UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 001-33882
ONCOTHYREON INC.
(Exact name of registrant as specified in its charter)
| Delaware | 26-0868560 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
2601 Fourth Ave, Suite 500 Seattle, Washington | 98121 (Zip Code) | |
| (Address of principal executive offices) |
Registrant’s telephone number, including area code:
(206) 801-2100
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange on Which Registered | |
| Common Stock, $0.0001 par value | The NASDAQ Stock Market LLC (The NASDAQ Global Market) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer þ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant’s common stock on the last day of its most recently completed second fiscal quarter, as reported on the NASDAQ Global Market, was approximately $383 million. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock, based on filings with the Securities and Exchange Commission, have been excluded from this computation since such persons may be deemed affiliates of the Registrant. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes.
There were 57,186,749 shares of the Registrant’s common stock, $0.0001 par value, outstanding on August 13, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Explanatory Note
We are filing this Amended Annual Report on Form 10-K/A (the “Amended Filing”) to correct certain errors in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on March 9, 2012 (the “Original Filing”). The purpose of this filing is to amend and restate our diluted earnings per share amounts included in the consolidated financial statements and related disclosures for the year ended December 31, 2010 and the unaudited condensed quarterly financial data for the quarterly periods ended September 30, 2011 and March 31, 2010 and to report a material weakness in internal control over financial reporting as of December 31, 2011. Details of the restatement are discussed below and in Note 2 to the accompanying restated consolidated financial statements.
Description of Restatement
In May 2009 and September 2010, we issued warrants to purchase our common stock in connection with equity financings (see Note 7). Under certain circumstances, such warrants may be settled in common stock or cash at the election of the holders. Because these instruments may be settled for cash in certain circumstances, the warrants are recorded as a liability at fair value on the balance sheet. The change in fair value of the warrants is reflected as other income or expense in our consolidated statement of operations.
The calculation of diluted earnings (loss) per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to earnings (loss) per share for the period, adjustments to net income or net loss used in the calculation are required to remove the change in fair value of the warrants for the period. Likewise, adjustments to the denominator are required to reflect the related dilutive shares. We failed to make such adjustments to the diluted earnings (loss) per share calculations for the periods discussed below.
A summary of the impact of the correction of the errors on the diluted earnings (loss) per share amounts follows:
| Three Months Ended September 30, 2011 | Three Months Ended March 31, 2010 | Year Ended December 31, 2010 | ||||||||||
| (unaudited) | (unaudited) | |||||||||||
Diluted earnings (loss) per share — as originally reported | $ | 0.22 | $(0.03) | $ | (0.58 | ) | ||||||
Difference in diluted earnings (loss) per share | (0.37 | ) | | (0.17) | | (0.14 | ) | |||||
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Diluted earnings (loss) per share — restated | $ | (0.15 | ) | $(0.20) | $ | (0.72 | ) | |||||
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The corrections have no impact on our consolidated balance sheets, net income or (loss), basic earnings (loss) per share, or the consolidated statements of cash flows or stockholders’ equity for any of the above mentioned periods. For a detailed reconciliation of diluted earnings (loss) per share amounts as originally reported to restated amounts, see Note 2 to the consolidated financial statements contained in Part II — Item 8 of this Amended Filing.
Internal Control Considerations
As a result of the restatement, our management determined that there was a control deficiency in our company’s internal control over financial reporting that constitutes a material weakness, as discussed in Part II — Item 9A of the Amended Filing. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. For a discussion of management’s consideration of the Company’s disclosure controls and procedures and the material weakness identified, see Part II — Item 9A included in this Amended Filing.
Items Amended in This Filing
For the convenience of the reader, this Amended Filing sets forth the Original Filing, as modified and superseded where necessary to reflect the restatement. The following items have been amended as a result of, and to reflect, the restatement:
| • | Part I — Item 1A. Risk Factors; |
| • | Part II — Item 6. Selected Financial Data; |
| • | Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| • | Part II — Item 8. Financial Statements and Supplementary Data; |
| • | Part II — Item 9A. Controls and Procedures; and |
| • | Part IV — Item 15. Exhibits and Financial Statement Schedules. |
In accordance with applicable SEC rules, this Amended Filing includes new certifications required by Rule 13a-14 under the Securities and Exchange Act of 1934 (“Exchange Act”) from our Chief Executive Officer and Chief Financial Officer dated as of the date of filing of this Amended Filing.
Except for the items noted above, no other information included in the Original Filing is being amended or updated by this Amended Filing. This Amended Filing continues to describe the conditions as of the date of the Original Filing and, except as contained herein, we have not updated or modified the disclosures contained in the Original Filing. Accordingly, this Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing, including any amendment to those filings.
ONCOTHYREON INC.
ANNUAL REPORT ON FORM 10 K/A
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
| Page | ||||||
| PART I | ||||||
Item 1A. | Risk Factors | 1 | ||||
| PART II | ||||||
Item 6. | Selected Financial Data | 18 | ||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||||
Item 8. | Financial Statements and Supplementary Data | 37 | ||||
Item 9A. | Controls and Procedures | 37 | ||||
| PART IV | ||||||
Item 15. | Exhibits and Financial Statement Schedules | 40 | ||||
| 46 | ||||||
-i-
PART I
| ITEM 1A. | Risk Factors |
Factors That Could Affect Future Results
Set forth below and elsewhere in this report, and in other documents we file with the SEC are descriptions of risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also affect our results of operations and financial condition.
Risks Relating to our Business
Our near-term success is highly dependent on the success of our lead product candidate, Stimuvax, and we cannot be certain that it will be successfully developed or receive regulatory approval or be successfully commercialized.
Our lead product candidate, Stimuvax, is being evaluated in Phase 3 clinical trials for the treatment of non-small cell lung cancer, or NSCLC. Stimuvax will require the successful completion of the ongoing NSCLC trials and possibly other clinical trials before submission of a biologic license application, or BLA, or its foreign equivalent for approval. This process can take many years and require the expenditure of substantial resources. Pursuant to our agreement with Merck KGaA, Merck KGaA is responsible for the development and the regulatory approval process and any subsequent commercialization of Stimuvax. We cannot assure you that Merck KGaA will continue to advance the development and commercialization of Stimuvax as quickly as would be optimal for our stockholders. In addition, Merck KGaA has the right to terminate the 2008 license agreement upon 30 days’ prior written notice if, in its reasonable judgment, it determines there are issues concerning the safety or efficacy of Stimuvax that would materially and adversely affect Stimuvax’s medical, economic or competitive viability. Clinical trials involving the number of sites and patients required for U.S. Food and Drug Administration, or FDA, approval of Stimuvax may not be successfully completed. If these clinical trials fail to demonstrate that Stimuvax is safe and effective, it will not receive regulatory approval. Even if Stimuvax receives regulatory approval, it may never be successfully commercialized. If Stimuvax does not receive regulatory approval or is not successfully commercialized, or if Merck were to terminate the 2008 license agreement, we may not be able to generate revenue, become profitable or continue our operations. Any failure of Stimuvax to receive regulatory approval or be successfully commercialized would have a material adverse effect on our business, operating results, and financial condition and could result in a substantial decline in the price of our common stock.
We understand that Merck KGaA intends to submit for regulatory approval of Stimuvax for the treatment of NSCLC based on the results of a single Phase 3 trial, the START study. If the FDA determines that the results of this single study do not demonstrate the efficacy of Stimuvax with a sufficient degree of statistical certainty, the FDA may require an additional Phase 3 study to be performed prior to regulatory approval. Such a trial requirement would delay or prevent commercialization of Stimuvax and could result in the termination by Merck KGaA of our license agreement with them. In addition, there can be no guarantee that the results of an additional trial would be supportive of the results of the START trial.
Stimuvax and ONT-10 are based on novel technologies, which may raise new regulatory issues that could delay or make FDA or foreign regulatory approval more difficult
The process of obtaining required FDA and other regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Stimuvax and ONT-10 are novel; therefore, regulatory agencies may lack experience with them, which may lengthen the
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regulatory review process, increase our development costs and delay or prevent commercialization of Stimuvax and our other active vaccine products under development.
To date, the FDA has approved for commercial sale in the United States only one active vaccine designed to stimulate an immune response against cancer. Consequently, there is limited precedent for the successful development or commercialization of products based on our technologies in this area.
The suspension of Merck’s clinical development program for Stimuvax could severely harm our business.
In March 2010, we announced that Merck KGaA suspended the clinical development program for Stimuvax as the result of a suspected unexpected serious adverse event reaction in a patient with multiple myeloma participating in an exploratory clinical trial. The suspension was a precautionary measure while an investigation of the cause of the adverse event was conducted, but it affected the Phase 3 clinical trials in NSCLC and in breast cancer. In June 2010, we announced that the FDA had lifted the clinical hold it had placed on the Phase 3 clinical trials in NSCLC. Merck KGaA has resumed the treatment and enrollment in these trials for Stimuvax in NSCLC. The clinical hold on the Stimuvax trial in breast cancer remains in effect and Merck KGaA has discontinued the Phase 3 trial in breast cancer.
As of the date of this report, we can offer no assurances that this serious adverse event was not caused by Stimuvax or that there are not or will not be more such serious adverse events in the future. The occurrence of this serious adverse event, or other such serious adverse events, could result in a prolonged delay, including the need to enroll more patients or collect more data, or the termination of the clinical development program for Stimuvax. For example, we have been informed that Merck KGaA plans to increase the size of the START trial of Stimuvax in NSCLC from an estimated number of 1,322 to 1,476 patients as part of a plan to maintain the statistical power of the trial. This change was agreed to in consultation with the FDA and the Special Protocol Agreement, or SPA, for START has been amended to reflect the change. Another unexpected serious adverse event reaction could cause a similar suspension of clinical trials in the future. Any of these foregoing risks could materially and adversely affect our business, results of operations and the trading price of our common stock.
We have a history of net losses, we anticipate additional losses and we may never become profitable.
Other than the year ended December 31, 2008, we have incurred net losses in each fiscal year since we commenced our research activities in 1985. The net income we realized in 2008 was due entirely to our December 2008 transactions with Merck KGaA and we do not anticipate realizing net income again for the foreseeable future. As of December 31, 2011, our accumulated deficit was approximately $389.9 million. Our losses have resulted primarily from expenses incurred in research and development of our product candidates. We do not know when or if we will complete our product development efforts, receive regulatory approval for any of our product candidates, or successfully commercialize any approved products. As a result, it is difficult to predict the extent of any future losses or the time required to achieve profitability, if at all. Any failure of our products to complete successful clinical trials and obtain regulatory approval and any failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations.
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There is no assurance that we will be granted regulatory approval for any of our product candidates.
Merck KGaA has been testing our lead product candidate, Stimuvax, in Phase 3 clinical trials for the treatment of NSCLC. We are conducting four Phase 2 trials and one Phase 1/2 trial for PX-866 and a Phase 1 trial for ONT-10. Our other product candidates remain in the pre-clinical testing stages. The results from pre-clinical testing and clinical trials that we have completed may not be predictive of results in future pre-clinical tests and clinical trials, and there can be no assurance that we will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals. A number of companies in the biotechnology and pharmaceutical industries, including our company, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. For example, the clinical trials for Stimuvax were suspended as a result of a suspected unexpected serious adverse event reaction in a patient. Although the clinical hold for trials in NSCLC has been lifted, it remains in effect for the trial in breast cancer and Merck KGaA has decided to discontinue the Phase 3 trial in breast cancer. Regulatory approval may not be obtained for any of our product candidates. If our product candidates are not shown to be safe and effective in clinical trials, the resulting delays in developing other product candidates and conducting related pre-clinical testing and clinical trials, as well as the potential need for additional financing, would have a material adverse effect on our business, financial condition and results of operations.
We are dependent upon Merck KGaA to develop and commercialize our lead product candidate, Stimuvax.
Under our license agreement with Merck KGaA for our lead product candidate, Stimuvax, Merck KGaA is entirely responsible for the development, manufacture and worldwide commercialization of Stimuvax and the costs associated with such development, manufacture and commercialization. Any future payments, including royalties to us, will depend on the extent to which Merck KGaA advances Stimuvax through development and commercialization. Merck KGaA has the right to terminate the 2008 license agreement, upon 30 days’ written notice, if, in Merck KGaA’s reasonable judgment, Merck KGaA determines that there are issues concerning the safety or efficacy of Stimuvax which materially adversely affect Stimuvax’s medical, economic or competitive viability; provided that if we do not agree with such determination we have the right to cause the matter to be submitted to binding arbitration. Our ability to receive any significant revenue from Stimuvax is dependent on the efforts of Merck KGaA. If Merck KGaA fails to fulfill its obligations under the 2008 license agreement, we would need to obtain the capital necessary to fund the development and commercialization of Stimuvax or enter into alternative arrangements with a third party. We could also become involved in disputes with Merck KGaA, which could lead to delays in or termination of our development and commercialization of Stimuvax and time-consuming and expensive litigation or arbitration. If Merck KGaA terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, the chances of successfully developing or commercializing Stimuvax would be materially and adversely affected.
We and Merck KGaA currently rely on third-party manufacturers to supply our product candidates. Any disruption in production, inability of these third-party manufacturers to produce adequate quantities to meet our needs or Merck’s needs or other impediments with respect to development or manufacturing could adversely affect the clinical development and commercialization of Stimuvax, our ability to continue our research and development activities or successfully complete pre-clinical studies and clinical trials, delay submissions of our regulatory applications or adversely affect our ability to commercialize our other product candidates in a timely manner, or at all.
Merck KGaA currently depends on a single manufacturer, Baxter International Inc., or Baxter, for the supply of our lead product candidate, Stimuvax, and on Corixa Corp. (now a
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part of GlaxoSmithKline plc, or GSK) for the manufacture of the adjuvant in Stimuvax. If Stimuvax is not approved by 2015, Corixa/GSK may terminate its obligation to supply the adjuvant. In this case, we would retain the necessary licenses from Corixa/GSK required to have the adjuvant manufactured, but the transfer of the process to a third party would delay the development and commercialization of Stimuvax, which would materially harm our business.
Similarly, we rely on a single manufacturer, Fermentek, LTD for the supply of wortmannin, a key raw ingredient for PX-866. Without the timely support of Fermentek, LTD, our development program for PX-866 could suffer significant delays, require significantly higher spending or face cancellation.
Our product candidates have not yet been manufactured on a commercial scale. In order to commercialize a product candidate, the third party manufacturer may need to increase its manufacturing capacity, which may require the manufacturer to fund capital improvements to support the scale up of manufacturing and related activities. With respect to PX-866, we may be required to provide all or a portion of these funds. The third party manufacturer may not be able to successfully increase its manufacturing capacity for our product candidate for which we obtain marketing approval in a timely or economic manner, or at all. If any manufacturer is unable to provide commercial quantities of a product candidate, we (or Merck KGaA, in the case of Stimuvax) will need to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for a particular product candidate could require us (or Merck KGaA, in the case of Stimuvax) to conduct comparative studies or use other means to determine equivalence between product candidates manufactured by a new manufacturer and those previously manufactured by the existing manufacturer, which could delay or prevent commercialization of our product candidates. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if alternative arrangements are not established on a timely basis or on acceptable terms, the development and commercialization of our product candidates may be delayed or there may be a shortage in supply.
Any manufacturer of our products must comply with current Good Manufacturing Practices, or cGMP, requirements enforced by the FDA through its facilities inspection program or by foreign regulatory agencies. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.
Any failure or delay in commencing or completing clinical trials for our product candidates could severely harm our business.
Each of our product candidates must undergo extensive pre-clinical studies and clinical trials as a condition to regulatory approval. Pre-clinical studies and clinical trials are expensive and take many years to complete. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:
| • | safety issues or side effects; |
| • | delays in patient enrollment and variability in the number and types of patients available for clinical trials; |
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| • | poor effectiveness of product candidates during clinical trials; |
| • | governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; |
| • | our or our collaborators’ ability to obtain regulatory approval to commence a clinical trial; |
| • | our or our collaborators’ ability to manufacture or obtain from third parties materials sufficient for use in pre-clinical studies and clinical trials; and |
| • | varying interpretation of data by the FDA and similar foreign regulatory agencies. |
It is possible that none of our product candidates will complete clinical trials in any of the markets in which we and/or our collaborators intend to sell those product candidates. Accordingly, we and/or our collaborators may not receive the regulatory approvals necessary to market our product candidates. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for product candidates would prevent or delay their commercialization and severely harm our business and financial condition. For example, although the suspension of the clinical development program for Stimuvax in March 2010 has been lifted for trials in NSCLC, it remains in effect for the Phase 3 breast cancer trial and, in any event, may result in a prolonged delay or in the termination of the clinical development program for Stimuvax. For example, Merck KGaA has announced that it has decided to discontinue the Phase 3 trial in breast cancer. A prolonged delay or termination of the clinical development program would have a material adverse impact on our business and financial condition.
The failure to enroll patients for clinical trials may cause delays in developing our product candidates.
We may encounter delays if we, any collaboration partners or Merck KGaA are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including, the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. Moreover, when one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials. Our product candidates are focused in oncology, which can be a difficult patient population to recruit. For example, the suspension of the Stimuvax trials resulted in Merck KGaA enrolling additional patients which could delay such trials.
We rely on third parties to conduct our clinical trials. If these third parties do not perform as contractually required or otherwise expected, we may not be able to obtain regulatory approval for or be able to commercialize our product candidates.
We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to assist in conducting our clinical trials. We have, in the ordinary course of business, entered into agreements with these third parties. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates.
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Even if regulatory approval is received for our product candidates, the later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions, including withdrawal of the product from the market.
Approval of a product candidate may be conditioned upon certain limitations and restrictions as to the drug’s use, or upon the conduct of further studies, and may be subject to continuous review. After approval of a product, if any, there will be significant ongoing regulatory compliance obligations, and if we or our collaborators fail to comply with these requirements, we, any of our collaborators or Merck KGaA could be subject to penalties, including:
| • | warning letters; |
| • | fines; |
| • | product recalls; |
| • | withdrawal of regulatory approval; |
| • | operating restrictions; |
| • | disgorgement of profits; |
| • | injunctions; and |
| • | criminal prosecution. |
Regulatory agencies may require us, any of our collaborators or Merck KGaA to delay, restrict or discontinue clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. For example, in March 2010, Merck KGaA suspended the clinical development program for Stimuvax in both NSCLC and breast cancer as the result of a suspected unexpected serious adverse event reaction in a patient with multiple myeloma participating in an exploratory clinical trial. Although the clinical hold placed on Stimuvax clinical trials in NSCLC has been lifted, the suspension of clinical trials in breast cancer remains in effect and Merck KGaA has announced that it has decided to discontinue the Phase 3 trial in breast cancer. In addition, we, any of our collaborators or Merck KGaA may be unable to submit applications to regulatory agencies within the time frame we currently expect. Once submitted, applications must be approved by various regulatory agencies before we, any of our collaborators or Merck KGaA can commercialize the product described in the application. All statutes and regulations governing the conduct of clinical trials are subject to change in the future, which could affect the cost of such clinical trials. Any unanticipated costs or delays in such clinical studies could delay our ability to generate revenues and harm our financial condition and results of operations.
Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally.
We intend to have our product candidates marketed outside the United States. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. To date, we have not filed for marketing approval for any of our product candidates and may not receive the approvals necessary to commercialize our product candidates in any market. The approval procedure varies among countries and can involve additional testing and data review. The time required to obtain foreign regulatory approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one
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jurisdiction may have a negative effect on the regulatory approval process in other jurisdictions, including approval by the FDA. The failure to obtain regulatory approval in foreign jurisdictions could harm our business.
Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.
Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians, patients, third-party payers such as health insurance companies and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:
| • | our ability to provide acceptable evidence of safety and efficacy; |
| • | the prevalence and severity of adverse side effects; |
| • | availability, relative cost and relative efficacy of alternative and competing treatments; |
| • | the effectiveness of our marketing and distribution strategy; |
| • | publicity concerning our products or competing products and treatments; and |
| • | our ability to obtain sufficient third party insurance coverage or reimbursement. |
If our product candidates do not become widely accepted by physicians, patients, third-party payers and other members of the medical community, our business, financial condition and results of operations would be materially and adversely affected.
Our ability to continue with our planned operations is dependent on our success at raising additional capital sufficient to meet our obligations on a timely basis. If we fail to obtain additional financing when needed, we may be unable to complete the development, regulatory approval and commercialization of our product candidates.
