personnel and/or the engagement of accounting and personnel consultants on a limited-time basis until we add a sufficient number of personnel.
Despite the existence of the material weaknesses above, we believe that our Condensed Consolidated Financial Statements contained in this Form 10-Q fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.
Other than as described above, there has been no change in our internal control over financial reporting during the quarter ended March 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost‑benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision‑making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost‑effective control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| | | KALOBIOS PHARMACEUTICALS, INC. |
| | | | |
Date: September 1,23, 2016 | | By: | /s/ Cameron Durrant |
| | | | Cameron Durrant |
| | | | Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | | | |
| | | | |
Date: September 1,23, 2016 | | By: | /s/ Dean Witter, III |
| | | | Dean Witter, III |
| | | | Interim Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
| | | | |
| Exhibit No. | | Description | |
| | | | |
3.110.1† | | CertificateBinding Letter of Amendment toIntent, dated February 29, 2016, between the AmendedRegistrant and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 13, 2015 (File No. 001-35798)).Savant Neglected Diseases, LLC. | |
| | | | |
10.1*10.2* | | 2012 Equity Incentive Plan, as amendedLetter Agreement, dated March 1, 2016, between the Registrant and restated (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2015 (File No. 001-35798)). | |
| | | |
10.2 | | Amendment No. Two to Loan and Security Agreement, by and between KaloBios Pharmaceuticals, Inc. and MidCap Financial SBIC, LP, dated as of August 7, 2015.Cameron Durrant, M.D. | |
| | | | |
| 31.1 | | Certification of Chief Executive Officer of the Registrant, as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| | | | |
| 31.2 | | Certification of Interim Chief Financial Officer of the Registrant, as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| | | | |
32.1†** | | Certification by the Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C. §1350). | |
| | | | |
32.2†** | | Certification by the Interim Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C. §1350). | |
| | | | |
| 101.INS | | XBRL Instance Document | |
| | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | |
| | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | |
| | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | |
| | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | |
| | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | |
| † | | Confidential Treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
| | |
| * | | Indicates management contract or compensatory plan. |
† | | |
| ** | | The Certifications attached as Exhibits 32.1 and 32.2 that accompanies this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of KaloBios Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing. |
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