Stock-Based Compensation
The Company recorded stock-based compensation expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss as follows:
| | Three Months | | Nine Months | |
| | Ended September 30, | | Ended September 30, | |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 | |
| General and administrative | $ | 278 | | $ | 273 | | $ | 1,477 | | $ | 275 | |
| Research and development | | 67 | | | 40 | | | 296 | | | 42 | |
| | $ | 345 | | $ | 313 | | $ | 1,773 | | $ | 317 | |
At September 30, 2017, the Company had $2.5 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 1.9 years.
10. Savant Arrangements
On February 29, 2016, the Company entered into a binding letter of intent (the “LOI”) with Savant Neglected Diseases, LLC (“Savant”). The LOI provided that the Company would acquire certain worldwide rights relating to benznidazole (the “Compound”) from Savant. Under the LOI, the Company made a non-refundable deposit to Savant of $500,000, which was credited towards the Initial Payment (as defined below), and agreed to make monthly payments to Savant equal to $87,500 for development services performed by Savant relating to the Compound.
The LOI provided that in consideration for the assets to be acquired, the Company would provide consideration to Savant, including:
| · | $3,000,000 (the “Initial Payment”) payable as soon as practicable but in no event later than the Company emerging from its Chapter 11 bankruptcy pursuant to a plan of reorganization (the “Bankruptcy Exit”); |
| · | a five-year warrant from the date of the Bankruptcy Exit to purchase up to 200,000 shares of common stock at a per share price of $2.25, exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain milestones related to regulatory approval of the Compound; and |
| · | certain additional payments to be further specified in the definitive agreements. |
On the Effective Date, as authorized by the Plan and the Confirmation Order, the Company and Savant entered into an Agreement for the Manufacture, Development and Commercialization of Benznidazole for Human Use (the “MDC Agreement”), pursuant to which the Company acquired certain worldwide rights relating to the Compound. The MDC Agreement consummates the transactions contemplated by the LOI.
Under the terms of the MDC Agreement, the Company acquired certain regulatory and non-intellectual property assets relating to the Compound and any product containing the Compound and an exclusive license of certain intellectual property assets related to the Compound. Savant will retain the right to use the licensed intellectual property for veterinary uses. The MDC Agreement provides that the Company and Savant will jointly conduct research and development activities with respect to the Compound, while the Company will be solely responsible for commercializing the Compound. The Company will fund the development program for the Compound and will reimburse Savant for its development program costs.
As required by the MDC Agreement, on the Effective Date, the Company made payments to Savant totaling $2,687,500, consisting of the remaining portion of the Initial Payment less the deposit in the amount of $2,500,000, an initial monthly Joint Development Program Cost payment of $87,500, and reimbursement of Savant’s legal fees capped at $100,000. The MDC Agreement provides for milestone payments, including payments related to U.S. and foreign regulatory submissions of up to $21 million and certain other contingent payments. Additionally, the Company will pay Savant royalties in the mid-teens on net sales of any benznidazole product on a product-by-product and country-by-country basis, which royalty will be reduced to the high single digits in the United States if a priority review voucher is not granted subsequent to regulatory approval of any benznidazole product. The MDC Agreement also provides that Savant is entitled to a portion of the amount the Company receives upon the sale, if any, of a PRV relating to the Compound.
In addition, on the Effective Date the Company and Savant also entered into a Security Agreement (the “Security Agreement”), pursuant to which the Company granted Savant a continuing senior security interest in the assets and rights acquired by the Company pursuant to the MDC Agreement and certain future assets developed from those acquired assets.
On the Effective Date, the Company issued to Savant a five year warrant (the “Warrant”) to purchase 200,000 shares of the Company’s Common Stock, at an exercise price of $2.25 per share, subject to adjustment. The Warrant is exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain regulatory related milestones. In addition, pursuant to the MDC Agreement, the Company has granted Savant certain “piggyback” registration rights for the shares issuable under the Warrant.
The Company determined the fair value of the Warrant to be approximately $670,000. During the course of 2016, the Company reevaluated the performance conditions and expected vesting of the Warrant at the end of each quarter and recorded expense of approximately $361,000 during the year ended December 31, 2016 in Research and development expenses.
The Company reevaluated the performance conditions and expected vesting of the Warrant as of September 30, 2017 and recorded a reduction in expense of approximately $59,000 during the three months ended September 30, 2017 and a reduction of expense of approximately $97,000 during the nine months ended September 30, 2017 due to a decline in the fair value, which reduction is included in Research and development expenses in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss. Specifically, as a result of the FDA granting accelerated and conditional approval of a benznidazole therapy manufactured by Chemo for the treatment of Chagas disease and awarding Chemo a neglected tropical disease PRV, the Company re-evaluated the final two vesting milestones and concluded that the probability of achievement of these milestones had decreased to 0%.The Company will continue to reevaluate the performance conditions and expected vesting of the Warrant on a quarterly basis until all performance conditions have been met.
Before a compound receives regulatory approval, the Company records upfront and milestone payments made to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.
The Company determined that the acquisition of the Compound should be treated as a purchase of in-process research and development. Accordingly, during the year ended December 31, 2016, the Company recorded $3,250,000, which includes an additional $250,000 payment made in 2015 to Savant, as a Research and development expense. In addition, during the year ended December 31, 2016, the Company recorded $262,500 in connection with the Joint Development Program and recorded $100,000 in legal fee reimbursement as a Research and development expense.
On May 26, 2017, the Company submitted its benznidazole IND to FDA which became effective on June 26, 2017. The Company recorded expense of $1,000,000 during the three months ended June 30, 2017 as a Research and development expense related to the milestone achievement associated with the IND being declared effective.
On July 10, 2017 FDA notified the Company that it granted Orphan Drug Designation to benznidazole for the treatment of Chagas disease. The Company recorded an expense of $1,000,000 during the three months ended September 30, 2017 as a Research and development expense related to the milestone achievement associated with Orphan Drug Designation.