We have expended and continue to expend substantial funds in connection with our product development activities and clinical trials and regulatory approvals. The very limited funds generated currently from our operations will be insufficient to enable us to bring all of our products currently under development to commercialization. Accordingly, we need to raise additional funds from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of our product candidates. We cannot be certain that additional financing will be available when and as needed or, if available, that it will be available on acceptable terms. If financing is available, it may be on terms that adversely affect the interests of our existing stockholders or restrict our ability to conduct our operations. If adequate financing is not available, we may need to continue to reduce or eliminate our expenditures for research and development, testing, production and marketing for some of our product candidates. Our actual capital requirements will depend on numerous factors, including:
| • | activities and arrangements related to the commercialization of our product candidates; |
| • | the progress of our research and development programs; |
| • | the progress of pre-clinical and clinical testing of our product candidates; |
| • | the time and cost involved in obtaining regulatory approvals for our product candidates; |
| • | the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights with respect to our intellectual property; |
| • | the effect of competing technological and market developments; |
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| • | the effect of changes and developments in our existing licensing and other relationships; and |
| • | the terms of any new collaborative, licensing and other arrangements that we may establish. |
If we require additional financing and cannot secure sufficient financing on acceptable terms, we may need to delay, reduce or eliminate some or all of our research and development programs, any of which would be expected to have a material adverse effect on our business, operating results, and financial condition.
If we are unable to obtain, maintain and enforce our proprietary rights, we may not be able to compete effectively or operate profitably.
Our success is dependent in part on obtaining, maintaining and enforcing our patents and other proprietary rights and will depend in large part on our ability to:
| • | obtain patent and other proprietary protection for our technology, processes and product candidates; |
| • | defend patents once issued; |
| • | preserve trade secrets; and |
| • | operate without infringing the patents and proprietary rights of third parties. |
As of June 30, 2012, we owned approximately 11 U.S. patents and 12 U.S. patent applications, as well as the corresponding foreign patents and patent applications, and held exclusive or partially exclusive licenses to approximately 10 U.S. patents and eight U.S. patent applications, as well as the corresponding foreign patents and patent applications. The degree of future protection for our proprietary rights is uncertain. For example:
| • | we might not have been the first to make the inventions covered by any of our patents, if issued, or our pending patent applications; |
| • | we might not have been the first to file patent applications for these inventions; |
| • | others may independently develop similar or alternative technologies or products and/or duplicate any of our technologies and/or products; |
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| • | it is possible that none of our pending patent applications will result in issued patents or, if issued, these patents may not be sufficient to protect our technology or provide us with a basis for commercially-viable products and may not provide us with any competitive advantages; |
| • | if our pending applications issue as patents, they may be challenged by third parties as infringed, invalid or unenforceable under U.S. or foreign laws; |
| • | if issued, the patents under which we hold rights may not be valid or enforceable; or |
| • | we may develop additional proprietary technologies that are not patentable and which may not be adequately protected through trade secrets, if for example a competitor were to independently develop duplicative, similar or alternative technologies. |
The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed in patents or the degree of protection afforded under patents. Although we believe our potential rights under patent applications provide a competitive advantage, it is possible that patent applications owned by or licensed to us will not result in patents being issued, or that, if issued, the patents will not give us an advantage over competitors with similar products or technology, nor can we assure you that we can obtain, maintain and enforce all ownership and other proprietary rights necessary to develop and commercialize our product candidates.
Even if any or all of our patent applications issue as patents, others may challenge the validity, inventorship, ownership, enforceability or scope of our patents or other technology used in or otherwise necessary for the development and commercialization of our product candidates. We may not be successful in defending against any such challenges. Moreover, the cost of litigation to uphold the validity of patents to prevent infringement or to otherwise protect our proprietary rights can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use the challenged technologies without payment to us. There is no assurance that our patents, if issued, will not be infringed or successfully avoided through design innovation. Intellectual property lawsuits are expensive and would consume time and other resources, even if the outcome were successful. In addition, there is a risk that a court would decide that our patents, if issued, are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of a patent were upheld, a court would refuse to stop the other party from using the inventions, including on the ground that its activities do not infringe that patent. If any of these events were to occur, our business, financial condition and results of operations would be materially and adversely effected.
In addition to the intellectual property and other rights described above, we also rely on unpatented technology, trade secrets, trademarks and confidential information, particularly when we do not believe that patent protection is appropriate or available. However, trade secrets are difficult to protect and it is possible that others will independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality and invention assignment agreement at the commencement of an employment or consulting relationship with us. However, it is possible that these agreements will not provide effective protection of our confidential information or, in the event of unauthorized use of our intellectual property or the intellectual property of third parties, provide adequate or effective remedies or protection.
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If our vaccine technology or our product candidates, including Stimuvax, conflict with the rights of others, we may not be able to manufacture or market our product candidates, which could have a material and adverse effect on us and on our collaboration with Merck KGaA.
Issued patents held by others may limit our ability to develop commercial products. All issued patents are entitled to a presumption of validity under the laws of the United States. If we need licenses to such patents to permit us to develop or market our product candidates, we may be required to pay significant fees or royalties, and we cannot be certain that we would be able to obtain such licenses on commercially reasonable terms, if at all. Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our products to market, that we use in producing our products, or that we use in treating patients with our products.
We know that others have filed patent applications in various jurisdictions that relate to several areas in which we are developing products. Some of these patent applications have already resulted in the issuance of patents and some are still pending. We may be required to alter our processes or product candidates, pay licensing fees or cease activities. Certain parts of our vaccine technology, including the MUC1 antigen, originated from third party sources.
These third party sources include academic, government and other research laboratories, as well as the public domain. If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or product candidates conflict with patent rights of others, third parties could bring legal actions against us, in Europe, the United States and elsewhere, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending applications. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent. As a result, third parties may be able to obtain patents with claims relating to our product candidates which they could attempt to assert against us. Further, as we develop our products, third parties may assert that we infringe the patents currently held or licensed by them and it is difficult to provide the outcome of any such action.
There has been significant litigation in the biotechnology industry over patents and other proprietary rights and if we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses and pay substantial royalties in order to continue to manufacture or market the affected products.
There is no assurance that we would prevail in any legal action or that any license required under a third party patent would be made available on acceptable terms or at all. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of claims of patent infringement or violation of other intellectual property rights, which could have a material and adverse effect on our business, financial condition and results of operations.
If any products we develop become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, our ability to successfully commercialize our products will be impaired.
Our future revenues, profitability and access to capital will be affected by the continuing efforts of governmental and private third party payers to contain or reduce the costs of health care through various means. We expect a number of federal, state and foreign proposals to control the cost of drugs through government regulation. We are unsure of the impact recent health care reform legislation may have on our business or what actions federal, state, foreign and private payers may take in response to the recent reforms.
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Therefore, it is difficult to provide the effect of any implemented reform on our business. Our ability to commercialize our products successfully will depend, in part, on the extent to which reimbursement for the cost of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the United States, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, particularly for indications for which there is no current effective treatment or for which medical care typically is not sought. Adequate third party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product research and development. If adequate coverage and reimbursement levels are not provided by government and third-party payers for use of our products, our products may fail to achieve market acceptance and our results of operations will be harmed.
Governments often impose strict price controls, which may adversely affect our future profitability.
We intend to seek approval to market our future products in both the United States and foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product. In some foreign countries, particularly in the European Union, prescription drug pricing is subject to government control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our future product to other available therapies.
In addition, it is unclear what impact, if any, recent health care reform legislation will have on the price of drugs in the United States. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the United States. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry.
We anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and downward pressure on the price for any approved product, and could seriously harm our prospects. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.
The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
| • | decreased demand for our product candidates; |
| • | impairment of our business reputation; |
| • | withdrawal of clinical trial participants; |
| • | costs of related litigation; |
| • | substantial monetary awards to patients or other claimants; |
| • | loss of revenues; and |
| • | the inability to commercialize our product candidates. |
Although we currently have product liability insurance coverage for our clinical trials for expenses or losses up to a $10 million aggregate annual limit, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any or all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our
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insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.
We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.
Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of our product candidates. We expect any product candidate that we commercialize with our collaborative partners or on our own will compete with existing, market-leading products and products in development.
Stimuvax. There are currently two products approved as maintenance therapy following treatment of inoperable locoregional Stage III NSCLC with induction chemotherapy, Tarceva (erlotinib), a targeted small molecule from Genentech, Inc., a member of the Roche Group, and Alimta (pemetrexed), a chemotherapeutic from Eli Lilly and Company. Stimuvax has not been tested in combination with or in comparison to these products. It is possible that other existing or new agents will be approved for this indication. In addition, there are at least three vaccines in development for the treatment of NSCLC, including GSK’s MAGE A3 vaccine in Phase 3, NovaRx Corporation’s Lucanix in Phase 3 and Transgene’s TG-4010 in Phase 2. TG-4010 also targets MUC1, although using technology different from Stimuvax. Of these vaccines, only Lucanix is being developed as a maintenance therapy in Stage III NSCLC, the same indication as Stimuvax. However, subsequent development of these vaccines, including Stimuvax, may result in additional direct competition.
Small Molecule Products. We have two small molecule programs in development; PX-866 and ONT-701. PX-866 is an inhibitor of phosphoinositide 3-kinase (PI3K). We are aware of several companies that have entered clinical trials with competing compounds targeting the same protein. Among those are compounds being developed by Novartis (Phase 1/2), Roche/Genentech (Phase 2), Bayer (Phase 1), Semafore (Phase 1), Sanofi-Aventis (Phase 2), Pfizer (Phase 1), GlaxoSmithKline (Phase 2) and Gilead Sciences, Inc. (Phase 3). There are also several approved targeted therapies for cancer and in development against which PX-866 might compete. ONT-701 is a small molecule inhibitor of the Bcl-2 anti-apoptotic protein family. We are aware of several companies that are developing competing drugs that target the same family, including Teva (Phase 2), Ascenta (Phase 2) and Abbott/Roche (Phase 1). There are also several approved targeted therapies for cancer and in development against which ONT-701 might compete.
Many of our potential competitors have substantially greater financial, technical and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to:
| • | design and develop products that are superior to other products in the market; |
| • | attract qualified scientific, medical, sales and marketing and commercial personnel; |
| • | obtain patent and/or other proprietary protection for our processes and product candidates; |
| • | obtain required regulatory approvals; and |
| • | successfully collaborate with others in the design, development and commercialization of new products. |
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Established competitors may invest heavily to quickly discover and develop novel compounds that could make our product candidates obsolete. In addition, any new product that competes with a generic market-leading product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome severe price competition and to be commercially successful. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition and operations will suffer.
If we are unable to enter into agreements with partners to perform sales and marketing functions, or build these functions ourselves, we will not be able to commercialize our product candidates.
We currently do not have any internal sales, marketing or distribution capabilities. In order to commercialize any of our product candidates, we must either acquire or internally develop a sales, marketing and distribution infrastructure or enter into agreements with partners to perform these services for us. Under our agreements with Merck KGaA, Merck KGaA is responsible for developing and commercializing Stimuvax, and any problems with that relationship could delay the development and commercialization of Stimuvax. Additionally, we may not be able to enter into arrangements with respect to our product candidates not covered by the Merck KGaA agreements on commercially acceptable terms, if at all. Factors that may inhibit our efforts to commercialize our product candidates without entering into arrangements with third parties include:
| • | our inability to recruit and retain adequate numbers of effective sales and marketing personnel; |
| • | the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products; |
| • | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and |
| • | unforeseen costs and expenses associated with creating a sales and marketing organization. |
If we are not able to partner with a third party and are not successful in recruiting sales and marketing personnel or in building a sales and marketing and distribution infrastructure, we will have difficulty commercializing our product candidates, which would adversely affect our business and financial condition.
If we lose key personnel, or we are unable to attract and retain highly-qualified personnel on a cost-effective basis, it would be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.
Our success depends in large part upon our ability to attract and retain highly qualified scientific, clinical, manufacturing, and management personnel. In addition, future growth will require us to continue to implement and improve our managerial, operational and financial systems, and continue to retain, recruit and train additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. Any difficulties in hiring or retaining key personnel or managing this growth could disrupt our operations. The competition for qualified personnel in the biopharmaceutical field is intense. We are highly dependent on our continued ability to attract, retain and motivate highly-qualified management, clinical and scientific personnel. Due to our limited resources, we may not be able to effectively recruit, train and retain additional qualified personnel. If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.
Furthermore, we have not entered into non-competition agreements with all of our key employees. In addition, we do not maintain “key person” life insurance on any of our
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officers, employees or consultants. The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would harm our research and development programs and our business.
Our business is subject to increasingly complex environmental legislation that has increased both our costs and the risk of noncompliance.
Our business may involve the use of hazardous material, which will require us to comply with environmental regulations. We face increasing complexity in our product development as we adjust to new and upcoming requirements relating to the materials composition of many of our product candidates. If we use biological and hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages. Environmental regulations could have a material adverse effect on the results of our operations and our financial position. We maintain insurance under our general liability policy for any liability associated with our hazardous materials activities, and it is possible in the future that our coverage would be insufficient if we incurred a material environmental liability.
We may expand our business through the acquisition of companies or businesses or in-licensing product candidates that could disrupt our business and harm our financial condition.
We may in the future seek to expand our products and capabilities by acquiring one or more companies or businesses or in-licensing one or more product candidates. For example, in September 2011 we entered into an exclusive, worldwide license agreement with Sanford-Burnham Medical Research Institute, or SBMRI, for certain intellectual property related to SBMRI’s small molecule program based on ONT-701 and related compounds. Acquisitions and in-licenses involve numerous risks, including:
| • | substantial cash expenditures; |
| • | potentially dilutive issuance of equity securities; |
| • | incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition; |
| • | difficulties in assimilating the operations of the acquired companies; |
| • | diverting our management’s attention away from other business concerns; |
| • | entering markets in which we have limited or no direct experience; and |
| • | potential loss of our key employees or key employees of the acquired companies or businesses. |
Other than our license from SBMRI, under our current management team we have not expanded our business through in-licensing and we have completed only one acquisition; therefore, our experience in making acquisitions and in-licensing is limited. We cannot assure you that any acquisition or in-license will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business or in-licensed product candidate. In addition, our future success would depend in part on our ability to manage the rapid growth associated with some of these acquisitions and in-licenses. We cannot assure you that we would be able to make the combination of our business with that of acquired businesses or companies or in-licensed product candidates work or be successful. Furthermore, the development or expansion of our business or any acquired business or company or in-licensed product candidate may require a substantial capital investment by us. We may also seek to raise funds by selling shares of our capital stock, which could dilute our current stockholders’ ownership interest, or securities convertible into our capital stock, which could dilute current stockholders’ ownership interest upon conversion.
If we fail to establish and maintain effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business, and our stock price and could result in litigation or similar actions.
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition, and could cause the trading price of our common stock to fall dramatically. We and our independent registered public accounting firm have identified a material weakness in our internal control over financial reporting that is described in greater detail in “Item 9A—Controls and Procedures.”
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company will have been detected.
Remedying this material weakness and maintaining proper and effective internal controls will require substantial management time and attention and may result in our incurring substantial incremental expenses. We retain outside consultants to assist us to design and implement an adequate risk assessment process to identify complex transactions requiring specialized knowledge to ensure the appropriate accounting for and disclosure of such transactions. We cannot be certain that the actions we will take to improve our internal control over financial reporting will be sufficient or that we will be able to implement our planned processes and procedures in a timely manner. In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals any other material weaknesses, the correction of any such material weaknesses could require additional remedial measures which could be costly and time-consuming. In addition, we may be unable to produce accurate financial statements on a timely basis. Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations.
In addition, we may become the subject of private or government actions regarding the financial restatement discussed in “Note 2 — Significant Accounting Policies — Restatement.” Any such actions or related litigation may be time consuming, expensive and disruptive to normal business operations, and the outcome of such actions or litigation would be difficult to predict. Compliance with governmental actions or defense of any litigation could result in significant expenditures and the diversion of our management’s time and attention from our operations, which could impede our business.
We cannot be certain that further accounting restatements will not occur in the future. Accounting restatements could create a significant strain on our internal resources and cause delays in our release of quarterly or annual financial results and the filing of related reports, increase our costs and cause management distraction.
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Risks Related to the Ownership of Our Common Stock
The trading price of our common stock may be volatile.
The market prices for and trading volumes of securities of biotechnology companies, including our securities, have been historically volatile. The market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common shares may fluctuate significantly due to a variety of factors, including:
| • | the results, and timing of the announcement of the results by Merck KGaA, of the clinical trails of Stimuvax, as well as speculation by market participants regarding such results; |
| • | the results of pre-clinical testing and clinical trials by us, our collaborators, our competitors and/or companies that are developing products that are similar to ours (regardless of whether such products are potentially competitive with ours); |
| • | public concern as to the safety of products developed by us or others |
| • | technological innovations or new therapeutic products; |
| • | governmental regulations; |
| • | developments in patent or other proprietary rights; |
| • | litigation; |
| • | comments by securities analysts; |
| • | the issuance of additional shares of common stock, or securities convertible into, or exercisable or exchangeable for, shares of our common stock in connection with financings, acquisitions or otherwise; |
| • | the incurrence of debt; |
| • | general market conditions in our industry or in the economy as a whole; and |
| • | political instability, natural disasters, war and/or events of terrorism. |
In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Because we do not expect to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.
We have never paid cash dividends on our common shares and have no present intention to pay any dividends in the future. We are not profitable and do not expect to earn any material revenues for at least several years, if at all. As a result, we intend to use all available cash and liquid assets in the development of our business. Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, if any, capital requirements, operating and financial conditions and on such other factors as our board of directors deems relevant. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
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We may seek to raise additional capital in the future; however, such capital may not be available to us on reasonable terms, if at all, when or as we require additional funding. If we issue additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing stockholders would experience further dilution.
We expect that we will seek to raise additional capital from time to time in the future. For example, in connection with our April 2012 underwritten public offering, we sold an aggregate of 13,512,500 shares of our common stock. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional working capital when required would have a material adverse effect on our business and financial condition and would be expected to result in a decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders. In February 2012 we entered into an agreement with Cowen and Company, LLC to sell shares of our common stock having aggregate sales proceeds of $50,000,000, from time to time, through an “at the market” equity offering program under which Cowen will act as sales agent. If we access the “at the market” equity offering program, we will set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. Subject to the terms and conditions of our agreement with Cowen, they may sell the shares by methods deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act, including sales made directly on The NASDAQ Global Market or other trading market or through a market maker. The sale of additional shares of our common stock pursuant to our agreement with Cowen will have a dilutive impact on our existing stockholders. Sales by us through Cowen could cause the market price of our common stock to decline significantly. Sales of our common stock under such agreement, or the perception that such sales will occur, could encourage short sales by third parties, which could contribute to the further decline of our stock price.
We can issue shares of preferred stock that may adversely affect the rights of a stockholder of our common stock.
Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock with designations, rights, and preferences determined from time-to-time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock. For example, an issuance of shares of preferred stock could:
| • | adversely affect the voting power of the holders of our common stock; |
| • | make it more difficult for a third party to gain control of us; |
| • | discourage bids for our common stock at a premium; |
| • | limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or |
| • | otherwise adversely affect the market price or our common stock. |
We have in the past, and we may at any time in the future, issue additional shares of authorized preferred stock.
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We expect our quarterly operating results to fluctuate in future periods, which may cause our stock price to fluctuate or decline.
Our quarterly operating results have fluctuated in the past, and we believe they will continue to do so in the future. Some of these fluctuations may be more pronounced than they were in the past as a result of the issuance by us in May 2009 and September 2010 of warrants to purchase shares of our common stock in connection with equity financings. As of June 30, 2012, there were outstanding warrants from the May 2009 and September 2010 financings exercisable for up to 2,691,241 shares of our common stock and 3,182,147 shares of our common stock, respectively. These warrants are classified as a liability. Accordingly, the fair value of the warrants is recorded on our consolidated balance sheet as a liability, and such fair value is adjusted at each financial reporting date with the adjustment to fair value reflected in our consolidated statement of net income (loss). The fair value of the warrants is determined using the Black-Scholes option-pricing model. Fluctuations in the assumptions and factors used in the Black-Scholes model can result in adjustments to the fair value of the warrants reflected on our balance sheet and, therefore, our statement of net income (loss). Due to the classification of such warrants and other factors, quarterly results of operations are difficult to forecast, and period-to-period comparisons of our operating results may not be predictive of future performance. In one or more future quarters, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our common stock could decline. In addition, the market price of our common stock may fluctuate or decline regardless of our operating performance.
Our management will have broad discretion over the use of proceeds from the sale of shares of our common stock and may not use such proceeds in ways that increase the value of our stock price.
In April 2012, we generated approximately $50.3 million of net proceeds from the sale of shares of our common stock in an underwritten public offering. We will have broad discretion over the use of proceeds from the sale of those shares and the sale, if any, of additional shares of common stock to Cowen pursuant to the “at the market” equity offering program that replaced our committed equity line financing facility and we could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our product candidates and cause the price of our common stock to decline.
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PART II
| ITEM 6. | Selected Financial Data |
The data set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012 and also with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| Year Ended December 31, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008(1) | 2007(2) | ||||||||||||||||
| (Amounts in thousands, except share and per share data.) | ||||||||||||||||||||
Consolidated Statements of Operations Data: | ||||||||||||||||||||
Revenue | ||||||||||||||||||||
Licensing revenue from collaborative and license agreements | $ | 145 | $ | 18 | $ | 2,051 | $ | 24,713 | $ | 440 | ||||||||||
Contract manufacturing(2) | — | — | — | 15,582 | 2,536 | |||||||||||||||
Licensing, royalties and other revenue | — | — | 27 | — | 103 | |||||||||||||||
Contract research and development | — | — | — | — | 631 | |||||||||||||||
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| 145 | 18 | 2,078 | 40,295 | 3,710 | ||||||||||||||||
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Expenses | ||||||||||||||||||||
Research and development(3) | 17,915 | 11,601 | 6,215 | 9,142 | 9,793 | |||||||||||||||
Manufacturing(1)(2) | — | — | — | 13,675 | 2,564 | |||||||||||||||
General and administrative(3) | 6,929 | 7,901 | 6,724 | 10,347 | 12,261 | |||||||||||||||
Marketing and business development | — | — | — | — | 565 | |||||||||||||||
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Total operating expenses | 24,844 | 19,502 | 12,939 | 33,164 | 25,183 | |||||||||||||||
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Income (loss) from operations | (24,699 | ) | (19,484 | ) | (10,861 | ) | 7,131 | (21,473 | ) | |||||||||||
Investment and other income (expense) | 305 | 636 | (8 | ) | 298 | (371 | ) | |||||||||||||
Interest expense | (631 | ) | — | — | (7 | ) | (5 | ) | ||||||||||||
Change in fair value of warrant liability | (17,631 | ) | 3,030 | (6,150 | ) | — | 1,421 | |||||||||||||
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Income (loss) before income taxes | (42,656 | ) | (15,818 | ) | (17,019 | ) | 7,422 | (20,428 | ) | |||||||||||
Income tax benefit (provision) | — | 200 | (200 | ) | — | — | ||||||||||||||
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Net income (loss) | $ | (42,656 | ) | $ | (15,618 | ) | $ | (17,219 | ) | $ | 7,422 | $ | (20,428 | ) | ||||||
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Earnings (loss) per share — basic | $ | (1.12 | ) | $ | (0.58 | ) | $ | (0.76 | ) | $ | 0.38 | $ | (1.05 | ) | ||||||
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Earnings (loss) per share — diluted (2010 restated)(4) | $ | (1.12 | ) | $ | (0.72 | ) | $ | (0.76 | ) | $ | 0.38 | $ | (1.05 | ) | ||||||
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Weighted average number of common shares outstanding — basic | 38,197,666 | 26,888,588 | 22,739,138 | 19,490,621 | 19,485,889 | |||||||||||||||
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Weighted average number of common shares outstanding — diluted | 38,197,666 | 26,972,969 | 22,739,138 | 19,570,170 | 19,485,889 | |||||||||||||||
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| As of December 31, | ||||||||||||||||||||
| 2011 | 2010(4) | 2009 | 2008(1) | 2007(2)(3) | ||||||||||||||||
| (Amounts in thousands, except share and per share data.) | ||||||||||||||||||||
Consolidated Balance Sheets Data: | ||||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 63,876 | $ | 28,877 | $ | 33,218 | $ | 19,166 | $ | 24,186 | ||||||||||
Total assets | $ | 71,351 | $ | 34,445 | $ | 38,225 | $ | 24,971 | $ | 36,218 | ||||||||||
Total long-term liabilities | $ | 33,236 | $ | 13,727 | $ | 10,732 | $ | 578 | $ | 12,823 | ||||||||||
Stockholders’ equity | $ | 33,433 | $ | 18,857 | $ | 25,418 | $ | 20,717 | $ | 11,722 | ||||||||||
Common shares outstanding | 43,613,107 | 30,088,628 | 25,753,405 | 19,492,432 | 19,485,889 | |||||||||||||||
| (1) | The effect of the asset purchase agreement and 2008 license agreement with Merck KGaA is reflected for the year ended December 31, 2008. See “Note 9 — Collaborative and License Agreements” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012. |
| (2) | In August 2007, we signed the amended and restated collaboration and supply agreements related to Stimuvax with Merck KGaA. Pursuant to the terms of the collaboration and supply agreements, from August 2007 to December 2008, with the entry into the 2008 license agreement, we retained the responsibility to manufacture Stimuvax and Merck KGaA agreed to purchase Stimuvax from us. During their term, the collaboration and supply agreements transformed what were previously reimbursements of a portion of the Stimuvax manufacturing costs to a long-term contract manufacturing arrangement. Our financial reporting during the term of the collaboration and supply agreements reflects the revenue and associated clinical trial material costs related to the supply of Stimuvax separately in the consolidated statements of operations as contract manufacturing revenue and manufacturing expense, respectively. Previously, these amounts were reported under contract research and development revenue and research and development expense, respectively. |
| (3) | Depreciation and amortization expense of $462,000, $269,000, $422,000 and $246,000 was reclassified to research and development and general and administrative expenses for the years ended December 31, 2010, 2009, 2008 and 2007, respectively, to conform to current year presentation. See “Note 2 — Significant Accounting Policies — Reclassifications” elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012. |
| (4) | 2010 amount is restated for the correction of the errors reported in “Note 2 — Significant Accounting Policies — Restatement.” |
| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this report. All dollar amounts included in this discussion and analysis of our financial condition and results of operations represent U.S. dollars unless otherwise specified. Throughout this discussion, unless the context specifies or implies otherwise, the terms “Company”, “Oncothyreon”, “Biomira”, “we”, “us” and “our” refer to Oncothyreon Inc., its predecessor, Biomira Inc., and its subsidiaries.
Overview
We are a clinical-stage biopharmaceutical company focused primarily on the development of therapeutic products for the treatment of cancer. Our goal is to develop and commercialize novel synthetic vaccines and targeted small molecules that have the
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potential to improve the lives and outcomes of cancer patients. Our cancer vaccines are designed to stimulate the immune system to attack cancer cells, while our small molecule compounds are designed to inhibit the activity of specific cancer-related proteins. We are advancing our product candidates through in-house development efforts and strategic collaborations.
Our lead product candidate, Stimuvax, is a cancer vaccine being evaluated in two Phase 3 clinical trials for the treatment of non-small cell lung cancer, or NSCLC. We have granted an exclusive, worldwide license to Merck KGaA of Darmstadt, Germany, or Merck KGaA, for the development, manufacture and commercialization of Stimuvax. Merck KGaA has completed enrollment of 1,514 patients in the Phase 3 START trial of Stimuvax in NSCLC and is currently expected to report the primary efficacy data in early 2013. We have also initiated a Phase 1 trial for ONT-10, a cancer vaccine directed against a target similar to Stimuvax, and which is proprietary to us. In addition to our vaccine product candidates, we have developed novel vaccine technology that we may further develop ourselves and/or license to others.
Our most advanced targeted small molecule is PX-866, for which we are currently conducting four Phase 2 trials and one Phase 1/2 Trial in a variety of cancer indications. PX-866 is an irreversible, pan-isoform phosphatidylinositol-3-kinase (PI-3K) inhibitor we obtained when we acquired ProlX Pharmaceuticals Corporation in 2006. We are also developing ONT-701, a preclinical pan inhibitor of the B-cell lymphoma-2, or Bcl-2, family of anti-apoptotic proteins. Overexpression of one or more of the Bcl-2 family of proteins is common in most human cancers. We obtained rights to ONT-701 as part of an exclusive, worldwide license agreement with Sanford Burnham Medical Research Institute. As of the date of this report, we have not licensed any rights to our small molecules to any third party and retain all development, commercialization and manufacturing rights. See “Note 9 — Collaborative and License Agreements” for additional information.
We believe the quality and breadth of our product candidate pipeline, strategic collaborations and scientific team will potentially enable us to become an integrated biopharmaceutical company with a diversified portfolio of novel, commercialized therapeutics for major diseases.
In May 2001, we entered into a collaborative arrangement with Merck KGaA to pursue joint global product research, clinical development and commercialization of Stimuvax. The collaboration covered the entire field of oncology for this product candidate and was documented in collaboration and supply agreements, which we refer to as the 2001 agreements. In connection with the execution of the 2001 collaboration and supply agreements, we received up-front cash payments of $2.8 million and $4.0 million, respectively. In January 2006, we and Merck KGaA entered into a binding letter of intent, pursuant to which the 2001 agreements were amended and we granted additional rights to Merck KGaA. In August 2007, we amended and restated our collaboration and supply agreements with Merck KGaA, which we refer to as the 2007 agreements, which restructured the 2001 agreements and formalized the terms set forth in the 2006 letter of intent. As a result of the 2007 agreements, Merck KGaA obtained an exclusive world-wide license with respect to the development and commercialization of Stimuvax. We had responsibility for the development of the manufacturing process and plans for the scale-up for commercial manufacturing and Merck KGaA had the right to act as a secondary manufacturer of Stimuvax. We also continued to be responsible for manufacture of the clinical and commercial supply of Stimuvax for which Merck KGaA agreed to pay us our cost of goods and provisions for certain contingent payments to us related to manufacturing scale-up and process transfer were added.
The entry into the 2007 agreements triggered a $2.5 million payment to us contemplated by the 2006 letter of intent, which we received in September 2007. In addition, under the
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2007 agreements, we were entitled to receive (1) a $5.0 million payment tied to the transfer of certain assays and methodology related to the manufacture of Stimuvax, which we received in December 2007, a $3.0 million payment tied to the transfer of certain Stimuvax manufacturing technology, which we received in May 2008, and a $2.0 million payment tied to the earlier of receipt of the first manufacturing run at commercial scale of Stimuvax and December 31, 2009, which we received in December 2009, (2) various additional contingent payments up to a maximum of $90.0 million in the aggregate tied to a biologics license application, or BLA, submission for first and second cancer indications, for regulatory approval of first and second cancer indications, and for various sales milestones, (3) royalties in the low twenties based on net sales outside of North America and (4) royalties based on net sales inside of North America with percentages in the mid-twenties, depending on the territory in which the net sales occur. If the manufacturing process payments due by December 31, 2009 were paid in full, the royalty rates would be reduced in all territories by 1.25%, relative to the 2001 agreements and the letter of intent.
In December 2008, we entered into a license agreement with Merck KGaA which replaced the 2007 agreements. Pursuant to the 2008 license agreement, in addition to the rights granted pursuant to the 2007 agreements, (1) we licensed to Merck KGaA the exclusive right to manufacture Stimuvax and the right to sublicense to other persons all such rights licensed, (2) we transferred certain manufacturing know-how to Merck KGaA, (3) we agreed not to develop any product, other than ONT-10, that is competitive with Stimuvax and (4) we granted to Merck a right of first negotiation in connection with any contemplated collaboration or license agreement with respect to the development or commercialization of ONT-10. Upon the execution of the 2008 license agreement, all of our future performance obligations related to the collaboration for the clinical development and development of the manufacture process of Stimuvax were removed and our continuing involvement in the development and manufacturing of Stimuvax ceased. Pursuant to the 2008 license agreement, we received an up-front cash payment of approximately $10.5 million. The provisions with respect to contingent payments remained unchanged and we may receive cash payments of up to $90 million, which figure excludes the $2.0 million received in December 2009 and $19.8 million received prior to the execution of the 2008 license agreement. We are also entitled to receive royalties based on net sales of Stimuvax ranging from a percentage in the mid-teens to high single digits, depending on the territory in which the net sales occur. Royalty rates were reduced relative to prior agreements by a specified amount which we believe is consistent with our estimated costs of goods, manufacturing scale-up costs and certain other expenses assumed by Merck KGaA.
In connection with the entry into the 2008 license agreement, we also entered into an asset purchase agreement, which, together with the 2008 license agreement we refer to as the 2008 agreements, pursuant to which we sold to Merck KGaA certain assets related to the manufacture of, and inventory of, Stimuvax, placebo and raw materials, and Merck KGaA agreed to assume certain liabilities related to the manufacture of Stimuvax and our obligations related to the lease of our Edmonton, Alberta, Canada facility. The plant and equipment in the Edmonton facility and inventory of raw materials, work-in-process and finished goods were sold for a purchase price of $0.6 million (including the assumption of lease obligation of $56,000) and $11.2 million, respectively. The purchase price of the inventory was first offset against advances made in prior periods resulting in net cash to us of $2.0 million. In addition, 43 employees at our former Edmonton facility were transferred to an affiliate of Merck KGaA, significantly reducing our operating expenses related to this program.
For additional information regarding our relationship with Merck KGaA, see “Note 9 — Collaborative and License Agreements” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012.
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We have not developed a therapeutic product to the commercial stage. As a result, with the exception of the unusual effects of the transaction with Merck KGaA in December 2008, our revenue has been limited to date, and we do not expect to recognize any material revenue for the foreseeable future. In particular, our ability to generate revenue in future periods will depend substantially on the progress of ongoing clinical trials for Stimuvax and our small molecule compounds, our ability to obtain development and commercialization partners for our small molecule compounds, Merck KGaA’s success in obtaining regulatory approval for Stimuvax, our success in obtaining regulatory approval for our small molecule compounds, and Merck KGaA’s and our respective abilities to establish commercial markets for these drugs.
Any adverse clinical results relating to Stimuvax or any decision by Merck KGaA to discontinue its efforts to develop and commercialize the product would have a material and adverse effect on our future revenues and results of operations and would be expected to have a material adverse effect on the trading price of our common stock. Our small molecule compounds are much earlier in the development stage than Stimuvax, and we do not expect to realize any revenues associated with the commercialization of our products candidates for the foreseeable future.
The continued research and development of our product candidates will require significant additional expenditures, including preclinical studies, clinical trials, manufacturing costs and the expenses of seeking regulatory approval. We rely on third parties to conduct a portion of our preclinical studies, all of our clinical trials and all of the manufacturing of cGMP material. We expect expenditures associated with these activities to increase in future years as we continue the development of our small molecule product candidates and ONT-10.
We have incurred substantial losses since our inception. As of December 31, 2011, our accumulated deficit totaled $389.9 million. We incurred a net loss of $42.7 million for 2011 compared to a net loss of $15.6 million for 2010. In future periods, we expect to continue to incur substantial net losses as we expand our research and development activities with respect to our small molecules product candidates. To date we have funded our operations principally through the sale of our equity securities, cash received through our strategic alliance with Merck KGaA, government grants, debt financings, and equipment financings. We completed financings in September 2010, in which we raised approximately $14.9 million in gross proceeds, in May 2009, in which we raised approximately $11.0 million in gross proceeds and in August 2009, in which we raised approximately $15.0 million in gross proceeds, from the sale of our common stock and the issuance of warrants. In February 2011, we entered into a loan and security agreement, which we refer to as the loan agreement, pursuant to which we incurred $5.0 million in term loan indebtedness. In June 2012, we paid approximately $4.1 million to extinguish our term loan prior to its maturity date. In May 2011, we completed a financing, in which we issued an aggregate of 11.5 million shares and generated net proceeds of approximately $43.1 million. In October 2011, we sold an aggregate of 639,071 shares of our common stock at a per share price of approximately $6.43 resulting in net proceeds of $4.1 million. In November 2011, we sold an aggregate of 805,508 shares of our common stock at a per share purchase price of approximately $6.21 resulting in net proceeds of $4.9 million. During 2011, warrants with respect to 402,101 underlying shares of our common stock were exercised, resulting in gross proceeds of approximately $1.9 million. In April 2012, we completed a financing, in which we issued an aggregate of 13.5 million shares and generated net proceeds of approximately $50.3 million. See the section captioned “Liquidity and Capital Resources” and “Note 6 — Notes Payable” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012 for additional information. Because we have limited revenues and substantial research and development and operating expenses, we expect that we will in the future seek additional working capital funding from the sale of equity, debt securities, or loans or the licensing of rights to our product candidates.
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Key Financial Metrics
Revenue
Our revenue in 2011 and 2010 was immaterial; however, the types of revenues described in this section are relevant for 2009. Historically, our revenue has been derived from payments under our collaborative and license agreements, our contract manufacturing activities, and miscellaneous licensing, royalty and other revenues from ancillary activities. Our arrangement with Merck KGaA regarding Stimuvax has historically contributed the substantial majority of our revenue.
Licensing Revenue from Collaborative and License Agreements. Revenue from collaborative and license agreements consists of (1) up-front cash payments for initial technology access or licensing fees and (2) contingent payments triggered by the occurrence of specified events or other contingencies derived from our collaborative and license agreements. Royalties from the commercial sale of products derived from our collaborative and license agreements are reported as licensing, royalties, and other revenue. For more information on revenue recognition for licensing revenue from collaborative and license agreements, see “— Critical Accounting Policies and Significant Judgments and Estimates — Revenue Recognition — Licensing Revenue from Collaborative and License Agreements” below.
Licensing, Royalties, and Other Revenue. Licensing, royalties, and other revenue consist of revenue from sales of compounds and processes from patented technologies to third parties and royalties received pursuant to collaborative agreements and license agreements. Royalties based on reported sales, if any, of licensed products are recognized based on the terms of the applicable agreement when and if reported sales are reliably measurable and collectability is reasonably assured. For more information on revenue recognition for licensing, royalties, and other revenue, see “— Critical Accounting Policies and Significant Judgments and Estimates — Revenue Recognition — Licensing, Royalties, and Other Revenue” below.
Expenses
Research and Development. Research and development expense consists of costs associated with research activities as well as costs associated with our product development efforts, conducting preclinical studies, and clinical trial and manufacturing costs. These expenses include external research and development expenses incurred pursuant to agreements with third party manufacturing organizations; technology access and licensing fees related to the use of proprietary third party technologies; employee and consultant-related expenses, including salaries, stock-based compensation expense, benefits, and related costs; allocated facility overhead which includes depreciation and amortization; and third party supplier expenses.
To date, we have recognized research and development expenses, including those paid to third parties, as they have been incurred. We credit funding received from government research and development grants against research and development expense when such funding is received in the period when incurred. These credits totaled $0.8 million for the year ended December 31, 2009. This grant was a Small Business Innovation Research, or SBIR, grant that we assumed in connection with our acquisition of ProlX on October 30, 2006. Funding for the SBIR grants was completed in 2009. No SBIR grants were received in 2010 and 2011.
Our research and development programs are at an early stage and may not result in any approved products. Product candidates that appear promising at early stages of development may not reach the market for a variety of reasons. Similarly, any of our continuing product candidates may be found to be ineffective or cause harmful side effects during clinical trials, may take longer to complete clinical trials than we have anticipated,
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may fail to receive necessary regulatory approvals, and may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality. As part of our business strategy, we may enter into collaboration or license agreements with larger third party pharmaceutical companies to complete the development and commercialization of our small molecule or other product candidates, and it is unknown whether or on what terms we will be able to secure collaboration or license agreements for any candidate. In addition, it is difficult to provide the impact of collaboration or license agreements, if any, on the development of product candidates. Establishing product development relationships with large pharmaceutical companies may or may not accelerate the time to completion or reduce our costs with respect to the development and commercialization of any product candidate.
As a result of these uncertainties and the other risks inherent in the drug development process, we cannot determine the duration and completion costs of current or future clinical stages of any of our product candidates. Similarly, we cannot determine when, if, or to what extent we may generate revenue from the commercialization and sale of any product candidate. The timeframe for development of any product candidate, associated development costs, and the probability of regulatory and commercial success vary widely. As a result, we continually evaluate our product candidates and make determinations as to which programs to pursue and how much funding to direct to specific candidates. These determinations are typically made based on consideration of numerous factors, including our evaluation of scientific and clinical trial data and an ongoing assessment of the product candidate’s commercial prospects. We anticipate that we will continue to develop our portfolio of product candidates, which will increase our research and development expense in future periods. We do not expect any of our current candidates to be commercially available before 2013, if at all.
General and Administrative. General and administrative expense consists principally of salaries, benefits, stock-based compensation expense, and related costs for personnel in our executive, finance, accounting, information technology, and human resource functions. Other general and administrative expenses include professional fees for legal, consulting, accounting services and allocation of our facility costs, which includes depreciation and amortization.
Investment and Other Income (Expense), net. Net investment and other income (expense) consists of interest and other income on our cash, short-term investments, long-term investments and foreign exchange gains and losses. Our investments consist of debt securities of U.S government agencies, corporate debt securities, commercial paper and certificates of deposit insured by the Federal Deposit Insurance Corporation. In 2010, we were awarded a federal grant for $0.5 million under the U.S. Government’s Qualifying Therapeutic Discovery Project, or QTDP, program, which was recorded as other income since the amounts pertained to expenses incurred in 2009 and 2010. Interest expense consists of interest incurred under our loan agreement with General Electric Capital Corporation. For more information, see “Note 6 — Notes Payable” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012.