In July 2017, the Company commenced litigation against Savant alleging that Savant breached the MDC Agreement and seeking a declaratory judgement. Savant has asserted counterclaims for breaches of contract under the MDC Agreement and the Security Agreement. The dispute primarily concerns the Company’s right under the MDC Agreement to offset certain costs incurred by the Company in excess of the agreed upon budget against payments due Savant. The aggregate cost overages as of September 30, 2017 that the Company asserts are Savant’s responsibility total approximately $3.4 million, net of a $500,000 deductible. The Company asserts that it is entitled to offset $2 million in milestone payments due Savant against the cost overages, such that as of June 30, 2017, Savant owed the Company approximately $1.4 million. As of September 30, 2017, Savant owed the Company approximately $2.1 million in cost overages. Such cost overages have been charged to Research and development expense as incurred. Recovery of such cost overages, if any, will be recorded as a reduction of Research and development expense in the period received. See Part II, Item 1 of this Form 10-Q for more information about this pending matter.
11. Litigation
Bankruptcy Proceeding
The Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code on December 29, 2015. See Note 2 for additional information related to the bankruptcy.
Securities Class Action Litigation
On December 18, 2015, a putative class action lawsuit (captioned Li v. KaloBios Pharmaceuticals, Inc. et al., 5:15-cv-05841-EJD) was filed against the Company in the United States District Court for the Northern District of California (the “Class Action Court”), alleging violations of the federal securities laws by the Company, Herb Cross and Martin Shkreli, the Company’s former Chairman and Chief Executive Officer. On December 23, 2015, a putative class action lawsuit was filed against the Company in the Class Action Court (captioned Sciabacucchi v. KaloBios Pharmaceuticals, Inc. et al., 3:15-cv-05992-CRB), similarly alleging violations of the federal securities laws by the Company and Mr. Shkreli. On December 31, 2015, a putative class action lawsuit was filed against the Company in the Class Action Court (captioned Isensee v. KaloBios Pharmaceuticals, Inc. et al., Case No. 15-cv-06331-EJD) also alleging violation of the federal securities laws by the Company, a former officer and Mr. Shkreli. On April 18, 2016, an amended complaint was filed in the Isensee suit, adding Herb Cross and Ronald Martell as defendants. On April 28, 2016, the Class Action Court consolidated these cases (the “Securities Class Action Litigation”) and appointed certain plaintiffs as the lead plaintiffs. The lead plaintiffs in the Securities Class Action Litigation were seeking damages of $20.0 million on behalf of all the affected members of the class represented in the Securities Class Action Litigation, (the “Securities Class Action Members”).
On June 15, 2016, a settlement stipulation (the “Securities Class Action Settlement”), was approved by the Bankruptcy Court. The Securities Class Action Settlement required the Company to issue 300,000 shares of common stock and submit a payment of $250,000 to the Securities Class Action Members and advance insurance proceeds of $1.25 million to the Securities Class Action Members (collectively, the consideration is the “Securities Class Action Settlement Consideration”). On January 20, 2017, the Class Action Court preliminarily approved the Securities Class Action Settlement and on June 22, 2017, the Class Action Court issued its final approval order. The Securities Class Action Settlement provides that any Securities Class Action Member is entitled to share in the Securities Class Action Settlement Consideration. The Securities Class Action Settlement provides for releases and related injunctions to be granted for the benefit of, among others, the Company, Ronald Martell, Herb Cross and all of the Company’s past, present and future directors, officers and employees, excluding Mr. Shkreli. Securities Class Action Members had the option to exclude themselves from the Securities Class Action Settlement and are thereby not bound by the terms of the Securities Class Action Settlement nor entitled to receive any amount of the Securities Class Acton Settlement Consideration. Such Securities Class Action Members, to the extent they properly excluded themselves from the Securities Class Action Settlement and timely and properly filed a proof of claim in the bankruptcy case, may have certain rights under the Plan with respect to such claims. Pursuant to the Plan and Confirmation Order, such claims are subordinated to the level of the Company’s common stock that was issued and outstanding when the Company’s bankruptcy case was filed. Such claims are also subject to the Company’s objection.
The Company’s agreement to the Securities Class Action Settlement was not in any way an admission of the Company’s wrongdoing or liability. During the year ended December 31, 2016, the 300,000 shares were issued and the $250,000 payment was made.
PIPE Litigation
On January 7, 2016, certain investors (the “PIPE Claimants”), commenced an adversary proceeding (captioned Gregory Rea, et al. v. KaloBios Pharmaceuticals, Inc., Adv. Pro. No. 16-50001 (LSS)) in the Bankruptcy Court against the Company alleging implied trust theories, breach of contract, fraud and violations of the federal securities laws in connection with the PIPE Claimants’ purchase of the Company’s common stock in the Private Placement (the “PIPE Litigation”). The PIPE Claimants also raised certain other objections to the Company’s bankruptcy proceeding. The PIPE Claimants sought an aggregate total of approximately $6.9 million in damages.
On May 9, 2016, the Bankruptcy Court entered an order approving a settlement stipulation between the Company and the PIPE Claimants (the “Settlement Stipulation”). Under the Settlement Stipulation, in connection with the effectiveness of the Plan, and per the terms of the Settlement Stipulation, the Company became obligated to issue 327,608 shares to the PIPE Claimants and make a payment of $250,000 to the PIPE Claimants for the purpose of satisfying expenses related to the PIPE Litigation. During the year ended December 31, 2016, the 327,608 shares were issued and the $250,000 payment was made.
Claim by Marek Biestek
Marek Biestek was a director of the Company who, while not a plaintiff in the above described PIPE Litigation, filed a proof of claim alleging damages from the PIPE transaction and filed an objection to the confirmation of the Plan. To resolve his objection to the Plan and his proof of claim, the Company settled with him individually by issuing him 3,750 additional shares of common stock. Mr. Biestek, as a former director of the Company, was excluded from the Securities Class Action Members and therefore received nothing from the Securities Class Action Litigation.
As of December 31, 2015, the Company recorded an obligation in stockholders’ equity to issue the shares related to the above claims totaling approximately $2.8 million and recorded the cash liability of $500,000 in Liabilities subject to compromise. During the year ended December 31, 2016, all of the above claims were satisfied and shares issued.
Savant Litigation
See Note 10 – “Savant Arrangements” and Part II, Item 1 of this Form 10-Q for information about litigation between the Company and Savant that was instituted in July 2017.
12. Subsequent Events
Vendor Negotiations
In October 2017, the Company reached agreement with certain vendors which reduced trade payables by $2.0 million, which includes $1.1 million reclassified to a long-term liability, as it is based on future revenue. The gain of $900,000, will be recognized in the Consolidated Statement of Operations and Comprehensive Loss for the three months ended December 31, 2017 as Other Income.
Term Loans
The outstanding principal balance of $14.7 million under the Term Loans, plus accrued interest and fees, became due on October 31, 2017. See Note 7 – “Debt and Equity Financing” for further information about the Term Loans. As of October 31, 2017, the aggregate amount of the Company’s obligations under the Term Loan Credit Agreement, including accrued interest and fees, approximated $16.1 million.
The Company does not have access to sufficient funds to repay the outstanding obligations under the Term Loan Credit Agreement. Accordingly, on October 31, 2017, the Company obtained a short-term extension of the maturity of the Company’s obligations under the Term Loans. On November 16, 2017, the Company obtained an additional short-term extension of the maturity of the Company’s obligations under the Term Loans. The extension agreed with the Term Loan Lenders extends the maturity date of the Company’s obligations under the Term Loan Credit Agreement to the earlier of (i) December 1, 2017, or (ii) the date that the Company consummates one or more alternative transactions with the Term Loan Lenders. Aside from the extension of the Maturity Date, the extensions did not modify any of the terms under the Term Loan Credit Agreement.
The Company has been discussing and continues to discuss with its Term Loan Lenders alternative transactions that might result in the satisfaction, extension or modification of the Company’s obligations including conversion of the Term Loans into equity in the Company, which may occur at a significant discount to the current market price and be dilutive to the ownership interests of existing stockholders. There can be no assurances that the Term Loan Lenders will agree to continue discussing any such alternative transactions or that the Company ultimately will be able to reach agreement with such Term Loan Lenders on the terms of any alternative transaction.
If the Company is unable to reach a satisfactory agreement with the Term Loan Lenders on any alternative transaction, the Company’s Board has authorized the Company’s management to prepare for a second bankruptcy filing while exploring other options in parallel.
Departure of Directors
On November 9, 2017, Dale Chappell and Ezra Friedberg resigned from the Board, effective immediately. Dr. Chappell is an affiliate of BHCMF, BHC and Cheval, each of which is a Term Loan Lender under the Term Loan Credit Agreement.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10‑Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. This Quarterly Report on Form 10-Q contains statements that discuss future events or expectations, projections of results of operations or financial condition, trends in our business, business prospects and strategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue” or the negative of those words and other comparable words. These statements may relate to, among other things, our expectations regarding the scope, progress, expansion, and costs of researching, developing and commercializing our product candidates; our intent to in-license or acquire additional product candidates; our opportunity to benefit from various regulatory incentives; expectations for our financial results, revenue, operating expenses and other financial measures in future periods; and the adequacy of our 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:
| · | our lack of revenues, history of operating losses, limited cash reserves and ability to obtain additional capital to develop and commercialize our product candidates, including the additional capital which will be necessary to complete the clinical trials that we have initiated or plan to initiate, and continue as a going concern; |
| · | our ability to consummate one or more alternative transactions with our term loan lenders to permit the satisfaction, extension or modification of our obligations under our term loan credit agreement; |
| · | the effect on our stock price and the significant dilution to the share ownership of our existing stockholders that may result from conversion of the term loans into equity of the company at a discount from the current market price; |
| · | our ability to execute our new strategy and business plan focused on developing our proprietary monoclonal antibody portfolio; |
| · | our ability to list our common stock on a national securities exchange, whether through a new listing or by completing a reverse merger or other strategic transaction; |
| · | the success, progress, timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders; |
| · | our ability to recover any portion of our investment in benznidazole after FDA’s award of a Priority Review Voucher to a competitor’s drug candidate; |
| · | uncertainties relating to the timetable for FDA action under the new presidential administration; |
| · | the potential timing and outcomes of clinical studies of lenzilumab, ifabotuzumab or any other product candidates and the uncertainties inherent in clinical testing; |
| · | our ability to timely source adequate supply of our development products from third-party manufacturers on which we depend; |
| · | the potential, if any, for future development of any of our present or future products; |
| · | our ability to successfully progress, partner or complete further development of our programs; |
| · | our ability to identify and develop additional products; |
| · | our ability to attain market exclusivity or to protect our intellectual property; |
| · | our ability to reach agreement with a partner to effect a successful commercialization of any of our product candidates; |
| · | the outcome of pending or future litigation; |
| · | changes in the regulatory landscape that may prevent us from pursuing or realizing any of the expected benefits from the various regulatory incentives at the center of our strategy, or the imposition of regulations that affect our products. |
These are only some of the factors that may affect the forward-looking statements contained in this Form 10-Q. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see “Risk Factors” discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. 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 rapidly 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 Form 10-Q. You should be aware that the forward-looking statements contained in this Form 10-Q are based on our current views and assumptions. We undertake no obligation to revise or update any forward-looking statements made in this Form 10-Q to reflect events or circumstances 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 Form 10-Q 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 were incorporated on March 15, 2000 in California and reincorporated as a Delaware corporation in September 2001 under the name KaloBios Pharmaceuticals, Inc. We completed our initial public offering in January 2013. Effective August 7, 2017, we changed our legal name to Humanigen, Inc.
We have undergone a significant transformation since December 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 2 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
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. On June 30, 2016, upon emergence from bankruptcy, the ticker symbol for the trading of our common stock on the over-the-counter market reverted back to KBIO. On June 26, 2017 our common stock began trading on the OTCQB Venture Market under the same ticker symbol. On August 7, 2017, following effectiveness of our previously reported name change to Humanigen, Inc., our common stock began trading on the OTCQB Venture Market under the new ticker symbol “HGEN”.