Change in Fair Value of Warrants. Warrants issued in connection with our securities offerings in May 2009 and September 2010 are classified as a liability due to their potential settlement in cash and other terms, as such, were recorded at their estimated fair value on the date of the closing of the respective transactions. The warrants are marked to market for each financial reporting period, with changes in estimated fair value recorded as a gain or loss in our consolidated statement of operations. The fair value of the warrants is determined using the Black-Scholes option-pricing model, which requires the use of significant judgment and estimates for the inputs used in the model. For more information, see “Note 3 — Fair Value Measurements” and “Note 7 — Share Capital” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012.
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Income Tax Benefit (Provision) for Income Tax. Due to our history of significant losses, we do not recognize the benefit of net operating losses and have established a full valuation allowance since the realization of these benefits is not reasonably assured. Our income tax provision in 2009 relates to alternative minimum tax liability on the sale of manufacturing rights and know how to Merck KGaA in December 2008 and the final process transfer payment received in 2009. In 2010 we recorded a tax benefit for recovery of taxes paid in the previous year and received payment in 2011. In 2011, no provision for income taxes was recorded.
Critical Accounting Policies and Significant Judgments and Estimates
We have prepared this Management’s Discussion and Analysis of Financial Condition and Results of Operations based on our audited consolidated financial statements, which have been included elsewhere in this report beginning on page F-1 and which have been prepared in accordance with generally accepted accounting principles in the United States. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of our consolidated financial statements as well as the reported amounts of revenue and expense during the periods presented. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable. We believe that the estimates and judgments upon which we rely are reasonable based upon historical experience and information available to us at the time that we make these estimates and judgments. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected.
The Securities and Exchange Commission considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations and if it requires the exercise of significant judgment and the use of estimates on the part of management in its application. We have discussed the selection and development of our critical accounting policies with the audit committee of our board of directors, and our audit committee has reviewed our related disclosures in this report. Although we believe that our judgments and estimates are appropriate, actual results may differ from these estimates.
We believe the following to be our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and because they require critical management judgment and estimates about matters that are uncertain:
| • | revenue recognition; |
| • | goodwill impairment; |
| • | stock-based compensation; and |
| • | warrant liability. |
Revenue Recognition
Our revenue in 2011 and 2010 was immaterial; however, the types of revenues described in this section are relevant for 2009.
We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collection is reasonably assured. We evaluate revenue from arrangements with multiple deliverables to determine whether the deliverables represent one or more units of accounting. Revenue arrangements entered into, or materially modified, through December 31, 2010 have been accounted for in accordance with accounting standards that state that a delivered item is considered a separate unit of accounting if the following separation criteria are met: (1) the delivered item has stand-alone value to the customer; (2) there is objective and reliable evidence of the fair value of any undelivered items; and (3) if the arrangement includes a general right of return relative to the delivered item, the delivery of undelivered items is probable and substantially in our control. The relevant revenue recognition accounting policy is then applied to each unit of accounting.
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Effective January 1, 2011, we adopted new accounting guidance on a prospective basis and will no longer rely on objective and reliable evidence of the fair value of the elements in a revenue arrangement in order to separate a deliverable into a separate unit of accounting. We will instead use a selling price hierarchy for determining the selling price of a deliverable, which will be used to determine the allocation of consideration to each unit of accounting under an arrangement. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. This new guidance will be applied by us to revenue arrangements entered into, or materially modified, beginning January 1, 2011. As of December 31, 2011, we have not applied these provisions to any of our revenue arrangements as we have not entered into any new, or materially modified any of our existing, revenue arrangements in 2011.
We have historically generated revenue from the following activities:
Licensing Revenue from Collaborative and License Agreements. Revenue from collaborative and license agreements consists of (1) up-front cash payments for initial technology access or licensing fees and (2) contingent payments triggered by the occurrence of specified events or other contingencies derived from our collaborative and license agreements. Royalties from the commercial sale of products derived from our collaborative and license agreements are reported as licensing, royalties, and other revenue.
If we have continuing obligations under a collaborative agreement and the deliverables within the collaboration cannot be separated into their own respective units of accounting, we utilize a multiple attribution model for revenue recognition as the revenue related to each deliverable within the arrangement should be recognized upon the culmination of the separate earnings processes and in such a manner that the accounting matches the economic substance of the deliverables included in the unit of accounting. As such, up-front cash payments are recorded as deferred revenue and recognized as revenue ratably over the period of performance under the applicable agreement.
Effective January 1, 2011, we adopted new accounting guidance for recognizing milestone revenue, which will be applied on a prospective basis. Consideration that is contingent upon achievement of a milestone for research or development deliverables will be recognized in its entirety as revenue in the period in which the milestone is achieved if the consideration earned from the achievement of a milestone meets all the criteria for the milestone to be considered substantive at the inception of the arrangement, such that it: (i) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the our performance to achieve the milestone; (ii) relates solely to past performance; and (iii) is reasonable relative to all deliverables and payment terms in the arrangement.
The provisions of the new milestone revenue guidance apply only to those milestones payable for research or development activities and do not apply to contingent payments for which payment is either contingent solely upon the passage of time or the result of a collaborative partner’s performance. Our existing collaboration agreements entail no performance obligations on our part, and milestone payments would be earned based on the collaborative partner’s performance; therefore, milestone payments under existing agreements are considered contingent payments to be accounted for outside of the new milestone revenue guidance. We will recognize contingent payments as revenue upon the occurrence of the specified events, assuming the payments are deemed collectible at that time.
With respect to our arrangement with Merck KGaA, we determined that the estimated useful life of the products and estimated period of our ongoing obligations corresponded
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to the estimated life of the issued patents for such product. Under the 2001 agreements, payments that we received were recorded as deferred revenue and recognized ratably over the period from the date of execution of the 2001 agreements to 2011. We chose that amortization period because, at the time, we believed it reflected an anticipated period of “market exclusivity” based upon our expectation of the life of the patent protection, after which the market entry of competitive products would likely occur. Payments received pursuant to the letter of intent and the 2007 agreements were recorded as deferred revenue and recognized ratably over the remaining estimated product life of Stimuvax, which was until 2018. Upon entering into the 2008 agreements, all of our future performance obligations related to our collaboration with Merck KGaA regarding Stimuvax were removed and our continuing involvement in the development and manufacturing of Stimuvax ceased; therefore, we recognized the balance of all previously recorded deferred revenue relating to our arrangement with Merck KGaA. Similarly, our receipt of the final manufacturing process transfer milestone payment in December 2009 was recognized currently since we had no continuing obligations pursuant to such arrangement. Any future contingent payments we receive pursuant to the 2008 license agreement will be immediately recognized in revenue.
Licensing, Royalties, and Other Revenue. Licensing, royalties, and other revenue consists of revenue from sales of compounds and processes from patented technologies to third parties and royalties received pursuant to collaborative agreements and license agreements. Royalties based on reported sales, if any, of licensed products are recognized based on the terms of the applicable agreement when and if reported sales are reliably measurable and collectability is reasonably assured. As of the date of this report, we have not received any royalties pursuant to our arrangement with Merck KGaA.
If we have no continuing obligations under a license agreement, or a license deliverable qualifies as a separate unit of accounting included in a collaborative arrangement, consideration that is allocated to the license deliverable is recognized as revenue upon commencement of the license term and contingent payments are recognized as revenue upon the occurrence of the events or contingencies provided for in such agreement, assuming collectability is reasonably assured.
Goodwill Impairment
Goodwill is carried at cost and is not amortized, but is reviewed annually for impairment on October 1 of each year, or more frequently when events or changes in circumstances indicate that the asset may be impaired. If the carrying value of goodwill exceeds its fair value, an impairment loss would be recognized. As of December 31, 2011, we had one reporting unit and there was a substantial excess of fair value compared to the carrying value. There were no impairment charges recorded for any of the periods presented.
Stock-Based Compensation
We maintain a share option plan under which an aggregate of 2,441,725 shares of common stock underlie outstanding options as of December 31, 2011 and an aggregate of 1,919,585 shares of common stock were available for future issuance. We maintain an Employee Stock Purchase Plan (“ESPP”) under which a total of 900,000 shares of common stock were reserved for sale to employees of the Company. As of December 31, 2011, there were 807,597 shares reserved for future purchases. We maintain a restricted share unit plan under which an aggregate of 143,495 shares of common stock underlie restricted stock units, or RSUs, as of December 31, 2011 and an aggregate of 200,922 shares of common stock were available for future issuance. We have generally granted options to our employees and directors under the share option plan, and we have granted RSUs to non-employee directors under the RSU plan. Prior to the April 1, 2008 amendment to our share option plan, we granted options with an exercise price denominated in Canadian dollars equal to the closing price of our shares on the Toronto Stock Exchange on the
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trading day immediately prior to the date of grant. On and after April 1, 2008, we granted options with an exercise price denominated in U.S. dollars equal to the closing price of our shares on The NASDAQ Global Market on the date of grant. On and after June 12, 2009 the fair value of the restricted share units has been determined to be the equivalent of our common shares closing trading price on the date immediately prior to the grant as quoted on The NASDAQ Global Market. Prior to June 12, 2009, the fair value was computed using the closing trading price on the date immediately prior to the grant as quoted in Canadian dollars on the Toronto Stock Exchange. Pursuant to an October 2011 amendment to the RSU plan, we are required to settle 25% of the shares of our common stock otherwise deliverable in connection with the vesting of any RSU and deliver to each non-employee director an amount in cash equal to the fair market value of the shares on the vesting date. The amendment is designed to facilitate satisfaction of the non-employee directors’ income tax obligation with respect to the vested RSUs. This modification resulted in the RSUs being classified as a liability. The outstanding RSU awards are required to be remeasured at each reporting date, or until settlement of the award, and any changes in valuation are recorded as compensation expense for the period.
We use the closing share price of our shares in The NASDAQ Global Market at the reporting or settlement date to determine the fair value of RSUs. We use the Black-Scholes option pricing model for determining the estimated fair value for our share option plan and employee stock purchase plan awards, which requires the use of highly subjective and complex assumptions to determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. We recognize the value of the portion of the awards that is ultimately expected to vest as expense over the requisite vesting periods on a straight-line basis for the entire award in our consolidated statements of operations. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Historically we have based the risk-free interest rate for the expected term of the option on the yield available on Government of Canada benchmark bonds with an equivalent expected term. Subsequent to April 1, 2008, we use the yield at the time of grant of a U.S. Treasury security. The expected life of options in years represents the period of time stock-based awards are expected to be outstanding, giving consideration to the contractual terms of the awards, vesting schedules and historical employee behavior. The expected volatility is based on the historical volatility of our common stock for a period equal to the stock option’s expected life.
Warrant liability
In May 2009 and September 2010, we issued warrants to purchase 2,909,244 and 3,182,147 shares of our common stock respectively in connection with a registered direct offering of our common stock and warrants. Of the warrants issued in May 2009, 262,101, zero and 91,500, warrants were exercised in 2011, 2010 and 2009 respectively. These warrants are classified as liabilities due to potential cash settlement upon the occurrence of certain transactions specified in the warrant agreement related to the warrants and, in the case of the warrants issued in May 2009, certain adjustments that may be made to the terms of the warrants if we issue or sell shares below the exercise price. The September 2010 equity financing triggered certain adjustment provisions in the May 2009 warrants and, as a result, the aggregate number of shares underlying such unexercised warrants increased by 135,600 to 2,953,344 as of December 31, 2010 and the per share exercise price decreased from $3.92 to $3.74. Pursuant to the terms of the warrant agreement, the terms of the warrants issued in May 2009 will not be further adjusted for any future transactions. Accordingly, the fair value of the warrants is recorded on our consolidated balance sheet as a liability, and such fair value is adjusted at each financial reporting period with the adjustment to fair value reflected in our consolidated statement of operations. The fair value of the warrants is determined using the Black-Scholes option pricing model.
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Fluctuations in the assumptions and factors used in the Black-Scholes model can result in adjustments to the fair value of the warrants reflected on our balance sheet and, therefore, our statement of operations. In 2010, we changed the way we estimated volatility when determining the fair value of the warrants using the Black-Scholes model. For more information, see “Note 3 — Fair Value Measurements” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012.
Results of Operations for the years ended December 31, 2011, 2010 and 2009
The following table sets forth selected consolidated statements of operations data for each of the periods indicated.
Overview
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions, except per share amounts) | ||||||||||||
Revenue | $ | 0.1 | $ | — | $ | 2.1 | ||||||
Operating expenses | (24.9 | ) | (19.5 | ) | (12.9 | ) | ||||||
Other income (expense), net | (0.3 | ) | 0.7 | — | ||||||||
Change in fair value of warrant liability | (17.6 | ) | 3.0 | (6.2 | ) | |||||||
Benefit (provision) for income tax | — | 0.2 | (0.2 | ) | ||||||||
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Net loss | $ | (42.7 | ) | $ | (15.6 | ) | $ | (17.2 | ) | |||
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Loss per share — basic | $ | (1.12 | ) | $ | (0.58 | ) | $ | (0.76 | ) | |||
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Loss per share — diluted | $ | (1.12 | ) | $ | (0.72 | )(1) | $ | (0.76 | ) | |||
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| (1) | Restated for the correction of the errors reported in “Note 2 — Significant Accounting Policies — Restatement.” |
We incurred a net loss of $42.7 million in 2011 compared to a net loss of $15.6 million in 2010. The increase in our net loss was primarily due to the increase in the fair value of our warrant liability, which was attributable principally to the increase in the price of our common stock. In addition, the increase in our net loss was also due to higher expenses in research and development related to the development of PX-866 and ONT-10. This increase was partly offset by lower general and administrative expenses due to lower professional fees incurred in 2011. The net loss of $15.6 million in 2010 compared to a net loss of $17.2 million in 2009 was primarily driven by the decline in the fair value of our warrant liability, which was attributable principally to the decrease in the price of our common stock. This was substantially offset by higher expenses in research and development related to the development of PX-866 and ONT-10. In addition, general and administrative expenses were higher due to higher professional fees incurred in 2010. Depreciation and amortization expense of $0.5 million and $0.3 million were reclassified to research and development and general and administrative expenses for the years ended December 31, 2010 and 2009 respectively, to conform to current year presentation. See “Note 2 — Significant Accounting Policies — Reclassifications” elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012 for more information. Based on our development plans for our small molecule and vaccine candidates we will continue to incur operating losses for the foreseeable future.
Revenue
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions) | ||||||||||||
Licensing revenues from collaborative and license agreements | $ | 0.1 | $ | — | $ | 2.1 | ||||||
We recognized $0.1 million of previously deferred revenue relating to an agreement with Prima Biomed Limited as we have no continuing performance obligations related to such
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agreement. We did not receive any revenues during 2010. License revenue in 2009 included a $2.0 million contractually obligated payment from Merck KGaA. We do not expect revenue from the license of Stimuvax, if at all, until the submission by Merck KGaA of the BLA for the first indication.
Research and Development Expense
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions) | ||||||||||||
Research and development | $ | 17.9 | $ | 11.6 | $ | 6.2 | ||||||
The $6.3 million, or 54.3%, increase in research and development expenses for 2011 compared to 2010 was primarily driven by higher clinical trial expense of $2.7 million due to greater activity related to the development of PX-866 compared to 2010. Research and development expenses in 2011 also included a license payment of $1.5 million to SBMRI and higher salaries and benefits expense of $1.2 million attributable to increased headcount. Preclinical and manufacturing development expenses were higher by $0.8 million due to greater preclinical and manufacturing activity. As we continue with our development on PX-866 and ONT-10, we expect that our research and development costs will be higher in 2012 compared to 2011.
The $5.4 million, or 87.1%, increase in research and development expenses for 2010 compared to 2009 was primarily driven by a $2.8 million increase in contract laboratory services and contract manufacturing and lab supplies, related to the development of PX-866 and ONT-10. Salaries and benefits and clinical trial expenses were higher by $1.3 million and $0.2 million, respectively, due to increased headcount and greater clinical trial activity. Grant revenue used to offset research and development expenses decreased to zero in 2010 from $0.8 million in 2009, since our activities related to the SBIR grant ceased in 2009.
General and Administrative Expense
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions) | ||||||||||||
General and administrative | $ | 6.9 | $ | 7.9 | $ | 6.7 | ||||||
The $1.0 million decrease in general and administrative expenses for 2011 relative to 2010 was principally due to $2.0 million lower professional fees incurred in 2011. The decrease was partially offset by higher director fees of $1.0 million. The October 2011 amendment to our RSU plan resulted in the RSUs being classified as a liability. The outstanding RSU awards are required to be remeasured at each reporting date, or until settlement of the award, and any changes in valuation are recorded as compensation expense for the period. For more information, see “Note 8 — Stock-based Compensation” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012. During the year ended December 31, 2011, we recorded additional expense of $0.3 million for RSUs that were revalued upon settlement and $0.7 million for outstanding RSUs revalued at December 31, 2011. We expect general and administrative expenses to be higher in 2012 compared to 2011; however, these expenses will be subject to fluctuations related to the changes in the fair value of the RSU liability.
The $1.2 million increase in 2010 relative to 2009 was principally due to a $1.3 million increase in professional fees incurred related to regulatory compliance in the first half of 2010 and a $0.2 million increase in directors and officers insurance premiums. The increase was partially offset by lower stock based compensation expense of $0.4 million and lower overhead allocation of $0.4 million, which includes rent, repair and maintenance, depreciation and amortization, communication expenses and supplies.
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Investment and Other Income (Expense), Net
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions) | ||||||||||||
Investment and other income (expense), net | $ | 0.3 | $ | 0.6 | $ | — | ||||||
Net investment and other income (expense) decreased by $0.3 million for 2011 compared to 2010 primarily due to receipt of a government grant of $0.5 million in 2010. The decrease was partly offset by derecognition of notes payable in the amount of $0.2 million related to the acquisition of Pro1X. For additional information, see “Note 6 — Notes payable assumed in connection with the acquisition of ProlX”
The $0.6 million increase in investment and other income in 2010 compared to 2009 was primarily attributable to receipt of a government grant of $0.5 million and higher average yields on our investments in 2010.
Interest Expense
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions) | ||||||||||||
Interest expense | $ | 0.6 | $ | — | $ | — | ||||||
Interest expense for 2011 increased by $0.6 million compared to 2010 due to cash interest and non-cash amortization of debt issuance costs and debt discount related to the notes payable that we entered into with General Electric Capital Corporation on February 8, 2011. For additional information, see “Note 6 — Notes payable — General Electric Capital Corporation”
Change in Fair Value of Warrant Liability
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions) | ||||||||||||
Change in fair value of warrant liability | $ | (17.6 | ) | $ | 3.0 | $ | (6.2 | ) | ||||
The $17.6 million recorded was due to the increase in fair value of warrant liability for the year ended 2011. Such increase was attributable principally to the increase in the price of our common stock and pertains to warrants issued in connection with the September 2010 and May 2009 financings.
The $3.0 million recorded was due to the decline in fair value of warrant liability for the year ended 2010. Such decline was attributable principally to the decrease in the price of our common stock and pertains to warrants issued in connection with the September 2010 and May 2009 financings. On December 31, 2010, we changed the way we estimated volatility when determining the fair value of the warrants using the Black-Scholes model. For more information, see “Note 3 — Fair Value Measurements” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012.
The warrants issued in May 2009 were subject to certain adjustments if we issued or sold shares below the original exercise price. A September 2010 equity financing triggered such adjustment provisions and, as a result, the aggregate number of shares underlying such unexercised warrants increased by 135,600 to 2,953,344 as of December 31, 2010 and the per share exercise price decreased from $3.92 to $3.74. Pursuant to the terms of the warrant agreement, the terms of the warrants issued in May 2009 will not be further adjusted for any future transactions.
The $6.2 million loss on the change in fair value of warrant liability for the year ended 2009 was attributable to the warrants issued in connection with the May 2009 financing.
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Income tax benefit (provision)
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions) | ||||||||||||
Income tax benefit (provision) | $ | — | $ | 0.2 | $ | (0.2 | ) | |||||
In 2010, we recorded a tax benefit for the recovery of taxes paid in the previous year. The provision for income tax in 2009 relates to alternative minimum tax incurred in connection with the December 2008 transactions with Merck KGaA and the final process manufacturing transfer payment received during 2009. While we have incurred substantial losses in historical periods (except for 2008), there are no assurances that we will realize any tax benefits and we have recorded a full valuation allowance against our net deferred tax assets.
Liquidity and Capital Resources
Cash, Cash Equivalents, Short-Term Investments, Long-Term Investments and Working Capital
As of December 31, 2011, our principal sources of liquidity consisted of cash and cash equivalents of $11.6 million, short-term investments of $52.3 million and long-term investments of $2.5 million. Our cash and cash equivalents consist of cash, money market funds and securities with an initial maturity of less than 90 days. Our short-term investments are invested in debt securities of U.S government agencies, corporate debt securities, commercial paper and certificates of deposit insured by the Federal Deposit Insurance Corporation with maturities not exceeding 12 months from the reporting date. Our long-term investments are invested in debt securities of U.S government agencies with maturities exceeding 12 months from the reporting date. Our primary source of cash has historically been proceeds from the issuance of equity securities, exercise of warrants, debt and equipment financings, and payments to us under grants, licensing and collaboration agreements. These proceeds have been used to fund our operations.