From the time of our emergence from bankruptcy to August 29, 2017, our lead product candidate was benznidazole for the treatment of Chagas disease, a parasitic illness that can lead to long-term heart, intestinal and neurological problems.
On June 30, 2016, we acquired certain worldwide rights to benznidazole from Savant Neglected Diseases, LLC, or Savant, and until August 29, 2017, we were primarily focused on the development necessary to seek and obtain approval by the United States Food and Drug Administration, or FDA, for benznidazole and the subsequent commercialization, if approved. According to FDA-issued guidance, benznidazole is eligible for review pursuant to a 505(b)(2) regulatory pathway as a potential treatment for Chagas disease and, if it became the first FDA-approved treatment for Chagas disease, we would have been eligible to receive a Priority Review Voucher (“PRV”).
However, on August 29, 2017, the FDA announced it had granted accelerated and conditional approval of a benznidazole therapy manufactured by Chemo Research, S.L. or Chemo, for the treatment of Chagas disease and had awarded that manufacturer a neglected tropical disease PRV. Chemo’s benznidazole also has received Orphan Drug designation. As a result of FDA’s actions and with the information currently available, we no longer expect to be eligible to receive a PRV with our own benznidazole candidate for the treatment of Chagas disease. Accordingly, we have ceased development for benznidazole and are currently assessing a full range of options with respect to our benznidazole assets and development program.
Since the FDA’s August 29, 2017 announcement, we have shifted our primary focus toward developing our proprietary monoclonal antibody portfolio, which comprises, lenzilumab (formerly known as KB003) and ifabotuzumab (formerly known as KB004), for use in addressing significant unmet needs in oncology. Both of these product candidates are in the early stage of development and will require substantial time, expenses, clinical development, testing, and regulatory approval prior to commercialization. Furthermore, neither of these product candidates has advanced into a pivotal registration study and it may be years before such a study is initiated, if at all.
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 and potentially involved in other serious conditions. In July 2016, we initiated dosing in a Phase 1 clinical trial in patients with chronic myelomonocytic leukemia or CMML to identify the maximum tolerated dose, or recommended Phase 2 dose of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity.
We have enrolled a total of nine patients in the 200, 400 and 600 mg dose cohorts of our CMML trial, and are currently evaluating subjects in the highest dose cohort of 600 mg for continuing accrual. We also plan to review preliminary safety and efficacy results and anticipate completion of the ad hoc interim analysis in the first half of 2018.
We also expect to explore lenzilumab’s effectiveness in reducing adverse events associated with chimeric antigen receptor T-cell, or CAR-T, therapy. Specifically, we intend to explore lenzilumab’s effectiveness in preventing, ameliorating or treating CAR-T-cell-related adverse events. We may also use the interim data from the lenzilumab CMML Phase I study to determine the feasibility of rapidly commencing a Phase I study in JMML patients, or to explore progressing directly with a JMML Phase I study. JMML, a rare pediatric cancer, is associated with a very high unmet medical need and there are no FDA-approved therapies.
Ifabotuzumab is an anti-EphA3 mAb that has the potential to offer a novel approach to treating solid tumors, hematologic malignancies and serious pulmonary conditions. EphA3 is aberrantly expressed on the surface of tumor cells and stromal cells in certain cancers. We completed the Phase 1 dose escalation portion of a Phase 1/2 ifabotuzumab clinical trial in hematologic malignancies for which the preliminary results were published in the journal Leukemia Research in 2016. An Investigator-Sponsored Phase 0/1 radiolabeled imaging trial of ifabotuzumab in glioblastoma multiforme (a particularly aggressive and deadly form of brain cancer) has begun at the Olivia-Newton John Cancer Institute in Melbourne, Australia. We are currently exploring partnering opportunities to enable further development of ifabotuzumab.
Lenzilumab and ifabotuzumab 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.
We have incurred significant losses and had an accumulated deficit of $259.5 million as of September 30, 2017. We expect to continue to incur net losses for the foreseeable future 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 continue as a going concern and to support our business efforts, including obtaining regulatory approvals for our product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates.
As discussed in further detail below under the caption “Liquidity and Capital Resources” and in Part II, Item 1A, “Risk Factors,” we do not have access to sufficient funds to repay our outstanding obligations totaling approximately $16.1 million under our outstanding Term Loans. We have been discussing and continue to discuss with our Term Loan Lenders alternative transactions that might result in the satisfaction, extension or modification of our obligations including conversion of the Term Loans into equity of the Company, which may occur at a significant discount to the current market price and be dilutive to the ownership interests of existing stockholders. If we are unable to reach agreement with our Term Loan Lenders to satisfy, extend or modify these obligations, we may be forced to file for a second bankruptcy. Even if we were to successfully reach such an agreement with our Term Loan Lenders, in the future we would need to 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 on 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.
Based on our current levels of operating expenses, our current capital will not 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, 2017, 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.
We are currently evaluating a full range of strategic alternatives to address or respond to our lack of liquidity to repay our outstanding term loans and other obligations. If we are able to successfully reach agreement with our Term Loan Lenders and are also able to successfully obtain additional financing, the review of strategic alternatives could result in, among other things, pursuit of a litigation strategy relating to our benznidazole intellectual property rights, a sale, merger, consolidation or business combination, asset divestiture, partnering, licensing or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions, or continuing to operate with our current business plan and strategy. We may incur substantial expenses associated with identifying, evaluating and pursuing potential strategic alternatives, and there can be no assurances as to whether any of these may be successfully implemented. If we are not successful in reaching agreement with our Term Loan Lenders, we may have to file a second petition for bankruptcy. See Part II, Item 1A, “Risk Factors.”
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 Condensed 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 Condensed 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, 2017, 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 2016 Annual Report on Form 10-K (File No. 001-35798), filed with the SEC on March 9, 2017.
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, 2017 we had an accumulated deficit of $259.5 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. 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 three and nine months ended September 30, 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 former lead product candidate benznidazole. Our operations during the three and nine months ended September 30, 2017, which are now largely related to advancing our development programs, have changed substantially from the same period in 2016. Accordingly, comparisons of our operations and results for the three and nine months ended September 30, 2017 to our operations and results in the prior year periods 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 following table shows our total research and development expenses for the three and nine months ended September 30, 2017 and 2016:
| | | For the | | | For the | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| External Costs | | | | | | | | | | | | |
| KB001 | | $ | - | | | $ | 5 | | | $ | - | | | $ | 10 | |
| Lenzilumab | | | 528 | | | | 99 | | | | 1,713 | | | | 215 | |
| Ifabotuzumab | | | 25 | | | | 30 | | | | 120 | | | | 176 | |
| Benznidazole | | | 3,138 | | | | 829 | | | | 6,956 | | | | 5,024 | |
| Internal costs | | | 116 | | | | 778 | | | | 1,539 | | | | 2,380 | |
| Total research and development | | $ | 3,807 | | | $ | 1,741 | | | $ | 10,328 | | | $ | 7,805 | |
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, 2017 and 2016
| | | Three Months Ended September 30, | | | Increase/(Decrease) | |
| (in thousands) | | 2017 | | | 2016 | | | $'s | | | % | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | $ | 3,807 | | | $ | 1,741 | | | $ | 2,066 | | | | 119 | |
| General and administrative | | | 1,993 | | | | 2,453 | | | | (460 | ) | | | (19 | ) |
| Loss from operations | | | (5,800 | ) | | | (4,194 | ) | | | 1,606 | | | | 38 | |
| Interest expense | | | (1,269 | ) | | | (30 | ) | | | 1,239 | | | | 4,130 | |
| Other income (expense), net | | | (14 | ) | | | 128 | | | | 142 | | | | 111 | |
| Reorganization items, net | | | (102 | ) | | | (427 | ) | | | (325 | ) | | | (76 | ) |
| Net loss | | $ | (7,185 | ) | | $ | (4,523 | ) | | $ | 2,662 | | | | 59 | |
Research and development expenses increased $2.1 million, from $1.7 million for the three months ended September 30, 2016 to $3.8 million for the three months ended September 30, 2017. The increase is driven by increases in benznidazole and lenzilumab development costs as well as an increase in internal costs. The 2017 benznidazole costs include the $1 million milestone achieved in July 2017. See Note 10 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for more information regarding the milestone achievement in July 2017.
General and administrative expenses decreased $0.5 million from $2.5 million for the three months ended September 30, 2016 to $2.0 million for the three months ended September 30, 2017. The decrease is primarily due to lower accounting and professional fees partially offset by an increase in legal fees due to the litigation with Savant.
Reorganization items, net, decreased $0.3 million from $0.4 million for the three months ended September 30, 2016 to $0.1 million for the three months ended September 30, 2017. The decrease is primarily related to a decrease in legal and professional fees due to less bankruptcy related activities.
Interest expense of $1.3 million recognized for the three months ended September 30, 2017 relates to interest accrued on the Term Loans and interest accrued on the Notes payable to vendors. Interest expense of $30,000 recognized for the three months ended September 30, 2016 was related to the debtor-in-possession financing entered into on April 1, 2016.
Other expense, net for the three months ended September 30, 2017 consists of foreign currency losses related to the payment of vendor invoices in foreign currencies. Other income, net for the three months ended September 30, 2016 primarily consists of foreign currency gains related to the payment of bankruptcy liabilities in foreign currencies.
Comparison of Nine months Ended September 30, 2017 and 2016
| | | Nine Months Ended September 30, | | | Increase/(Decrease) | |
| (in thousands) | | 2017 | | | 2016 | | | $'s | | | % | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | $ | 10,328 | | | $ | 7,805 | | | $ | 2,523 | | | | 32 | |
| General and administrative | | | 5,987 | | | | 6,169 | | | | (182 | ) | | | (3 | ) |
| Loss from operations | | | (16,315 | ) | | | (13,974 | ) | | | 2,341 | | | | 17 | |
| Interest expense | | | (2,245 | ) | | | (76 | ) | | | 2,169 | | | | 2,854 | |
| Other income (expense), net | | | (38 | ) | | | 128 | | | | 166 | | | | 130 | |
| Reorganization items, net | | | (289 | ) | | | (8,039 | ) | | $ | (7,750 | ) | | | (96 | ) |
| Net loss | | $ | (18,887 | ) | | $ | (21,961 | ) | | $ | (3,074 | ) | | | (14 | ) |
Research and development expenses increased $2.5 million, from $7.8 million for the nine months ended September 30, 2016 to $10.3 million for the nine months ended September 30, 2017. The increase is driven by an increase in benznidazole and lenzilumab development costs and internal development costs. The 2017 benznidazole costs include the cumulative $2.0 million in milestones achieved in June and July 2017. See Note 10 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for more information regarding these milestone achievements. The 2016 benznidazole costs included the costs of the technology acquisition which occurred on June 30, 2016.
General and administrative expenses decreased $0.2 million, from $6.2 million for the nine months ended September 30, 2016 to $6.0 million for the nine months ended September 30, 2017 primarily due to a decrease in accounting and auditing expenses during the nine months ended September 30, 2017 as compared to the prior year.
Reorganization items, net decreased $7.7 million, from $8.0 million for the nine months ended September 30, 2016 to $0.3 million for the nine months ended September 30, 2017 due to the amounts incurred during the nine months ended September 30, 2016 related to the bankruptcy plan, including legal fees of $4.8 million, $1.1 million in professional fees, $0.7 million related to the fair value of common shares issued to our CEO and two directors for their service in bankruptcy, $1.1 million in legal and other costs related to the debtor-in-possession financing, $0.5 million related to the beneficial conversion expense recognized in connection with the debtor-in-possession financing, offset by a net gain on the termination of the South San Francisco lease of $0.2 million. The costs incurred during the nine months ended September 30, 2017 include $0.2 million in legal and professional fees related to ongoing bankruptcy proceedings.