Our cash and cash equivalents were $11.6 million as of December 31, 2011 compared to $5.5 million as of December 31, 2010, an increase of $6.1 million, or 110.9%. The increase was primarily attributable to net proceeds of $43.1 million from the sale of our common stock pursuant to an underwritten public offering, net proceeds of approximately $9.0 million received from sale of our common stock pursuant to our equity line financing facility, $4.8 million received from a term loan with General Electric Capital Corporation, and approximately $1.9 million received from warrant exercises. Such increase was partially offset by net purchase of investments of $31.4 million and net cash used in operations of $21.0 million.
As of December 31, 2011, our working capital was $60.1 million compared to $28.2 million as of December 31, 2010, an increase of $31.9 million, or 113.1%. The increase in working capital was primarily attributable to an increase in short-term investments of $28.9 million and cash and cash equivalents of $6.1 million. Such increase was offset by a $1.7 million increase in current portion of notes payable, a $0.8 million increase in accrued liabilities and a decrease in government grants receivable of $0.5 million.
On February 8, 2011, we entered into a Loan and Security Agreement with General Electric Capital Corporation, or GECC, pursuant to which GECC extended to us an initial term loan with an aggregate principal amount of $5.0 million. The proceeds from the initial term loan, after payment of lender fees and expenses, were approximately $4.8 million. In June 2012, we paid approximately $4.1 million to extinguish the loan prior to its scheduled maturity. The net proceeds are being used for general corporate purposes, including research and product development, such as funding pre-clinical studies and clinical trials and otherwise moving product candidates towards commercialization, or the possible acquisition or licensing of new product candidates or
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technology which could result in other product candidates. See “Note 6 — Notes Payable” to the consolidated financial statements for additional information regarding the loan agreement.
On May 4, 2011, we closed an underwritten public offering of 11,500,000 shares of our common stock at a price to the public of $4.00 per share, resulting in net cash proceeds of approximately $43.1 million.
In July and August of 2011, warrants with respect to 402,101 underlying shares of our common stock were exercised, resulting in gross cash proceeds of approximately $1.9 million.
On October 4, 2011, we sold an aggregate of 639,071 shares of our common stock pursuant to our committed equity line financing facility, at a per share purchase price of approximately $6.43 resulting in net cash proceeds of $4.1 million. The per share purchase price was established under the financing facility by reference to the volume weighted average prices of our common stock on The NASDAQ Global Market during a 10-day pricing period, net a discount of 5% per share.
On November 10, 2011, we sold an aggregate of 805,508 shares of our common stock pursuant to our committed equity line financing facility, at a per share purchase price of approximately $6.21 resulting in net cash proceeds of $4.9 million. The per share purchase price was established under the financing facility by reference to the volume weighted average prices of our common stock on The NASDAQ Global Market during a 10-day pricing period, net of a discount of 5% per share.
On April 3, 2012, we closed an underwritten public offering of 13,512,500 shares of our common stock at a price to the public of $4.00 per share for gross proceeds of approximately $54.1 million. The net proceeds from the sale of the shares, after deducting the underwriters’ discounts and other estimated offering expenses payable by us, were approximately $50.3 million.
We believe that our currently available cash and cash equivalents and investments will be sufficient to finance our operations for at least the next 12 months. Nevertheless, we expect that we will require additional capital from time to time in the future in order to continue the development of products in our pipeline and to expand our product portfolio. We would expect to seek additional financing from the sale and issuance of equity or debt securities, but we cannot predict that financing will be available when and as we need financing or that, if available, the financing terms will be commercially reasonable. If we are unable to raise additional financing when and if we require, it would have a material adverse effect on our business and results of operations. To the extent we issue additional equity securities, our existing shareholders could experience substantial dilution.
Cash Flows from Operating Activities
Cash used in operating activities is primarily driven by our net loss. However, operating cash flows differ from net loss as a result of non-cash charges or differences in the timing of cash flows and earnings recognition.
Net cash used in operating activities totaled $21.0 million in 2011, compared to $17.7 million in 2010. The increase in net cash used in operating activities for 2011 as compared to 2010 was primarily due to an increase in research and development expenses related to the greater activity in the development of PX-866 and ONT-10, which was partially offset by a decrease in general and administrative expenses.
Net cash used in operating activities totaled $17.7 million in 2010, compared to $9.1 million in 2009. The increase in net cash used in operating activities compared to 2009 was primarily due to an increase in research and development and general and administrative expenses.
Cash Flows from Investing Activities
We had cash outflows of $31.6 million from investing activities during 2011, an increase of $22.2 million from the $9.4 million outflow in 2010. This change was attributable principally to increased net purchases of investments of $31.4 million in 2011 compared to $9.1 million in 2010 and lower expenditures on capital assets of $0.2 million.
We had cash outflows of $9.4 million from investing activities during the year ended December 31, 2010, a decrease of $6.2 million from the $15.6 million outflow during the year ended December 31, 2009. This change was attributable principally to net purchases of short-term investments of $9.1 million in 2010 compared to net purchases in the prior year of $14.2 million and lower expenditures on capital assets of $1.1 million.
Cash Flows from Financing Activities
Cash provided by financing activities during 2011 was $58.7 million, which consisted of net proceeds of $43.1 million from the sale of our common stock pursuant to an underwritten public offering, net proceeds of $9.0 million received from sale of our common stock
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pursuant to our equity line financing facility, $4.8 million received from a term loan with General Electric Capital Corporation, and approximately $1.9 million received from warrant exercises. This was partially offset by $0.2 million cash paid in connection with the vesting of RSUs and a principal payment of approximately $0.1 million on our term loan with GECC.
We generated $13.7 million in net cash during 2010 from the September 2010 equity financing, which involved the issuance of common stock and warrants.
During the year ended December 31, 2009, we generated $24.6 million of net cash from financings completed in May and August 2009, each of which involved the issuance of common stock and warrants.
Contractual Obligations and Contingencies
In our continuing operations, we have entered into long-term contractual arrangements from time to time for our facilities, debt financing, the provision of goods and services, and acquisition of technology access rights, among others. The following table presents contractual obligations arising from these arrangements as of December 31, 2011:
| Payments Due by Period | ||||||||||||||||||||
| Total | Less than 1 Year | 1 — 3 Years | 4 — 5 Years | After 5 Years | ||||||||||||||||
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Operating leases | $ | 4,194 | $ | 577 | $ | 1,186 | $ | 1,209 | $ | 1,222 | ||||||||||
Notes payable | 4,924 | 1,818 | 3,106 | — | — | |||||||||||||||
Interest commitment on notes payable | 720 | 434 | 286 | — | — | |||||||||||||||
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Total | $ | 9,838 | $ | 2,829 | $ | 4,578 | $ | 1,209 | $ | 1,222 | ||||||||||
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In May 2008, we entered into a sublease for an office and laboratory facility in Seattle, Washington totaling approximately 17,000 square feet where we have consolidated our operations. The sublease expired on December 17, 2011. The sublease provided for a base monthly rent of $33,324 increasing to $36,354. In May 2008, we also entered into a lease directly with the landlord of such facility which has a seven year term beginning at the expiration of the sublease. The lease provides for a base monthly rent of $47,715 increasing to $52,259 in 2018. We also have entered into operating lease obligations through September 2015 for certain office equipment.
In connection with the acquisition of ProlX, we assumed two loan agreements under which approximately $199,000 was outstanding at December 31, 2010. We are required to repay such loans if we commercialize or sell the product that was the subject of such agreements. In February 2011, we provided notice to the counterparty to such agreements that we do not intend to commercialize such product. As a result, the agreements were terminated in March 2011 and we do not expect to be required to repay the loans. In connection with the acquisition of ProlX, we may become obligated to issue additional shares of our common stock to the former stockholders of ProlX upon satisfaction of certain milestones. We may become obligated to issue shares of our common stock with a fair value of $5.0 million (determined based on a weighted average trading price at the time of issuance) upon the initiation of the first Phase 3 clinical trial for a ProlX product. We may become obligated to issue shares of our common stock with a fair value of $10.0 million (determined based on a weighted average trading price at the time of issuance) upon regulatory approval of a ProlX product in a major market.
Under certain licensing arrangements for technologies incorporated into our product candidates, we are contractually committed to payment of ongoing licensing fees and royalties, as well as contingent payments when certain milestones as defined in the agreements have been achieved.
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Guarantees and Indemnification
In the ordinary course of our business, we have entered into agreements with our collaboration partners, vendors, and other persons and entities that include guarantees or indemnity provisions. For example, our agreements with Merck KGaA contain certain tax indemnification provisions, and we have entered into indemnification agreements with our officers and directors. Based on information known to us as of December 31, 2011, we believe that our exposure related to these guarantees and indemnification obligations is not material.
Off-Balance Sheet Arrangements
During the period presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.
Recent Accounting Pronouncements
In September 2011, FASB issued new guidance on testing goodwill for impairment. The new guidance simplifies how an entity tests goodwill for impairment. It allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The new guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this new accounting pronouncement on January 1, 2012 had no impact on our financial position or results of operations.
In June 2011, FASB and the International Accounting Standards Board (“IASB”) updated the guidance on presentation of items within other comprehensive income. In this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. We adopted these standards using the two separate but consecutive statements approach on January 1, 2012 for all periods presented. The amendments in this update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We adopted this standard in Q1 2012 and applied it retrospectively to this Amendment No.1 of the 2011 Annual Report on Form 10-K. The adoption of this standard only impacts the presentation of our financial statements, and not our results of operations or financial position.
In May 2011, FASB and the IASB published converged standards on fair value measurement and disclosure. The standards do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The standards clarified some existing rules and provided guidance for additional disclosures: (1) the concepts of “highest and best use” and “valuation premise” in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities; (2) when measuring the fair value of instruments classified in equity (for example, equity issued in a business combination), the entity should measure it from the perspective of a
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market participant that holds that instrument as an asset; and (3) quantitative information about the unobservable inputs used in Level 3 measurements should be included. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this new accounting pronouncement on January 1, 2012 only impacted the presentation of our financial statements, and not our financial position or results of operations.
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| ITEM 8. | Financial Statements and Supplementary Data |
See Financial Statements beginning on page F-1.
| ITEM 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2011, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the Securities and Exchange Commission, or SEC, under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, management has concluded that as of December 31, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weakness in our internal control over financial reporting described below in Management’s Report on Internal Control over Financial Reporting. Despite the existence of this material weakness, we believe that the consolidated financial statements included in this Amendment No. 1 of the 2011 Annual Report on Form 10-K for the year ended December 31, 2011 present, in all material respects, our financial position, results of operations, comprehensive income and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. We have designed our internal controls to provide reasonable assurance that our financial
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statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and include those policies and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our management conducted an evaluation of the effectiveness of our internal controls based on the criteria set forth in theInternal Control — Integrated Frameworkdeveloped by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, as of December 31, 2011.
In performing the assessment, our management identified a deficiency in our internal control over financial reporting that constitutes a material weakness under standards established by the Public Company Accounting Oversight Board, or PCAOB, as of December 31, 2011. Specifically, we do not have adequately designed controls in place to ensure the appropriate accounting for and disclosure of diluted earnings (loss) per share in accordance with U.S. GAAP. This lack of adequate control and an adequate risk assessment process resulted in our failure to identify and apply the appropriate accounting guidance to the calculation of diluted earnings per share. As a result of this material weakness, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2011, based on the criteria established inInternal Control — Integrated Framework, issued by the COSO and consequently we did not maintain effective internal control over reporting.
A material weakness is 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 our annual or interim financial statements will not be prevented or detected on a timely basis.
The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report thereto, included below.
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
Changes in Internal Control over Financial Reporting
As a result of the material weakness described above, management will present a proposed remediation plan to our audit committee concerning our internal control over financial reporting by September 6, 2012. Remedying the material weakness described above will require management time and attention over the coming quarters and may result in additional incremental expenses, which includes increasing reliance on outside consultants. Any failure on our part to remedy our identified weakness or any additional errors or delays in our financial reporting would have a material adverse effect on our business and results of operations and could have a substantial adverse impact on the trading price of our common stock.
Subject to oversight by our board of directors, our chief executive officer will be responsible for implementing management’s internal control remediation plan, adopted by our audit committee and approved by our board of directors.
Except as described above, there have been no changes in our internal control over financial reporting during the year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Oncothyreon Inc.
We have audited Oncothyreon Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Oncothyreon Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our report dated March 9, 2012, we expressed an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2011. As described in the following paragraph, the Company subsequently identified material misstatements in its financial statements, which required such financial statements to be restated, and determined that a material weakness in controls existed as of December 31, 2011. Accordingly, our opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, expressed herein is different from that expressed in our previous report.
A material weakness is a deficiency, or 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 following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls over the Company’s application of generally accepted accounting principles to the calculation of diluted earnings (loss) per share. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Oncothyreon Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2011. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2011 financial statements and this report does not affect our report dated March 9, 2012, except for Note 2 – as it relates to Restatement, Note 7 – as it relates to Loss per Share, Note 13 Subsequent Events, and the retrospective adoption of amendments to the accounting standard relating to the reporting and display of comprehensive loss described in Note 2, as to which the date is August 13, 2012, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Oncothyreon Inc. has not maintained effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
/s/ Ernst & Young LLP
Seattle, Washington
March 9, 2012,
except for the effects of the material weakness described
in the sixth paragraph above, as to which the date is
August 13, 2012
39
PART IV
| ITEM 15. | Exhibits and Financial Statement Schedules |
| (a) | The following documents are filed as part of this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012: |
1. Financial Statements:
Our consolidated financial statements are contained in Item 8 of this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012.
2. Financial Statement Schedules:
All financial statement schedules have been omitted because the required information is either included in the financial statements or notes thereto, or is not applicable.
3. Exhibits:
The exhibits required by Item 601 of Regulation S-K are listed in paragraph (b) below.
| (b) | Exhibits: |
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC:
| Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | Exhibit No. | Filing Date | Filed Herewith | |||||
2.1(a) | Agreement and Plan of Reorganization among ProlX Pharmaceuticals Corporation, D. Lynn Kirkpatrick, Garth Powis and Biomira Inc., dated October 30, 2006. | S-4/A | 2.1 | October 29, 2007 | ||||||
2.1(b) | Amendment No. 1 to Agreement and Plan of Reorganization dated November 7, 2007. | 10-K | 2.1(b) | May 6, 2010 | ||||||
3.1 | Amended and Restated Certificate of Incorporation of Oncothyreon Inc. | S-4/A | 3.1 | September 27, 2007 | ||||||
3.2 | Bylaws of Oncothyreon Inc. | 10-Q | 3.1 | August 14, 2009 | ||||||
4.1 | Form of registrant’s common stock certificate. | S-4/A | 4.1 | September 27, 2007 | ||||||
4.2 | Form of Warrant(1). | |||||||||
4.3 | Form of Warrant issued pursuant to the terms of the Securities Purchase Agreement, dated September 23, 2010, by and among Oncothyreon Inc. and the signatories thereto, as amended. | S-1 | 10.49 | October 4, 2010 | ||||||
40
| Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | Exhibit No. | Filing Date | Filed Herewith | |||||
4.4 | Form of Warrant to Purchase Common Stock issued by Oncothyreon Inc. to the Lenders pursuant to the terms of the Loan and Security Agreement. | 8-K | 10.3 | February 9, 2011 | ||||||
4.5 | Registration Rights Agreement, dated July 6, 2010 between Oncothyreon Inc. and Small Cap Biotech Value, Ltd. | 8-K | 4.1 | July 7, 2010 | ||||||
4.6 | Registration Rights Agreement, dated September 28, 2010 by and among Oncothyreon Inc. and the signatories thereto. | 8-K | 4.1 | September 27, 2010 | ||||||
10.1* | Amended and Restated Share Option Plan. | 10-K | 10.1 | March 9, 2012 | ||||||
10.2* | Form of Stock Option Agreement under the Amended and Restated Share Option Plan. | 10-K | 10.2 | March 9, 2012 | ||||||
10.3* | Amended and Restated Restricted Share Unit Plan. | 10-K | 10.3 | March 9, 2012 | ||||||
10.4* | Form of Restricted Share Unit Agreement under the Amended and Restated Restricted Share Unit Plan. | 10-K | 10.4 | March 9, 2012 | ||||||
10.5* | 2010 Employee Stock Purchase Plan. | 8-K | 10.1 | June 8, 2010 | ||||||
10.6* | Form of Subscription Agreement and Notice of Withdrawal under the 2010 Employee Stock Purchase Plan. | 8-K | 10.2 | June 8, 2010 | ||||||
10.7* | Form of Indemnification Agreement. | S-4/A | 10.1 | September 27, 2007 | ||||||
10.8* | Offer letter with Robert Kirkman, dated August 29, 2006. | S-4 | 10.27 | September 12, 2007 | ||||||
10.8(a)* | Amendment to Robert Kirkman Offer Letter dated December 31, 2008. | 10-K | 10.18(a) | March 30, 2009 | ||||||
10.8(b)* | Amendment to Robert Kirkman Offer Letter dated December 3, 2009. | 8-K | 10.1 | December 7, 2009 | ||||||
10.9* | Offer Letter with Gary Christianson, dated June 29, 2007. | 10-Q | 10.1 | November 10, 2008 | ||||||
10.9(a)* | Amendment to Gary Christianson Offer Letter dated December 31, 2008. | 10-K | 10.40(a) | March 30, 2009 | ||||||
41
| Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | Exhibit No. | Filing Date | Filed Herewith | |||||
10.9(b)* | Amendment to Gary Christianson Offer Letter dated December 3, 2009. | 8-K | 10.2 | December 7, 2009 | ||||||
10.10* | Offer Letter dated June 9, 2009 between Oncothyreon Inc. and Scott Peterson, Ph.D. | 8-K | 10.2 | June 15, 2009 | ||||||
10.10(a)* | Amendment to Scott Peterson Offer Letter dated December 3, 2009. | 8-K | 10.4 | December 7, 2009 | ||||||
10.11* | Offer Letter dated July 6, 2009 between Oncothyreon Inc. and Diana Hausman, M.D.. | 8-K | 10.1 | August 4, 2009 | ||||||
10.11(a)* | Amendment to Diana Hausman Offer Letter dated December 3, 2009. | 8-K | 10.3 | December 7, 2009 | ||||||
10.12* | Offer letter with Julia M. Eastland, dated August 17, 2010. | 8-K | 10.1 | August 31, 2010 | ||||||
10.13 | Lease Agreement between Selig Holdings Company and Oncothyreon Inc., dated May 9, 2008. | 10-Q | 10.3 | November 10, 2008 | ||||||
10.14 | Loan and Security Agreement between Oncothyreon Inc. and General Electric Capital Corporation dated February 8, 2011. | 8-K | 10.1 | February 9, 2011 | ||||||
10.14(a) | Amendment to Loan and Security Agreement between Oncothyreon Inc. and General Electric Capital Corporation dated February 3, 2011 | 10-K | 10.14(a) | March 9, 2012 | ||||||
10.15 | Promissory Note issued by Oncothyreon Inc. to General Electric Capital Corporation dated February 8, 2011. | 8-K | 10.2 | February 9, 2011 | ||||||
10.16 | Common Stock Purchase Agreement, dated July 6, 2010 between Oncothyreon Inc. and Small Cap Biotech Value, Ltd. | 8-K | 10.1 | July 7, 2010 | ||||||
10.17 | Securities Purchase Agreement, dated September 23, 2010, by and among Oncothyreon Inc. and the signatories thereto. | 8-K | 10.1 | September 27, 2010 | ||||||
10.17(a) | Amendment No. 1 to the Securities Purchase Agreement, dated September 28, 2010. | 8-K | 10.1 | September 30, 2010 | ||||||
10.18† | License Agreement between Biomira Inc. and the Dana-Farber Cancer Institute, Inc., dated November 22, 1996. | S-4 | 10.6 | September 12, 2007 | ||||||
42
| Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | Exhibit No. | Filing Date | Filed Herewith | |||||
10.19† | Amended and Restated License Agreement between Imperial Cancer Research Technology Limited and Biomira Inc., dated November 14, 2000. | S-4/A | 10.11 | September 27, 2007 | ||||||
10.20 | Consent and Acknowledgement among Biomira Inc., Biomira International Inc., Biomira Europe B.V., Imperial Cancer Research Technology Limited and Merck KGaA, dated February 5, 2002. | S-4 | 10.13 | September 12, 2007 | ||||||
10.21† | License Agreement between the Governors of the University of Alberta and Biomira Inc., dated December 1, 2001. | S-4/A | 10.14 | September 27, 2007 | ||||||
10.22† | Letter Agreement between Biomira Inc. and Cancer Research Technology Limited (formerly Imperial Cancer Research Technology Limited), dated March 9, 2004. | S-4/A | 10.16 | September 27, 2007 | ||||||
10.23† | Exclusive License Agreement between the University of Arizona and ProlX Pharmaceuticals Corporation, dated July 29, 2004. | S-4 | 10.18 | September 12, 2007 | ||||||
10.23(a) | First Amendment to Exclusive License Agreement between University of Arizona and Oncothyreon Inc., dated September 27, 2010. | 10-K | 10.7(a) | March 14, 2011 | ||||||
10.24† | Adjuvant License Agreement between Biomira International Inc. and Corixa Corporation, dated October 20, 2004. | S-4/A | 10.19 | September 27, 2007 | ||||||
10.25† | Adjuvant Supply Agreement between Biomira International Inc. and Corixa Corporation, dated October 20, 2004. | S-4/A | 10.20 | September 27, 2007 | ||||||
10.26† | Exclusive Patent License Agreement between the University of Arizona and ProlX Pharmaceuticals Corporation, dated September 15, 2005. | S-4 | 10.21 | September 12, 2007 | ||||||
10.26(a) | First Amendment to Exclusive Patent License Agreement between the University of Arizona and Oncothyreon Inc., dated November 28, 2008. | 10-K | 10.10(a) | March 14, 2011 | ||||||
43
| Incorporated by Reference | ||||||||||||
Exhibit No. | Exhibit Description | Form | Exhibit No. | Filing Date | Filed Herewith | |||||||
10.26(b) | Second Amendment to Exclusive Patent License Agreement between the University of Arizona and Oncothyreon Inc., dated August 13, 2010. | 10-K | 10.10(b) | March 14, 2011 | ||||||||
10.27† | Letter Agreement between the University of Arizona and Biomira Inc., dated October 6, 2006. | S-4 | 10.28 | September 12, 2007 | ||||||||
10.28 | Amendment Number 1 to Adjuvant License Agreement and Adjuvant Supply Agreement between Corixa Corporation, d/b/a GlaxoSmithKline Biologicals N.A. and Biomira Management Inc., dated August 8, 2008. | 10-Q | 10.4 | November 10, 2008 | ||||||||
10.29† | Amended and Restated License Agreement between Biomira Management, Inc. and Merck KGaA, dated December 18, 2008. | 10-Q | 10.1 | May 15, 2009 | ||||||||
10.30 | Common Stock Purchase Agreement by and among Biomira Inc., Biomira International Inc. and Merck KGaA dated May 2, 2001. | 10-K | 10.41 | May 6, 2010 | ||||||||
10.31 | Tax Indemnity Agreement by and between Biomira International Inc. and Merck KGaA dated May 3, 2001. | 10-K | 10.42 | May 6, 2010 | ||||||||
21.1 | Subsidiaries of Oncothyreon Inc. | 10-K | 21.1 | March 9, 2012 | ||||||||
23.1 | Consent of Deloitte & Touche LLP, independent registered public accounting firm. | X | ||||||||||
23.2 | Consent of Ernst & Young LLP, independent registered public accounting firm. | X | ||||||||||
24.1 | Power of Attorney(2). | |||||||||||
31.1 | Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
31.2 | Certification of Julie Eastland, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
44
| Incorporated by Reference | ||||||||||||
Exhibit No. | Exhibit Description | Form | Exhibit No. | Filing Date | Filed Herewith | |||||||
32.1 | Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2). | X | ||||||||||
32.2 | Certification of Julie Eastland, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2). | X | ||||||||||
101.INS | XBRL Instance Document(3). | |||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document(3). | |||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document(3). | |||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document(3). | |||||||||||
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document(3). | |||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document(3). | |||||||||||
| (1) | Incorporated by reference from Annex A to the Company’s free writing prospectus, dated as of May 19, 2009, and filed on May 20, 2009 |
| (2) | Incorporated by reference from the signature page to the Company’s Annual Report on Form 10-K filed on March 9, 2012. |
| (3) | Furnished herewith. |
| * | Executive Compensation Plan or Agreement. |
| † | Confidential treatment has been granted for portions of this exhibit. |
45
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Seattle, County of King, State of Washington on August 13, 2012.