Interest expense of $2.2 million recognized for the nine months ended September 30, 2017 relates to interest accrued on the Term Loans and interest accrued on the Notes payable to vendors. Interest expense of $76,000 recognized for the nine months ended September 30, 2016 was related to the debtor-in-possession financing entered into on April 1, 2016.
Other expense, net for the nine months ended September 30, 2017 consists of foreign currency losses related to the payment of vendor invoices in foreign currencies. Other income, net for the nine months ended September 30, 2016 primarily consists of foreign currency gains related to the payment of bankruptcy liabilities in foreign currencies.
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, 2017, we had cash and cash equivalents of $1.1 million. As of November 16, 2017, we had cash and cash equivalents of approximately $145,000.
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) | | 2017 | | | 2016 | |
| | | | | | | |
| Net cash (used in) provided by: | | | | | | |
| Operating activities | | $ | (12,311 | ) | | $ | (17,948 | ) |
| Investing activities | | | - | | | | 92 | |
| Financing activities | | | 10,500 | | | | 12,330 | |
| Net decrease in cash and cash equivalents | | $ | (1,811 | ) | | $ | (5,526 | ) |
Net cash used in operating activities was $12.3 million and $17.9 million for the nine months ended September 30, 2017 and 2016, respectively. The primary use of cash in 2017 was to fund our operations related to the development of our product candidates, whereas the primary use of cash in 2016 was to fund our operations related to the Plan. Cash used in operating activities of $12.3 million for the nine months ended September 30, 2017 primarily related to our net loss of $18.9 million, adjusted for non-cash items, such as $1.8 million in stock based compensation, $2.2 million in noncash interest expense and net increases in working capital items, primarily $2.3 million of Accrued expenses.
Cash used in operating activities of $17.9 million for the nine months ended September 30, 2016 primarily related to our net loss of $21.8 million, adjusted for non-cash items, such as $1.6 million related to reorganization items related to the debtor-in-possession financing, $1.5 million related to the issuance of stock to our CEO and two directors, $0.3 million related to the issuance of warrants to Savant in connection with the acquisition of certain rights related to the benznidazole license, $0.2 million related to a net gain on lease termination, other non-cash items of $0.4 million and net cash outflows of $0.3 million related to changes in operating assets and liabilities, primarily Liabilities subject to compromise, Accounts payable and Accrued expenses.
Net cash provided by investing activities was $0.1 million for the nine months ended September 30, 2016, primarily related to the reduction in restricted cash in connection with the termination of our former office lease in South San Francisco. There was no Net cash provided by investing activities for the nine months ended September 30, 2017.
Net cash provided by financing activities was $10.5 million for the nine months ended September 30, 2017 related to the March 2017 and July 2017 Term Loans. Net cash provided by financing activities was $12.3 million for the nine months ended September 30, 2016 related to the debtor-in-possession and equity bankruptcy financings.
In connection with our emergence from bankruptcy in June 2016, we closed an $11 million financing that provided the funds required to enable our exit from Chapter 11, as well as to fund our current working capital needs. In December 2016, we entered into a Credit and Security Agreement (the “Term Loan Credit Agreement”) providing for an original $3.0 million credit facility (the “December 2016 Term Loan”), net of certain fees and expenses. On March 21, 2017, we entered into an amendment to the Term Loan Credit Agreement to obtain an additional $5.5 million (the “March 2017 Term Loan”), net of certain fees and expenses, providing additional working capital. On July 8, 2017, we entered into a second amendment to the Term Loan Credit Agreement to obtain an additional $5.0 million (the “July 2017 Term Loan” and together with the December 2016 Term Loan and the March 2017 Term Loan, the “Term Loans”), net of certain fees and expenses, providing additional working capital. As of September 30, 2017, we had received the entire amount available under the July 2017 Term Loan, bringing the total principal amount of the Term Loans to $14.7 million. The outstanding balance of $16.1 million under the Term Loans, including accrued interest and fees, became due on October 31, 2017. On October 31, 2017, we obtained a short-term extension from our Term Loan Lenders of the maturity of our obligations under the Term Loan Credit Agreement until November 10, 2017. On November 16, 2017, we obtained an additional short-term extension of the maturity of our obligations under the Term Loan Credit Agreement. The extension agreed with the Term Loan Lenders extends the maturity date of our obligations under the Term Loan Credit Agreement to the earlier of (i) December 1, 2017, or (ii) the date that we consummate one or more alternative transactions with the Term Loan Lenders. Aside from the extension of the Maturity Date, the extensions did not modify any of the terms under the Term Loan Credit Agreement.
We do not have access to sufficient funds to repay the outstanding obligations under the Term Loan Credit Agreement. Accordingly, we have been discussing and continue to discuss with our Term Loan Lenders alternative transactions that might result in the satisfaction, extension or modification of our obligations including conversion of the Term Loans into equity of the Company, which may occur at a significant discount to the current market price and be dilutive to the ownership interests of existing stockholders. There can be no assurances that the Term Loan Lenders will agree to continue discussing any such alternative transactions or that we ultimately will be able to reach agreement with such Term Loan Lenders on the terms of any alternative transaction.
If we are unable to reach a satisfactory agreement with the Term Loan Lenders on any alternative transactions, the Company’s board of directors has authorized the Company’s management team to prepare for a second bankruptcy filing while exploring other options in parallel.
Please see Note 7 – “Debt and Equity Financing” and Note 12 – “Subsequent Events” to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q, for additional information relating to the Term Loan Credit Agreement. See also Part II, Item 1A, “Risk Factors.”
Even if we were able to reach agreement with the Term Loan Lenders, we would require substantial additional capital to continue as a going concern and to support our business efforts, including obtaining regulatory approvals for our product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. The amount of capital we would 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; |
| · | the success, progress, timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders; |
| · | our ability to re-list our common stock on a national securities exchange, whether through a new listing or by completing a strategic transaction; |
| · | 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 and outcome of pending and future litigation; |
| · | 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 are pursuing efforts to raise additional capital 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 in the best interests of our stockholders, we may also find it appropriate to enter into a strategic transaction that could result in, among other things, a sale, merger, consolidation or business combination.
Based on our current levels of operating expenses, our current capital will not 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 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. On June 30, 2016, upon emergence from bankruptcy, the ticker symbol for the trading of our common stock on the over-the-counter market reverted back to KBIO. On June 26, 2017 we began trading on the OTCQB Venture Market under the same ticker symbol. On August 7, 2017, following the effectiveness of our previously reported name change, our common stock began trading on the OTCQB Venture Market under the new ticker symbol “HGEN”. Although our common stock is eligible to trade in the OTCQB Venture Market, 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.
Committed Equity Financing Facility
On August 24, 2017, we entered into a Common Stock Purchase Agreement, dated as of August 23, 2017 (the "ELOC Purchase Agreement"), with Aperture Healthcare Ventures Ltd. ("Aperture") pursuant to which we may, subject to certain conditions and limitations set forth in the ELOC Purchase Agreement, require Aperture to purchase up to $15.0 million worth of newly issued shares of our common stock, over the 36-month term following the effectiveness of the initial resale registration statement described below (the “Investment Period”). From time to time over the Investment Period, and in our sole discretion, we may present Aperture with one or more notices requiring Aperture to purchase a specified dollar amount of shares of our common stock, based on the price per share per day over five consecutive trading days (the “Pricing Period”). In addition, in our sole discretion, but subject to certain limitations, we may require Aperture to purchase a percentage of the daily trading volume of our common stock for each trading day during the Pricing Period.
On August 23, 2017, in connection with the ELOC Purchase Agreement, we entered into a Registration Rights Agreement (the "ELOC RRA”) with Aperture, pursuant to which we granted to Aperture certain registration rights related to the shares issuable in accordance with the ELOC Purchase Agreement. Under the ELOC RRA, we agreed to use our commercially reasonable efforts to prepare and file with the SEC one or more registration statements for the purpose of registering the resale of the maximum shares issuable pursuant to the ELOC Purchase Agreement.
The actual amount of funds that can be raised under the Aperture committed equity financing facility will depend on the number of shares of our common stock sold under the ELOC Purchase Agreement and the market value of our common stock during the Pricing Period of each sale. We have yet to file a registration statement under the ELOC RRA. Sales of common stock under the ELOC Purchase Agreement cannot commence until such registration statement is filed and declared effective by the SEC. There can be no assurance that we will use the Aperture facility to raise funds in the future. See Note 7 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for more information regarding the ELOC Purchase Agreement and the ELOC RRA.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.
| Item 4. | Controls and Procedures. |
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 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 our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2017 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 Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2017, 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
| Item 1. | Legal Proceedings. |
Please see Note 11 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for a summary of other legal proceedings.
On July 10, 2017, the Company filed a complaint against Savant Neglected Diseases, LLC (“Savant”) in the Superior Court for the State of Delaware, New Castle County (the “Delaware Court”). KaloBios Pharmaceuticals, Inc. v. Savant Neglected Diseases, LLC, No. N17C-07-068 PRW-CCLD. The Company asserted breach of contract and declaratory judgment claims against Savant arising under the MDC Agreement. See Note 10 - “Savant Arrangements” to the accompanying condensed consolidated financial statements for more information about the MDC Agreement. The Company alleges that Savant has breached its MDC Agreement obligations to pay cost overages that exceed a budgetary threshold as well as other related MDC Agreement representations and obligations. In the litigation, the Company has alleged that as of June 30, 2017, Savant was responsible for aggregate cost overages of approximately $3.4 million, net of a $500,000 deductible under the MDC. The Company asserts that it is entitled to offset $2 million in milestone payments due Savant against the cost overages, such that as of June 30, 2017 Savant owed the Company approximately $1.4 million.
On July 12, 2017, Savant removed the case to the United States District Court for the District of Delaware, claiming that the action is related to or arises under the bankruptcy court case from which the Company emerged in July 2016. In re KaloBios Pharmaceuticals, Inc., No. 15-12628-LSS (Bankr. D. Del.). On July 27, 2017, Savant filed an Answer and Counterclaims. Savant’s filing alleges breaches of contracts under the MDC Agreement and the Security Agreement, claiming that the Company breached its obligations to pay the milestone payments and other related representations and obligations.
On August 1, 2017, the Company moved to remand the case back to the Delaware Superior Court. Briefing on that motion is completed and awaiting determination by the Bankruptcy Court.
On August 2, 2017, Savant sent a foreclosure notice to the Company, demanding that the Company provide the Collateral as defined in the Security Agreement for inspection and possession on August 9, 2017, with a public sale to be held on September 1, 2017. The Company moved for a Temporary Restraining Order and Preliminary Injunction in the bankruptcy court on August 4, 2017. Savant responded on August 7, 2017. On August 7, 2017, the bankruptcy court granted the Company’s motion for a Temporary Restraining Order, entering an order prohibiting Savant from collecting on or selling the Collateral, entering the Company’s premises, issuing any default notices to the Company, or attempting to exercise any other remedies under the MDC Agreement or the Security Agreement. The parties have stipulated to continue the provisions of the Temporary Restraining Order in full force and effect until further order of the appropriate court.
We do not have sufficient funds to repay our outstanding term loan obligations in full or significant part. If we cannot reach agreement with our Term Loan Lenders on alternative transactions providing for the satisfaction, extension or modification of our term loan obligations, we may have to file for bankruptcy in the near future.
As of October 31, 2017, the aggregate amount of our obligations under the Term Loan Credit Agreement, including accrued interest and fees, approximated $16.1 million. The extension agreed with the Term Loan Lenders extends the maturity date of our obligations under the Term Loan Credit Agreement to the earlier of (i) December 1, 2017, or (ii) the date that we consummate one or more alternative transactions with the Term Loan Lenders.