| ONCOTHYREON INC | ||
By: | /s/ Robert L. Kirkman | |
| Robert L. Kirkman | ||
| President, CEO and Director | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Robert L. Kirkman Robert L. Kirkman | President, Chief Executive Officer and Director (Principal Executive Officer) | August 13, 2012 | ||
/s/ Julia M. Eastland Julia M. Eastland | Chief Financial Officer, Secretary and Vice President of Corporate Development (Principal Financial and Accounting Officer) | August 13, 2012 | ||
* Christopher S. Henney | Chairman and Director | August 13, 2012 | ||
* Richard L. Jackson | Director | August 13, 2012 | ||
* Daniel K. Spiegelman | Director | August 13, 2012 | ||
* W. Vickery Stoughton | Director | August 13, 2012 | ||
* Douglas Williams | Director | August 13, 2012 | ||
*By: | /s/ Robert L. Kirkman | |
| Robert L. Kirkman | ||
| attorney-in-fact |
46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Oncothyreon Inc.
We have audited the accompanying consolidated balance sheets of Oncothyreon Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Oncothyreon Inc. at December 31, 2011 and 2010 , and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the 2010 consolidated financial statements have been restated to correct an error in the calculation of diluted earnings (loss) per share.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Oncothyreon Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2012, except for the effects of the material weakness described in the sixth paragraph of that report as to which the date is August 13, 2012, expressed an adverse opinion on the effectiveness of internal control over financial reporting.
/s/ Ernst & Young LLP
Seattle, Washington
March 9, 2012,
except for Note 2 – as it relates to Restatement,
Note 7 – as it relates to Loss per Share,
Note 13 Subsequent Events, and the retrospective adoption of
amendments to the accounting standard relating to the reporting and
display of comprehensive loss described in Note 2, as to which the date is
August 13, 2012
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Oncothyreon Inc.
Seattle, Washington
We have audited the accompanying consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows of Oncothyreon Inc. and subsidiaries (the “Company”) for the year ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Oncothyreon Inc. and subsidiaries for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Seattle, Washington
May 5, 2010
(August 13, 2012 as to the effects of presenting comprehensive loss as described in Note 2 to the consolidated financial statements)
F-3
ONCOTHYREON INC.
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
(In thousands, except share and per share amounts) | ||||||||
ASSETS |
| |||||||
Current | ||||||||
Cash and cash equivalents | $ | 11,609 | $ | 5,514 | ||||
Short-term investments | 52,267 | 23,363 | ||||||
Accounts and other receivables | 321 | 131 | ||||||
Government grant receivable | — | 489 | ||||||
Prepaid and other current assets | 610 | 583 | ||||||
|
|
|
| |||||
| 64,807 | 30,080 | |||||||
Long-term investments | 2,531 | — | ||||||
Property and equipment, net | 1,643 | 1,958 | ||||||
Other assets | 253 | 290 | ||||||
Goodwill | 2,117 | 2,117 | ||||||
|
|
|
| |||||
Total assets | $ | 71,351 | $ | 34,445 | ||||
|
|
|
| |||||
LIABILITIES |
| |||||||
Current | ||||||||
Accounts payable | $ | 459 | $ | 624 | ||||
Accrued liabilities | 1,287 | 533 | ||||||
Accrued compensation and related liabilities | 858 | 686 | ||||||
Current portion of notes payable | 1,749 | — | ||||||
Current portion of restricted share unit liability | 329 | — | ||||||
Current portion of deferred revenue | — | 18 | ||||||
|
|
|
| |||||
| 4,682 | 1,861 | |||||||
Notes payable | 3,059 | 199 | ||||||
Noncurrent portion of deferred revenue | — | 127 | ||||||
Deferred rent | 617 | 388 | ||||||
Restricted share unit liability | 759 | — | ||||||
Warrant liability | 28,771 | 12,983 | ||||||
Class UA preferred stock, 12,500 shares authorized, 12,500 shares issued and outstanding | 30 | 30 | ||||||
|
|
|
| |||||
| 37,918 | 15,588 | |||||||
|
|
|
| |||||
Commitments and contingencies | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $0.0001 par value; 10,000,000 shares authorized, no shares issued or outstanding | — | — | ||||||
Common stock, $0.0001 par value; 100,000,000 shares authorized, 43,613,107 and 30,088,628 shares issued and outstanding | 353,851 | 353,850 | ||||||
Additional paid-in capital | 74,537 | 17,328 | ||||||
Accumulated deficit | (389,911 | ) | (347,255 | ) | ||||
Accumulated other comprehensive loss | (5,044 | ) | (5,066 | ) | ||||
|
|
|
| |||||
| 33,433 | 18,857 | |||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 71,351 | $ | 34,445 | ||||
|
|
|
| |||||
See accompanying notes to the consolidated financial statements
F-4
ONCOTHYREON INC.
Consolidated Statements of Operations
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||
Revenues | ||||||||||||
Licensing revenue from collaborative and license agreements | $ | 145 | $ | 18 | $ | 2,051 | ||||||
Licensing, royalties, and other revenue | — | — | 27 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 145 | 18 | 2,078 | |||||||||
Operating Expenses | ||||||||||||
Research and development, net | 17,915 | 11,601 | 6,215 | |||||||||
General and administrative | 6,929 | 7,901 | 6,724 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 24,844 | 19,502 | 12,939 | |||||||||
|
|
|
|
|
| |||||||
Loss from operations | (24,699 | ) | (19,484 | ) | (10,861 | ) | ||||||
Other income (expense) | ||||||||||||
Investment and other income (expense), net | 305 | 636 | (8 | ) | ||||||||
Interest expense | (631 | ) | — | — | ||||||||
Change in fair value of warrant liability | (17,631 | ) | 3,030 | (6,150 | ) | |||||||
|
|
|
|
|
| |||||||
Total other income (expense), net | (17,957 | ) | 3,666 | (6,158 | ) | |||||||
Loss before income taxes | (42,656 | ) | (15,818 | ) | (17,019 | ) | ||||||
Income tax benefit (provision) | — | 200 | (200 | ) | ||||||||
|
|
|
|
|
| |||||||
Net loss | $ | (42,656 | ) | $ | (15,618 | ) | $ | (17,219 | ) | |||
|
|
|
|
|
| |||||||
Loss per share — basic | $ | (1.12 | ) | $ | (0.58 | ) | $ | (0.76 | ) | |||
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| |||||||
Loss per share — diluted (2010 restated) | $ | (1.12 | ) | $ | (0.72 | ) | $ | (0.76 | ) | |||
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| |||||||
Shares used to compute basic loss per share | 38,197,666 | 26,888,588 | 22,739,138 | |||||||||
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| |||||||
Shares used to compute diluted loss per share (2010 restated) | 38,197,666 | 26,972,969 | 22,739,138 | |||||||||
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| |||||||
See accompanying notes to the consolidated financial statements
F-5
Consolidated Statements of Comprehensive Loss
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
Net loss | $ | (42,656 | ) | $ | (15,618 | ) | $ | (17,219 | ) | |||
Other comprehensive income (loss): | ||||||||||||
Unrealized gain on available-for-sale securities | 22 | — | — | |||||||||
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| |||||||
Other comprehensive income (loss) | 22 | — | — | |||||||||
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| |||||||
Comprehensive loss | $ | (42,634 | ) | $ | (15,618 | ) | $ | (17,219 | ) | |||
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| |||||||
See accompanying notes to the condensed consolidated financial statements
F-6
ONCOTHYREON INC.
Consolidated Statements of Stockholders’ Equity
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Shareholders’ Equity | ||||||||||||||||||||
| Number | Value | |||||||||||||||||||||||
| (In thousands, except share amounts) | ||||||||||||||||||||||||
Balance at December 31, 2008 | 19,492,432 | $ | 325,043 | $ | 15,094 | $ | (314,418 | ) | $ | (5,066 | ) | $ | 20,653 | |||||||||||
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| |||||||||||||
Net loss | — | — | — | (17,219 | ) | — | (17,219 | ) | ||||||||||||||||
Common stock issued, net of offering costs of $0.4 million | 6,159,495 | 20,013 | — | — | — | 20,013 | ||||||||||||||||||
Warrant exercises | 91,558 | 668 | — | — | — | 668 | ||||||||||||||||||
Warrants expiration | — | 37 | — | — | — | 37 | ||||||||||||||||||
Restricted stock units converted | 9,920 | 75 | (75 | ) | — | — | — | |||||||||||||||||
Restricted stock units granted | — | — | 257 | — | — | 257 | ||||||||||||||||||
Share-based employee compensation expense | — | — | 1,009 | — | — | 1,009 | ||||||||||||||||||
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| |||||||||||||
Balance at December 31, 2009 | 25,753,405 | 345,836 | 16,285 | (331,637 | ) | (5,066 | ) | 25,418 | ||||||||||||||||
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|
|
|
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|
|
|
|
|
| |||||||||||||
Net loss | — | — | — | (15,618 | ) | — | (15,618 | ) | ||||||||||||||||
Common stock issued, net of offering costs of $1.2 million | 4,302,791 | 7,849 | — | — | — | 7,849 | ||||||||||||||||||
Employee stock purchase plan | 20,434 | 58 | — | — | — | 58 | ||||||||||||||||||
Restricted stock units converted | 9,498 | 80 | (80 | ) | — | — | — | |||||||||||||||||
Restricted stock units granted | — | — | 150 | — | — | 150 | ||||||||||||||||||
Share-based employee compensation expense | — | — | 973 | — | — | 973 | ||||||||||||||||||
Stock option exercise | 2,500 | — | — | — | — | — | ||||||||||||||||||
Warrants expiration | — | 27 | — | — | — | 27 | ||||||||||||||||||
|
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|
|
|
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|
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|
|
|
| |||||||||||||
Balance at December 31, 2010 | 30,088,628 | 353,850 | 17,328 | (347,255 | ) | (5,066 | ) | 18,857 | ||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Net loss | — | — | — | (42,656 | ) | — | (42,656 | ) | ||||||||||||||||
Unrealized gain on available-for-sale securities | — | — | — | — | 22 | 22 | ||||||||||||||||||
Common stock issued, net of offering costs of $3.1 million | 12,944,579 | 1 | 52,031 | — | — | 52,032 | ||||||||||||||||||
Employee stock purchase plan | 71,969 | — | 207 | — | — | 207 | ||||||||||||||||||
Restricted stock units granted | — | — | 323 | — | — | 323 | ||||||||||||||||||
Restricted stock units converted | 93,122 | 134 | — | — | 134 | |||||||||||||||||||
Restricted stock units, cash settled on conversion | — | — | (189 | ) | — | — | (189 | ) | ||||||||||||||||
Share-based employee compensation expense | — | — | 1,204 | — | — | 1,204 | ||||||||||||||||||
Stock option exercise | 12,708 | — | 48 | — | — | 48 | ||||||||||||||||||
Warrants issued | — | — | 114 | — | — | 114 | ||||||||||||||||||
Warrants exercise | 402,101 | — | 1,901 | — | — | 1,901 | ||||||||||||||||||
Reclassification of fair value of warrants exercised from liability to equity | — | — | 1,843 | — | — | 1,843 | ||||||||||||||||||
Reclassification of fair value of outstanding RSUs from equity to liability | — | — | (407 | ) | — | — | (407 | ) | ||||||||||||||||
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| |||||||||||||
Balance at December 31, 2011 | 43,613,107 | $ | 353,851 | $ | 74,537 | $ | (389,911 | ) | $ | (5,044 | ) | $ | 33,433 | |||||||||||
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| |||||||||||||
See accompanying notes to the consolidated financial statements
F-7
ONCOTHYREON INC.
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net loss | $ | (42,656 | ) | $ | (15,618 | ) | $ | (17,219 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 457 | 462 | 269 | |||||||||
Amortization of discount and deferred financing costs on notes payable | 149 | — | — | |||||||||
Share-based equity facility structuring fee | — | 200 | — | |||||||||
Stock-based compensation expense | 2,342 | 1,123 | 1,266 | |||||||||
Provision for notes receivable, employees | — | 154 | — | |||||||||
Change in fair value of warrant liability | 17,631 | (3,030 | ) | 6,150 | ||||||||
Recognition of deferred revenue | (145 | ) | (22 | ) | (15 | ) | ||||||
Derecognition of debt | (199 | ) | — | — | ||||||||
Other | 13 | 6 | 7 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts and other receivables | (203 | ) | (58 | ) | 1,782 | |||||||
Government grants receivable | 489 | (489 | ) | 40 | ||||||||
Prepaid and other current assets | (31 | ) | (434 | ) | 151 | |||||||
Other long-term assets | 161 | 148 | — | |||||||||
Accounts payable | (165 | ) | (2 | ) | 147 | |||||||
Accrued liabilities | 754 | (120 | ) | (997 | ) | |||||||
Accrued compensation and related liabilities | 172 | (118 | ) | (803 | ) | |||||||
Deferred rent | 229 | 93 | 110 | |||||||||
|
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|
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| |||||||
Net cash used in operating activities | (21,002 | ) | (17,705 | ) | (9,112 | ) | ||||||
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|
|
| |||||||
Cash flows from investing activities | ||||||||||||
Purchases of investments | (88,118 | ) | (29,331 | ) | (16,127 | ) | ||||||
Redemption of investments | 56,705 | 20,212 | 1,883 | |||||||||
Purchases of property and equipment | (142 | ) | (324 | ) | (1,433 | ) | ||||||
Payments received on notes receivable from employees | — | — | 34 | |||||||||
|
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|
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| |||||||
Net cash used in investing activities | (31,555 | ) | (9,443 | ) | (15,643 | ) | ||||||
|
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|
|
|
| |||||||
Cash flows from financing activities | ||||||||||||
Proceeds from issuance of common stock and warrants, net of issuance costs | 52,239 | 13,688 | 24,563 | |||||||||
Proceeds from stock option exercised | 48 | — | — | |||||||||
Proceeds from warrants exercised | 1,901 | — | — | |||||||||
Proceeds from debt financing, net of issuance cost | 4,804 | — | — | |||||||||
Cash settled on conversion of restricted share units | (189 | ) | — | — | ||||||||
Principal payment on notes payable | (151 | ) | — | — | ||||||||
|
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|
|
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| |||||||
Net cash provided by financing activities | 58,652 | 13,688 | 24,563 | |||||||||
|
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|
|
| |||||||
Increase (decrease) in cash and cash equivalents | 6,095 | (13,460 | ) | (192 | ) | |||||||
Cash and cash equivalents, beginning of year | 5,514 | 18,974 | 19,166 | |||||||||
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| |||||||
Cash and cash equivalents, end of year | $ | 11,609 | $ | 5,514 | $ | 18,974 | ||||||
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Supplemental disclosure of cash flow information | ||||||||||||
Interest paid | $ | 437 | $ | — | $ | — | ||||||
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| |||||||
Income taxes paid | $ | — | $ | — | $ | 200 | ||||||
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See accompanying notes to the consolidated financial statements
F-8
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
1. DESCRIPTION OF BUSINESS
Oncothyreon Inc. (the “Company” or “Oncothyreon”) is a clinical-stage biopharmaceutical company incorporated in the State of Delaware on September 7, 2007. Oncothyreon is focused primarily on the development of therapeutic products for the treatment of cancer. Oncothyreon’s goal is to develop and commercialize novel synthetic vaccines and targeted small molecules that have the potential to improve the lives and outcomes of cancer patients. Oncothyreon’s operations are not subject to any seasonality or cyclicality factors.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the following significant accounting policies.
Restatement
The Company has determined that restatements are required to previously reported diluted earnings (loss) per share amounts for the quarterly periods ended September 30, 2011 and March 31, 2010 as well as the year ended December 31, 2010.
In May 2009 and September 2010, the Company issued warrants to purchase its common stock in connection with equity financings (See Note 7). Under certain circumstances, such warrants may be settled in common stock or cash at the election of the holders. Because these instruments may be settled for cash in certain circumstances, the warrants are recorded as a liability at fair value on the balance sheet. The change in fair value of the warrants is reflected as other income or expense in the Company’s consolidated statement of operations.
The calculation of diluted earnings (loss) per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to earnings (loss) per share for the period, adjustments to net income or net loss used in the calculation are required to remove the change in fair value of the warrants for the period. Likewise, adjustments to the denominator are required to reflect the related dilutive shares. The Company failed to make such adjustments to the diluted earnings (loss) per share calculations for the periods discussed above.