We do not have access to sufficient funds to repay these outstanding obligations in full or in part. We have been discussing and continue to discuss with our Term Loan Lenders alternative transactions that might result in the satisfaction, extension or modification of these obligations, including conversion of the Term Loans into equity in the Company, which may occur at a significant discount to the current market price. There can be no assurances that the Term Loan Lenders will agree to continue discussing any such alternative transactions or that we ultimately will be able to reach agreement with such Term Loan Lenders on the terms of any alternative transaction.
If we are unable to reach a satisfactory agreement with our Term Loan Lenders our board of directors has authorized us to begin preparing the company to file a second bankruptcy petition. Given our lack of liquidity, it is reasonably likely that any such filing would result in a complete loss of value for our unsecured creditors and holders of our common stock.
If we are able to reach agreement with our Term Loan Lenders to convert the Term Loans into equity of the Company, the share ownership of our existing stockholders will be significantly diluted.
We have been discussing and continue to discuss with our Term Loan Lenders alternative transactions that might result in the satisfaction, extension or modification of our Term Loan obligations, including conversion of the Term Loans into equity in the Company, at a discount from the current market price. If the Term Loan Lenders agree to convert the Term Loan into equity of the Company at a discount from current market prices, current stockholders will experience significant dilution in their shares ownership.
Even if we were able to reach agreement with our Term Loan Lenders, we will need substantial additional capital to develop and commercialize our product candidates and to continue as a going concern, but our access to capital funding is uncertain.
We will require substantial additional capital to continue as a going concern and to support our business efforts, including obtaining regulatory approvals for lenzilumab and ifabotuzumab, 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; |
| • | the success, progress, timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders; |
| • | our ability to re-list our common stock on a national securities exchange, whether through a new listing or by completing a strategic transaction; |
| • | 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 assets and 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 will need to 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. In addition, to the extent that additional capital is raised through the sale of equity or convertible debt securities, such issuance will result in further dilution to our stockholders.
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.
We may not be able to recover any portion of our investment in benznidazole after the FDA’s award of a Priority Review Voucher to a competitor’s drug candidate.
From the time of our emergence from bankruptcy to August 29, 2017, our lead product candidate was benznidazole for the treatment of Chagas disease. We acquired certain worldwide rights to benznidazole on June 30, 2016 and, until August 29, 2017, were primarily focused on the development necessary to seek and obtain approval by the FDA for benznidazole and the subsequent commercialization, if approved. According to FDA issued guidance, benznidazole is eligible for review pursuant to a 505(b)(2) regulatory pathway as a potential treatment for Chagas disease and, if it became the first FDA-approved treatment for Chagas disease, we would have been eligible to receive a PRV. We invested a significant portion of our time and financial resources in the approval of benznidazole with a more limited focus on our other product candidates.
However, on August 29, 2017, the FDA announced it had granted accelerated and conditional approval of a benznidazole therapy manufactured by Chemo for the treatment of Chagas disease and had awarded that manufacturer a tropical disease PRV. Chemo’s benznidazole also received Orphan Drug designation. As a result of FDA’s actions and with the information currently available, we no longer expect to be eligible to receive a PRV with our own benznidazole candidate for the treatment of Chagas disease.
We are currently assessing a full range of options with respect to our benznidazole assets and development program, which may include an asset divestiture or pursuit of a litigation strategy if we believe our benznidazole intellectual property rights have been violated by any of our competitors. Litigation may be necessary to protect our rights, which could result in substantial costs and be a distraction to our management team. There can be no assurance that the exploration or pursuit of one or more of these options will result in our ability to recover all or any portion of our investment in benznidazole.
If we can obtain funding, our forward-looking business operations will depend on the success of our product candidates, lenzilumab and ifabotuzumab. We cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize, any of our product candidates.
. We have a limited pipeline of product candidates and are not conducting active research at this time for discovery of new molecules or antibodies. We are currently dependent on the successful continued development and regulatory approval of our current product candidates for our future business success. Since the FDA’s August 29, 2017 announcement, our primary focus has shifted to investing our time and financial resources in the development of lenzilumab and ifabotuzumab.
We will need to successfully enroll and complete clinical trials of lenzilumab and ifabotuzumab, and potentially obtain regulatory approval to market these products. The future clinical, regulatory and commercial success of our product candidates is subject to a number of risks, including the following:
| | • | we may not be able to enroll adequate numbers of eligible patients in the clinical trials we propose to conduct; |
| | • | we may not have sufficient financial and other resources to complete the clinical trials; |
| | • | we may not be able to provide acceptable evidence of safety and efficacy for our product candidates; |
| | • | the results of our clinical trials may not meet the level of statistical or clinical significance, or product safety, required by FDA for marketing approval; |
| | • | we may not be able to obtain, maintain and enforce our patents and other intellectual property rights; and |
| | • | we may not be able to obtain and maintain commercial manufacturing arrangements with third-party manufacturers or establish commercial-scale manufacturing capabilities. |
Furthermore, even if we do receive regulatory approval to market any of our product candidates, any such approval may be subject to limitations on the indicated uses for which we may market the product. If any of our product candidates are unsuccessful, that could have a substantial negative impact on our business.
Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that our product candidates will be successfully developed or commercialized. If we or any future development partners are unable to develop, or obtain regulatory approval for or, if approved, successfully commercialize, one or more of our product candidates, we may not be able to generate sufficient revenue to continue our business.
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
| | | |
| Exhibit No. | | Description |
| | | |
| 2.1 | | |
| | | |
| 3.1 | | |
| | | |
| 3.2 | | |
| | | |
| 3.3 | | |
| | | |
| 4.1 | | |
| | | |
| 10.1 | | |
| | | |
| 31.1 | | |
| | | |
| 31.2 | | |
| | | |
32.1** | | |
| | | |
32.2** | | |
| | | |
| 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 |
_________________________
| ** | | 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 Humanigen, 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. |
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.
| | | HUMANIGEN, INC. |
| | | | |
| Date: November 17, 2017 | | By: | /s/ Cameron Durrant |
| | | | Cameron Durrant |
| | | | Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | | | |
| | | | |
| Date: November 17, 2017 | | By: | /s/ Greg Jester |
| | | | Greg Jester |
| | | | Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer) |