A summary of the impact of the correction of the errors on the diluted earnings (loss) per share amounts follows:
| Three Months Ended September 30, 2011 | Three Months Ended March 31, 2010 | Year Ended December 31, 2010 | ||||||||||
| (unaudited) | (unaudited) | |||||||||||
Diluted earnings (loss) per share — as originally reported | $ | 0.22 | $ | (0.03 | ) | $ | (0.58 | ) | ||||
Difference in diluted earnings (loss) per share | (0.37 | ) | (0.17 | ) | (0.14 | ) | ||||||
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| |||||||
Diluted earnings (loss) per share — restated | $ | (0.15 | ) | $ | (0.20 | ) | $ | (0.72 | ) | |||
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| |||||||
For further clarification of the calculation of the diluted earnings (loss) per share in the original filings and these amended filings, the following tables illustrate a reconciliation of the components of the numerator and denominator included in the calculations noted above. (in thousands except share and per share amounts):
| Diluted earnings (loss) per share | Three Months Ended September 30, 2011 | Three Months Ended March 31, 2010 | Year Ended December 31, 2010 | |||||||||
| (unaudited) | (unaudited) | |||||||||||
Numerator | ||||||||||||
As originally reported — Net income (loss) | $ | 9,937 | $ | (772 | ) | $ | (15,618 | ) | ||||
Correction — reflect adjustment for change in fair value of warrant liability | (16,633 | ) | (4,621 | ) | (3,887 | ) | ||||||
|
|
|
|
|
| |||||||
Numerator, as restated | $ | (6,696 | ) | $ | (5,393 | ) | $ | (19,505 | ) | |||
Denominator | ||||||||||||
As originally reported — weighted-average common shares used to compute net income (loss) per share | 44,849,971 | 25,753,405 | 26,888,588 | |||||||||
Remove previously reported effect of dilutive securities: | ||||||||||||
Stock options | (351,696 | ) | — | — | ||||||||
Warrants | (2,337,916 | ) | — | — | ||||||||
Restricted share unit plan | (231,584 | ) | — | — | ||||||||
Add correct effect of dilutive securities: | ||||||||||||
Stock options (1) | — | — | — | |||||||||
Warrants | 2,707,051 | 558,939 | 84,381 | |||||||||
Restricted share unit plan (1) | — | — | — | |||||||||
|
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|
|
|
| |||||||
Denominator, as restated | 44,635,826 | 26,312,344 | 26,972,969 | |||||||||
|
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|
|
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| |||||||
Restated diluted earnings (loss) per share | $ | (0.15 | ) | $ | (0.20 | ) | $ | (0.72 | ) | |||
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| |||||||
| (1) | Since the numerator used to calculate diluted net income (loss) per share was a loss for each of the periods presented, the dilutive effects of stock options and restricted share unit were not included since the effect was anti-dilutive. |
The corrections have no impact on the Company’s consolidated balance sheets, net income or loss, basic earnings (loss) per share, or the consolidated statements of cash flows or stockholders’ equity for any of the above mentioned periods.
Reclassifications
In 2011, the Company reclassified depreciation and amortization expense such that these amounts are no longer presented as a separate line on the statements of operations; instead, these expenses are allocated to research and development, net and general and administrative expenses based on the respective head count. The prior years’ depreciation and amortization expenses were reclassified for consistency with current period presentation. These reclassifications had no effect on reported operating expenses, loss from operations, or net loss.
Depreciation and amortization expense for the years ended December 31, 2011, 2010 and 2009 was $0.46 million, $0.46 million and $0.26 million, respectively. The amounts allocated to research and development, net expenses were $0.35 million, $0.36 million and $0.13 million; and the amounts allocated to general and administrative expenses were $0.11 million, $0.10 million and $0.13 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Basis of consolidation
The Company’s consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries, including Oncothyreon Canada Inc., Biomira Management Inc., ProlX Pharmaceuticals Corporation, Biomira BV and Oncothyreon Luxembourg. All intercompany balances and transactions have been eliminated upon consolidation.
Accounting estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make complex and subjective judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. By their nature, these judgments are subject to an inherent degree of uncertainty and as a consequence actual results may differ from those estimates.
Cash and cash equivalents
Cash equivalents include short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of 90 days or less at the time of purchase. At December 31, 2011, cash and cash equivalents was comprised of $4.8 million in cash, $3.9 million in certificates of deposit and $2.9 million in money market funds. As of
F-9
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
December 31, 2010, cash and cash equivalents was comprised of $4.3 million in cash and $1.2 million in certificates of deposit. The carrying value of cash equivalents approximates their fair value.
Investments
Investments are classified as available-for-sale securities and are carried at market value with unrealized temporary holding gains and losses, where applicable, excluded from net loss and reported in other comprehensive loss and also as a net amount in accumulated other comprehensive loss until realized. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect an other-than-temporary impairment. All asset classes purchased for short-term investment are limited to a final maturity from purchase date of 12 months. The Company’s long-term investments are investment with maturities exceeding 12 months but less than five years. The Company is exposed to credit risk on its cash equivalents, short-term investments and long-term investment in the event of non-performance by counterparties, but does not anticipate such non-performance and mitigates exposure to concentration of credit risk through the nature of its portfolio holdings.
The amortized cost, unrealized gains or losses and estimated fair value of the Company’s cash, cash equivalents and investments for the periods presented are summarized below (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
As of December 31, 2011: | ||||||||||||||||
Cash | $ | 4,841 | $ | — | $ | — | $ | 4,841 | ||||||||
Money market funds | 2,869 | — | — | 2,869 | ||||||||||||
Certificates of deposits | 10,633 | — | — | 10,633 | ||||||||||||
Debt securities of U.S. government agencies | 16,378 | 2 | — | 16,380 | ||||||||||||
Corporate bonds | 31,664 | 20 | — | 31,684 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 66,385 | $ | 22 | $ | — | $ | 66,407 | ||||||||
|
|
|
|
|
|
|
| |||||||||
As of December 31, 2010: | ||||||||||||||||
Cash | $ | 1,509 | $ | — | $ | — | $ | 1,509 | ||||||||
Money market funds | 4,005 | — | — | 4,005 | ||||||||||||
Certificates of deposits | 23,363 | — | — | 23,363 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 28,877 | $ | — | $ | — | $ | 28,877 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Warrants
Warrants issued in connection with the Company’s May 2009 and September 2010 financings are recorded as liabilities as both have the potential for cash settlement upon the occurrence of a fundamental transaction (as defined in the warrant; see “Note 7 — Share Capital”). Changes in the fair value of the warrants are recognized as other income (expense) in the consolidated statements of operations.
Accounts and other receivables
Accounts and other receivables are reviewed whenever circumstances indicate that the carrying amount of the receivable may not be recoverable. At this time, the Company does not deem an allowance to be necessary.
F-10
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
Property and equipment, depreciation and amortization
Property and equipment are recorded at cost and depreciated over their estimated useful lives on a straight-line basis, as follows:
Scientific and office equipment | 5 years | |
Computer software and equipment | 3 years | |
Leasehold improvements and leased equipment | Shorter of useful life or the term of the lease |
Long-lived assets
Long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for impairment, the Company first compares the undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its estimated fair value. Fair value is determined by management through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. There were no impairment charges recorded for any of the periods presented.
Goodwill
Goodwill is carried at cost and is not amortized, but is reviewed annually for impairment on October 1 of each year or more frequently when events or changes in circumstances indicate that the asset may be impaired. In the event that the carrying value of goodwill exceeds its fair value, an impairment loss would be recognized. There were no impairment charges recorded for any of the periods presented.
Deferred rent
Rent expense is recognized on a straight-line basis over the term of the lease. Lease incentives, including rent holidays provided by lessors, and rent escalation provisions are accrued as deferred rent.
Revenue recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collection is reasonably assured. In accordance with ASC Topic 605-25, the Company evaluates revenue from arrangements with multiple deliverables to determine whether the deliverables represent one or more units of accounting. Revenue arrangements entered into, or materially modified, through December 31, 2010 have been accounted for in accordance with accounting standards that state that a delivered item is considered a separate unit of accounting if the following separation criteria are met: (1) the delivered item has stand-alone value to the customer; (2) there is objective and reliable evidence of the fair value of any undelivered items; and (3) if the arrangement includes a general right of return relative to the delivered item, the delivery of undelivered items is probable and substantially in the Company’s control. The relevant revenue recognition accounting policy is then applied to each unit of accounting.
Effective January 1, 2011, the Company adopted new accounting guidance on a prospective basis and will no longer rely on objective and reliable evidence of the fair value of the elements in a revenue arrangement in order to separate a deliverable into a separate unit of accounting. The Company will instead use a selling price hierarchy for determining the
F-11
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
selling price of a deliverable, which will be used to determine the allocation of consideration to each unit of accounting under an arrangement. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. This new guidance will be applied by the Company to revenue arrangements entered into, or materially modified, beginning January 1, 2011. As of December 31, 2011, the Company had not applied these provisions to any of our revenue arrangements as the Company had not entered into any new, or materially modified any of its existing, revenue arrangements in 2011.
The Company has historically generated revenue from the following activities:
Licensing revenue from collaborative and license agreements. Revenue from collaborative and license agreements consists of (1) up-front cash payments for initial technology access or licensing fees and (2) contingent payments triggered by the occurrence of specified events or other contingencies derived from the Company’s collaborative and license agreements. Royalties from the commercial sale of products derived from the Company’s collaborative and license agreements are reported as licensing, royalties, and other revenue.
If the Company has continuing obligations under a collaborative agreement and the deliverables within the collaboration cannot be separated into their own respective units of accounting, the Company utilizes a Multiple Attribution Model for revenue recognition as the revenue related to each deliverable within the arrangement should be recognized upon the culmination of the separate earnings processes and in such a manner that the accounting matches the economic substance of the deliverables included in the unit of accounting. As such, up-front cash payments are recorded as deferred revenue and recognized as revenue ratably over the period of performance under the applicable agreement.
Effective January 1, 2011, the Company adopted new accounting guidance for recognizing milestone revenue, which will be applied on a prospective basis. Consideration that is contingent upon achievement of a milestone for research or development deliverables will be recognized in its entirety as revenue in the period in which the milestone is achieved if the consideration earned from the achievement of a milestone meets all the criteria for the milestone to be considered substantive at the inception of the arrangement, such that it: (i) is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (ii) relates solely to past performance; and (iii) is reasonable relative to all deliverables and payment terms in the arrangement.
The provisions of the new milestone revenue guidance apply only to those milestones payable for research or development activities and do not apply to contingent payments for which payment is either contingent solely upon the passage of time or the result of a collaborative partner’s performance. The Company’s existing collaboration agreements entail no performance obligations on the part of the Company, and milestone payments would be earned based on the collaborative partner’s performance; therefore, milestone payments under existing agreements are considered contingent payments to be accounted for outside of the new milestone revenue guidance. The Company will recognize contingent payments as revenue upon the occurrence of the specified events, assuming the payments are deemed collectible at that time.
F-12
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
Licensing, royalties, and other revenue. Licensing, royalties, and other revenue consists of revenue from sales of compounds and processes from patented technologies to third parties and royalties received pursuant to collaborative agreements and license agreements. Royalties based on reported sales, if any, of licensed products are recognized based on the terms of the applicable agreement when and if reported sales are reliably measurable and collectability is reasonably assured.
If the Company has no continuing obligations under a license agreement, or a license deliverable qualifies as a separate unit of accounting included in a collaborative arrangement, license payments that are allocated to the license deliverable are recognized as revenue upon commencement of the license term and contingent payments are recognized as revenue upon the occurrence of the events or contingencies provided for in such agreement, assuming collectability is reasonably assured.
Government grants
Funds received pursuant to government grants are is recognized when the related research and development expenditures that qualify for grants are made and the Company has complied with the conditions for the receipt of the government grants. Government grants are recorded as other income or applied to reduce eligible expenses incurred, depending upon the circumstances surrounding timing of grant funding. Prior to 2010, the Company credited funding received from government research and development grants against research and development expenses since the grants were received in the same period as expenditures were incurred. In 2010, the Company was awarded a federal grant for $0.5 million under the U.S. Government’s Qualifying Therapeutic Discovery Project (“QTDP”) program for expenses incurred in 2009 and 2010, and recorded the funding received as other income in 2010.
Research and development costs
Research and development expenses include personnel and facility related expenses, which includes depreciation and amortization, outside contract services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Research and development costs are expensed as incurred. In instances where the Company enters into agreements with third parties for clinical trials, manufacturing and process development, research and other consulting activities, costs are expensed as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables.
The Company’s accruals for clinical trials are based on estimates of the services received and pursuant to contracts with numerous clinical trial centers and clinical research organizations. In the normal course of business, the Company contracts with third parties to perform various clinical trial activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful accrual of patients, and the completion of portions of the clinical trial or similar conditions. The objective of the Company’s accrual policy is to match the recording of expenses in its consolidated financial statements to the actual services received. As such, expense accruals related to clinical trials are recognized based on its estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract.
F-13
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
Foreign exchange
The Company’s consolidated financial statements are reported in U.S. dollars.
Effective January 1, 2008, the Company changed its functional currency to the U.S. dollar from the Canadian dollar in order to more accurately represent the currency of the economic environment in which it operates as a result of the Company’s redomicile into the United States effective December 10, 2007 (See “Note 1 — Description of Business”) and increasing U.S. dollar denominated revenues and expenditures. For periods subsequent to January 1, 2008, the Company’s foreign subsidiaries are considered to be integrated foreign operations and, accordingly, have the same functional currency as the parent, the U.S. dollar.
Accumulated other comprehensive loss consists of cumulative translation adjustments related to the consolidation of the Company’s investments in foreign subsidiaries arising in periods prior to the change in functional currency. Should the Company liquidate or substantially liquidate its investments in its foreign subsidiaries, the Company would be required to recognize the related cumulative translation adjustments pertaining to the liquidated or substantially liquidated subsidiaries, as a charge to earnings in the Company’s consolidated statement of operations and comprehensive income (loss).
The Company does not utilize derivative instruments. At December 31, 2011, the Company had a minimal amount of Canadian dollar denominated cash and cash equivalents.
Earnings per share
Basic net income or loss per share is calculated by dividing net income or loss by the weighted average number of shares outstanding for the period. Diluted net income or loss per share is calculated by adjusting the numerator and denominator of the basic net income or loss per share calculation for the effects of all potentially dilutive common shares. Potential dilutive shares of the Company’s common stock include stock options, restricted shares units, warrants and shares under the Company’s 2010 Employee Stock Purchase Plan. For the years ended December 31, 2011, 2010 and 2009, 8,507,309, 6,158,520 (restated) and 5,861,841 shares, respectively, were excluded from the calculations of diluted net loss per share, since the effect of these shares, potentially issuable upon the exercise or conversion, was anti-dilutive.
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the carrying amounts and tax bases of assets and liabilities and losses carried forward and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.
The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company does not believe any uncertain tax positions currently pending will have a material adverse effect on its consolidated financial statements nor expects any
F-14
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
material change in its position in the next 12 months. Penalties and interest, of which there are none, would be reflected in income tax expense. Tax years are open to the extent the Company has net operating loss carryforwards available to be utilized currently.
Accumulated other comprehensive loss
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income or loss includes unrealized gains and losses on its available-for-sale short-term and long-term investments. In addition to the unrealized gains and losses on investments, accumulated other comprehensive income (loss) consists of foreign currency translation adjustments which arose from the conversion of the Canadian dollar functional currency consolidated financial statements to the U.S. dollar reporting currency consolidated financial statements prior to January 1, 2008. As of December 31, 2011, our accumulated other comprehensive income (loss) consist primarily of foreign currency translation adjustment. The cumulative translation adjustment balance as of December 31, 2011, 2010 and 2009 was approximately $5.1 million each respectively.
Stock-based compensation
The Company recognizes in the statements of operations the estimated grant date fair value of share-based compensation awards granted to employees over the requisite service period. Stock-based compensation expense in the consolidated statements of operations is recorded on a straight-line basis over the requisite service period for the entire award, which is generally the vesting period, with the offset to additional paid-in capital. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company sponsors a Restricted Share Unit (“RSU”) Plan for non-employee directors that was established in 2005. An amendment to the RSU Plan in October 2011 requires the Company to settle 25% of the shares of its common stock otherwise deliverable in connection with the vesting of any RSU and deliver to each non-employee director an amount in cash equal to the fair market value of the shares on the vesting date to satisfy the non-employee directors’ tax obligations. This amendment resulted in the RSUs being classified as a liability. The outstanding RSU awards are required to be remeasured at each reporting date, or until settlement of the award, and any changes in valuation are recorded as compensation expense for the period. The Company uses the closing share price of our shares in The NASDAQ Global Market at the reporting or settlement date to determine the fair value of RSUs.
Segment information
The Company operates in a single business segment, — research and development of therapeutic products for the treatment of cancer.
Recent accounting pronouncements
In September 2011, FASB issued new guidance on testing goodwill for impairment. The new guidance simplifies how an entity tests goodwill for impairment. It allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The new guidance will be effective for annual and interim goodwill impairment tests performed for
F-15
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
fiscal years beginning after December 15, 2011. The adoption of this new accounting pronouncement on January 1, 2012 had no impact on our financial position or results of operations.
In June 2011, FASB and the International Accounting Standards Board (“IASB”) updated the guidance on presentation of items within other comprehensive income. In this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company adopted these standards using the two separate but consecutive statements approach on January 1, 2012 for all periods presented. The amendments in this update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this standard in Q1 2012 and applied it retrospectively to this Amendment No.1 of the 2011 Annual Report on Form 10-K. The adoption of this standard only impacts the presentation of the Company’s financial statements, and not the results of operations or financial position of the Company.
In May 2011, FASB and the IASB published converged standards on fair value measurement and disclosure. The standards do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The standards clarified some existing rules and provided guidance for additional disclosures: (1) the concepts of “highest and best use” and “valuation premise” in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities; (2) when measuring the fair value of instruments classified in equity (e.g., equity issued in a business combination), the entity should measure it from the perspective of a market participant that holds that instrument as an asset; and (3) quantitative information about the unobservable inputs used in Level 3 measurements should be included. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this standard is only expected to impact the presentation of the Company’s financial statements, and not the results of operations or financial position of the Company.
3. FAIR VALUE MEASUREMENTS
The Company measures at fair value certain financial assets and liabilities in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs which reflect the Company’s market assumptions when measuring fair value. There are three levels of inputs that may be used to measure fair value:
| • | Level 1 — quoted prices in active markets for identical assets or liabilities; |
| • | Level 2 — observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
F-16
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
| • | Level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The Company’s financial assets and liabilities measured at fair value consisted of the following as of December 31, 2011 and 2010 (in thousands):
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 2,869 | $ | — | $ | — | $ | 2,869 | $ | 4,005 | $ | — | $ | — | $ | 4,005 | ||||||||||||||||
Certificates of deposits | — | 10,633 | — | 10,633 | — | 23,363 | — | 23,363 | ||||||||||||||||||||||||
Debt securities of U.S. government agencies | — | 16,380 | — | 16,380 | — | — | — | — | ||||||||||||||||||||||||
Corporate debt securities and commercial paper | — | 31,684 | — | 31,684 | — | — | — | — | ||||||||||||||||||||||||
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| $ | 2,869 | $ | 58,697 | $ | — | $ | 61,566 | $ | 4,005 | $ | 23,363 | $ | — | $ | 27,368 | |||||||||||||||||
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Financial Liability: | ||||||||||||||||||||||||||||||||
Restricted Share Units | $ | 1,088 | $ | — | $ | — | $ | 1,088 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Warrants | — | — | 28,771 | 28,771 | — | — | 12,983 | 12,983 | ||||||||||||||||||||||||
If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data. These investments are included in Level 2 and consist of certificates of deposits denominated at or below $250,000 issued by banks insured by the Federal Deposit Insurance Corporation.
There were no transfers between Level 1 and Level 2 during 2011. The change in fair value of warrants classified in Level 3, in the amount of $17.6 million, is recorded as other expense in the condensed consolidated statements of operations for the year ended December 31, 2011.
F-17
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
The estimated fair value of warrants accounted for as liabilities was determined on the issuance date and warrants are subsequently marked to market at each financial reporting date. The change in fair value of the warrants is recorded in the statement of operations as a gain (loss) estimated using the Black-Scholes option-pricing model with the following inputs:
| As of December 31, 2011 | ||||||||
| May 2009 Warrants | September 2010 Warrants | |||||||
Exercise price | $ | 3.74 | $ | 4.24 | ||||
Market value of stock at end of period | $ | 7.58 | $ | 7.58 | ||||
Expected dividend rate | 0.0 | % | 0.0 | % | ||||
Expected volatility | 63.4 | % | 80.4 | % | ||||
Risk-free interest rate | 0.3 | % | 0.5 | % | ||||
Expected life (in years) | 2.40 | 3.75 | ||||||
| As of December 31, 2010 | ||||||||
| May 2009 Warrants | September 2010 Warrants | |||||||
Exercise price | $ | 3.74 | $ | 4.24 | ||||
Market value of stock at end of period | $ | 3.26 | $ | 3.26 | ||||
Expected dividend rate | 0.0 | % | 0.0 | % | ||||
Expected volatility | 102.7 | % | 92.2 | % | ||||
Risk-free interest rate | 1.2 | % | 1.9 | % | ||||
Expected life (in years) | 3.40 | 4.75 | ||||||
The table below shows the change in fair value of the warrant liability during the year ended December 31, 2011. The change includes warrants that were valued on their exercise dates and reclassified from liability to equity upon issuance of common shares.
(in thousands):
Warrant liability as of January 1, 2011 | $ | 12,983 | ||
Change in fair value for the twelve months ended December 31, 2011 | 17,631 | |||
Reclassified to equity upon exercise for the twelve months ended December 31, 2011 | (1,843 | ) | ||
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Balance as of December 31, 2011 | $ | 28,771 | ||
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On December 31, 2010, the Company changed the way it estimates volatility when determining the fair value of the warrants using the Black-Scholes model. Prior to December 31, 2010, the volatility was calculated using the Company’s historical stock price, and discounting it by 15% to give effect to estimated lowered volatility expected by warrant holders. Before estimating the fair value of the warrants on December 31, 2010, the Company commissioned a study on volatility, and determined that the most appropriate volatility to use as of December 31, 2010, and for the foreseeable future, is the unadjusted volatility calculated using the Company’s historical stock price.
4. NOTES RECEIVABLE, EMPLOYEES
Pursuant to the acquisition of ProlX, the Company advanced cash of $0.3 million to certain employees of ProlX and a former director of ProlX. The principal amount of the loans, together with interest accrued at the rate of 5.0% per annum to the date of payment, was
F-18
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
due and payable on April 28, 2009. The former director repaid his loan in 2008 and one former employee repaid $38,635 of interest and principal during 2009 and $39,200 was forgiven in 2010 subject to meeting certain conditions outlined in a subsequent consulting agreement. The original due date for the remaining loan was extended to April 28, 2011. Interest income of $7,000 and $9,000 related to these loans has been recorded in the consolidated statements of operations in 2010 and 2009, respectively.
Notes receivable due from employees is reviewed whenever circumstances indicate that the carrying amount of the receivable may not be recoverable. For the year ended December 31, 2010, the Company intended to forgive the remaining loan in 2011 and therefore recorded an allowance of $153,720 for the remaining balance. During 2011, the Company wrote off the notes receivable balance of $153,720.
5. PROPERTY AND EQUIPMENT
The table below outlines the cost, accumulated depreciation and amortization and net carrying value of the Company’s property and equipment for the years ended December 31, 2011 and 2010:
| 2011 | ||||||||||||
| Cost | Accumulated Depreciation and Amortization | Net Carrying Value | ||||||||||
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Leasehold improvements | $ | 1,574 | $ | 412 | $ | 1,162 | ||||||
Scientific equipment | 1,373 | 927 | 446 | |||||||||
Office equipment | 34 | 13 | 21 | |||||||||
Computer software and equipment | 319 | 305 | 14 | |||||||||
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| $ | 3,300 | $ | 1,657 | $ | 1,643 | |||||||
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| Cost | Accumulated Depreciation and Amortization | Net Carrying Value | ||||||||||
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Leasehold improvements | $ | 1,510 | $ | 227 | $ | 1,283 | ||||||
Scientific equipment | 1,321 | 702 | 619 | |||||||||
Office equipment | 27 | 8 | 19 | |||||||||
Computer software and equipment | 300 | 263 | 37 | |||||||||
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| $ | 3,158 | $ | 1,200 | $ | 1,958 | |||||||
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Depreciation and leasehold improvement amortization expense for the years ended December 31, 2011, 2010 and 2009 was $0.5 million, $0.5 million and $0.3 million, respectively.
6. NOTES PAYABLE
Notes payable assumed in connection with the acquisition of ProlX
In connection with the acquisition of ProlX, the Company assumed two loan agreements under which approximately $199,000 was outstanding at December 31, 2010. The Company is required to repay such loans if it commercializes or sells the product that was the subject
F-19
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
of such agreement. In February 2011, the Company provided notice to the counterparty to such agreements that the Company does not intend to commercialize such product. As a result, the agreements were terminated March 2011 and the Company does not expect to incur any repayment obligations of such loans; therefore, the note payable was derecognized in March 2011 and $199,000 was recognized as other income.
Notes payable — General Electric Capital Corporation
On February 8, 2011, the Company entered into a Loan and Security Agreement with General Electric Capital Corporation (“GECC”, and together with the other financial institutions that may become parties to the Loan and Security Agreement, the “Lenders”), pursuant to which the Lenders agreed to make a term loan in an aggregate principal amount of $5.0 million (the “Term Loan”), subject to the terms and conditions set forth in the Term Loan. On February 8, 2011, the Lenders funded a Term Loan in the principal amount of $5.0 million on a total facility of $12.5 million. The Term Loan accrues interest at a fixed rate of 10.64% per annum and is payable over a 42-month period. The Company is required to make monthly payments of interest only, through November 1, 2011, and is required to repay the principal amount of the Term Loan over a period of 32 consecutive equal monthly installments of principal of $151,515 plus accrued interest, commencing on December 1, 2011. At maturity of the Term Loan, the Company is also required to make a final payment equal to 1.5% ($75,000) of the Term Loan, which has been treated as a discount to the loan. The Company may incur additional fees if it elects to prepay the Term Loan. In connection with the Term Loan, on February 8, 2011, the Company issued to an affiliate of GECC a warrant to purchase up to an aggregate of 48,701 shares of common stock at an exercise price of $3.08 per share. This warrant, classified as equity, is immediately exercisable and will expire on February 8, 2018.
The Company allocated the aggregate proceeds of the Term Loan between the warrant and the debt obligations based on their relative fair values. The fair value of the warrant issued to the affiliate of GECC was calculated utilizing the Black-Scholes option-pricing model. The Company is amortizing the relative fair value of the warrants of $114,447 together with the final payment of $75,000 as a discount over the term of the loan through maturity date using the effective interest method, resulting in a total effective interest rate of 14.89%. As of December 31, 2011, the unamortized Term Loan discount was $116,080. If the maturity of the debt is accelerated due to an event of default, then the amortization would also be accelerated.
The loan agreement with GECC contains certain restrictive covenants that limit or restrict the Company’s ability to incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, or repurchase stock. The loan agreement also requires that the Company have 12 months of unrestricted cash and cash equivalents (as calculated in the loan agreement) as of each December 31 during the term of the loan agreement. As security for its obligations under the Loan agreement, the Company granted the Lenders a lien on substantially all of its assets, excluding intellectual property. The Company was in compliance with its financial and non-financial covenants as of December 31, 2011.
Deferred financing costs of $196,039 were capitalized as other assets and are being amortized to interest expense over the term of the Term Loan. As of December 31, 2011, the unamortized Term Loan deferred financing costs were $120,119.
F-20
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
As of December 31, 2011, the future contractual principal payments on the Term Loan including the final payment fee are as follows (in thousands):
2012 | $ | 1,818 | ||
2013 | 1,818 | |||
2014 | 1,288 | |||
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Total | $ | 4,924 | ||
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A reconciliation of the face value of the Term Loan to the carrying value of the Term Loan as of December 31, 2011 is as follows (in thousands):
Total Term Loan, including final payment fee (face value) | $ | 4,924 | ||
Less: Term Loan discount balance | (116 | ) | ||
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Total Term Loan carrying value | 4,808 | |||
Less: current portion of notes payable | (1,749 | ) | ||
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Long-term notes payable | $ | 3,059 | ||
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Interest expense for the year ended December 31, 2011, all of which related to the Term Loan, was $631,132. No interest expense was incurred for the years ended December 31, 2010 and 2009. Interest expense is calculated using the effective interest method and includes non-cash amortization of debt discount and capitalized loan fees in the amount of $149,287 for the year ended December 31, 2011.
7. SHARE CAPITAL
Class UA preferred stock
As of December 31, 2011 and 2010, the Company had 12,500 shares of Class UA preferred stock authorized, issued and outstanding. The Class UA preferred stock has the following rights, privileges, and limitations:
Voting. Each share of Class UA preferred stock will not be entitled to receive notice of, or to attend and vote at, any Stockholder meeting unless the meeting is called to consider any matter in respect of which the holders of the shares of Class UA preferred stock would be entitled to vote separately as a class, in which case the holders of the shares of Class UA preferred stock shall be entitled to receive notice of and to attend and vote at such meeting. Amendments to the certificate of incorporation of Oncothyreon that would increase or decrease the par value of the Class UA preferred stock or alter or change the powers, preferences or special rights of the Class UA preferred stock so as to affect them adversely would require the approval of the holders of the Class UA preferred stock.
Conversion. The Class UA preferred stock is not convertible into shares of any other class of Oncothyreon capital stock.
Dividends. The holders of the shares of Class UA preferred stock will not be entitled to receive dividends.
Liquidation preference. In the event of any liquidation, dissolution or winding up of the Company, the holders of the Class UA preferred stock will be entitled to receive, in preference to the holders of the Company’s common stock, an amount equal to the lesser of (1) 20% of the after tax profits (“net profits”), determined in accordance with Canadian generally accepted accounting principles, where relevant, consistently applied, for the period commencing at the end of the last completed financial year of the Company and
F-21
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
ending on the date of the distribution of assets of the Company to its stockholders together with 20% of the net profits of the Company for the last completed financial year and (2) CDN $100 per share.
Holders of Class UA preferred stock are entitled to mandatory redemption of their shares if the Company realizes “net profits” in any year. For this purpose, “net profits . . . means the after tax profits determined in accordance with generally accepted accounting principles, where relevant, consistently applied.” The Company has taken the position that this applies to Canadian GAAP and accordingly there have been no redemptions to date.
Redemption. The Company may, at its option and subject to the requirements of applicable law, redeem at any time the whole or from time to time any part of the then-outstanding shares of Class UA preferred stock for CDN $100 per share. The Company is required each year to redeem at CDN $100 per share that number of shares of Class UA preferred stock as is determined by dividing 20% of the net profits by CDN $100.
The difference between the redemption value and the book value of the Class UA preferred stock will be recorded at the time that the fair value of the shares increases to redemption value based on the Company becoming profitable as measured using Canadian GAAP.
Preferred stock
As of December 31, 2011 and 2010, the Company had 10,000,000 shares of undesignated preferred stock, $0.0001 par value per share, authorized, with none outstanding. Shares of preferred stock may be issued in one or more series from time to time by the Board of Directors of the Company, and the board of directors is expressly authorized to fix by resolution or resolutions the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of the shares of each series of preferred stock. Subject to the determination of the board of directors of the Company, the preferred stock would generally have preferences over common stock with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding up of the Company.
Common stock
As of December 31, 2011, the Company had 100,000,000 shares of common stock, $0.0001 par value per share, authorized. The holders of common stock are entitled to receive such dividends or distributions as are lawfully declared on the Company’s common stock, to have notice of any authorized meeting of stockholders, and to exercise one vote for each share of common stock on all matters which are properly submitted to a vote of the Company’s stockholders. As a Delaware corporation, the Company is subject to statutory limitations on the declaration and payment of dividends. In the event of a liquidation, dissolution or winding up of the Company, holders of common stock have the right to a ratable portion of assets remaining after satisfaction in full of the prior rights of creditors, including holders of the Company’s indebtedness, all liabilities and the aggregate liquidation preferences of any outstanding shares of preferred stock. The holders of common stock have no conversion, redemption, preemptive or cumulative voting rights.
Amounts pertaining to issuances of common stock are classified as common stock on the consolidated balance sheet, approximately $4,360 and $3,000 of which represents par value of common stock as of December 31, 2011 and 2010 respectively. Additional paid-in capital primarily relates to amounts for share-based compensation (see “Note 8 — Stock-based Compensation”).
F-22
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
Equity Financings and Warrants
On May 26, 2009, the Company closed the sale of 3,878,993 shares of its common stock and warrants to purchase an additional 2,909,244 shares of common stock for gross proceeds of approximately $11.1 million. The purchase price per unit, consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock, was $2.85. The exercise price of the warrants is $3.92 per share. The warrants are exercisable at any time on or prior to May 26, 2014. Upon exercise, holders of the warrants are required to deliver the aggregate exercise price with respect to the number of underlying shares; provided that if a registration statement is not available with respect to the issuance of such shares upon exercise, under certain circumstances, holders may exercise warrants on a ��net” basis. If holders exercise warrants on a “net” basis, the Company would not receive any cash in respect of the shares issued upon exercise. At the election of the warrant holder, upon certain transactions, including a merger, tender offer or sale of substantially all of the assets of the Company, the holder may receive cash in exchange for the warrant, in an amount determined by application of the Black-Scholes option valuation model.
The warrants issued in May 2009 were subject to certain adjustments if the Company issued or sold shares below the original exercise price. A September 2010 equity financing, discussed below, triggered such adjustment provisions and, as a result, the aggregate number of shares underlying such unexercised warrants increased by 135,600 to 2,953,344 as of December 31, 2010 and the per share exercise price decreased from $3.92 to $3.74. Pursuant to the terms of the warrant agreement, the terms of the warrants issued in May 2009 will not be further adjusted for any future transactions. During 2011, 262,101 of the May 2009 warrants were exercised. As of December 31, 2011, there were 2,691,241 outstanding warrants from the May 2009 financing.
On August 7, 2009, the Company closed the sale of 2,280,502 shares of its common stock and warrants to purchase an additional 684,150 shares of common stock for gross proceeds of approximately $15.0 million. The purchase price per unit, consisting of one share of common stock and a warrant to purchase 0.30 shares of common stock, was $6.58. The exercise price of the warrants is $6.58 per share. The warrants were exercisable at any time on or prior to August 7, 2011. During 2011, 140,000 of the August 2009 warrants were exercised and 544,150 warrants expired.
On September 28, 2010, the Company closed the sale of 4,242,870 units, with each unit consisting of one share of Company common stock and a warrant to purchase 0.75 shares of common stock, at $3.50 per unit for proceeds of approximately $13.6 million, net of $1.2 million in issuance costs associated with the offering. A total of 3,182,147 shares of common stock are issuable upon the exercise of such warrants. The exercise price of the warrants is $4.24 per share. These warrants are exercisable at any time on or after the six-month anniversary of the closing through and including the five year anniversary of the earlier of (i) the date on which the shares of common stock underlying the warrants may be freely resold pursuant to a resale registration statement and (ii) the date on which the shares of common stock underlying the warrants may be sold under Rule 144, promulgated under the Securities Act of 1933, as amended, without any restriction or limitation and without the requirement to be in compliance with Rule 144(c)(1). Upon exercise, holders of the warrants are required to deliver an executed exercise notice, the aggregate exercise price with respect to the number of underlying shares as to which the warrant is being exercised and, if the warrant is exercised in full, the original warrant. If, on the date the exercise notice is delivered to the Company, there is not an effective registration statement registering, or no current prospectus available for the resale by the holder of the shares
F-23
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
underlying the warrant, then the holder may exercise the warrants on a “net” basis. If a holder exercises the warrant on a “net” basis, the Company would not receive any cash in respect of the shares issued upon exercise. By delivery to the Company of a written request before the 30th day after the consummation of certain transactions, including a merger, tender offer or sale of substantially all of the assets of the Company, a holder may receive cash in exchange for the warrant, in an amount determined by application of the Black-Scholes option valuation model to the unexercised portion of the warrant on the date of such transaction. As of December 31, 2011, there were 3,182,147 outstanding warrants from the September 2010 financing.
The warrants issued in May 2009 and September 2010 have been classified as liabilities, as opposed to equity, due to the potential cash settlement upon the occurrence of certain transactions as noted above.
In February 2011, the Company issued 48,701 warrants, which have been classified as equity, to purchase shares of common stock in connection with a Loan and Security Agreement entered into with GECC. For additional information regarding the Company’s term loan with GECC, see “Note 6 — Notes Payable” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012.
A summary of outstanding warrants as of December 31, 2011 and 2010 and changes during the years then ended is presented below (in thousands).
| 2011 | 2010 | |||||||
| Shares Underlying Warrants | Shares Underlying Warrants | |||||||
Balance, beginning of year | 6,819,641 | 3,838,918 | ||||||
Equity placements | — | 3,317,747 | ||||||
Warrants issued with term loan | 48,701 | — | ||||||
Exercise of warrants | (402,103 | ) | — | |||||
Expiration of warrants | (544,150 | ) | (337,024 | ) | ||||
|
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| |||||
Balance, end of year | 5,922,089 | 6,819,641 | ||||||
|
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| |||||
The following table summarizes information regarding warrants outstanding at December 31, 2011:
Exercise Prices | Shares Underlying Outstanding Warrants | Expiry Date | ||||||
$3.08 | 48,701 | February 8, 2018 | ||||||
$3.74 | 2,691,241 | May 26, 2014 | ||||||
$4.24 | 3,182,147 | September 28, 2015 | ||||||
|
| |||||||
| 5,922,089 | ||||||||
|
| |||||||
| For the Years Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
Shares underlying warrants outstanding classified as liabilities | 5,873,388 | 6,135,491 | ||||||
Shares underlying warrants outstanding classified as equity | 48,701 | 684,150 | ||||||
F-24
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
On May 4, 2011, the Company closed an underwritten public offering of 11,500,000 shares of its common stock at a price to the public of $4.00 per share for gross proceeds of $46.0 million. The net proceeds from the sale of the shares, after deducting the underwriters’ discounts and other estimated offering expenses payable were approximately $43.1 million.
On October 4, 2011, the Company sold an aggregate of 639,071 shares of its common stock pursuant to the Company’s committed equity line financing facility, at a per share purchase price of approximately $6.43 resulting in aggregate proceeds of $4.1 million. The per share purchase price was established under the financing facility by reference to the volume weighted average prices of the Company’s common stock on The NASDAQ Global Market during a 10-day pricing period, net a discount of 5% per share. The Company received net proceeds from the sale of these shares of approximately $4.1 million after deducting the Company’s estimated offering expenses of approximately $49,000, including a placement agent fee of $41,000.
On November 10, 2011, the Company sold an aggregate of 805,508 shares of its common stock pursuant to the Company’s committed equity line financing facility, at a per share purchase price of approximately $6.21 resulting in aggregate proceeds of $5.0 million. The per share purchase price was established under the financing facility by reference to the volume weighted average prices of the Company’s common stock on The NASDAQ Global Market during a 10-day pricing period, net a discount of 5% per share. The Company received net proceeds from the sale of these shares of approximately $4.9 million after deducting the Company’s estimated offering expenses of approximately $50,000.
Conversion of restricted share units
Restricted share units of 121,393, 9,498 and 9,920 with a weighted average fair value of $7.47, $8.46 and $7.56 were converted into 121,393, 9,498 and 9,920 shares of common stock during 2011, 2010 and 2009 respectively. Pursuant to an October 2011 amendment to the Company’s RSU plan, the Company withheld 28,271 shares of the 121,393 RSUs, representing 25% of the shares of our common stock otherwise deliverable in connection with the vesting of the RSUs, and the Company delivered to each non-employee director an amount in cash equal to the fair market value of the shares on the vesting date in order to facilitate satisfaction of the non-employee directors’ income tax obligation with respect to the vested RSUs. See “Note 8 Stock-Based Compensation” of the audited financial statements included elsewhere in this Annual Report on Form 10-K/A for the year ended December 31, 2011 filed with the SEC on August 13, 2012 for additional information.
F-25
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
Loss per share
The following is a reconciliation of the numerators and denominators of basic and diluted loss per share computations:
| 2011 | 2010 (Restated) | 2009 | ||||||||||
(in thousands, except share and per share amounts) | ||||||||||||
Numerator: | ||||||||||||
Net loss used to compute net loss per share: | ||||||||||||
Basic | $ | (42,656 | ) | $ | (15,618 | ) | $ | (17,219 | ) | |||
Adjustment for change in fair value of warrant liability | — | (3,887 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Diluted | $ | (42,656 | ) | $ | (19,505 | ) | $ | (17,219 | ) | |||
Denominator: | ||||||||||||
Weighted average shares outstanding used to compute net loss per share: | ||||||||||||
Basic | 38,197,666 | 26,888,588 | 22,739,138 | |||||||||
Adjustment for dilutive effect of warrants | — | 84,381 | — | |||||||||
|
|
|
|
|
| |||||||
Diluted | 38,197,666 | 26,972,969 | 22,739,138 | |||||||||
Net loss per share - basic | $ | (1.12 | ) | $ | (0.58 | ) | $ | (0.76 | ) | |||
|
|
|
|
|
| |||||||
Net loss per share - diluted | $ | (1.12 | ) | $ | (0.72 | )(1) | $ | (0.76 | ) | |||
|
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|
|
|
| |||||||
| (1) | Reflects the effect of the correction of the errors described in “Note 2—Significant Accounting Policies—Restatement.” |
Shares potentially issuable upon the exercise or conversion of director and employee stock options of 2,441,725, 2,075,025 and 1,836,657; non-employee director restricted share units of 143,495, 217,198 and 186,266; and warrants of 5,922,089, 3,866,297 (restated) and 3,838,918 have been excluded from the calculation of diluted loss per share in the years ended December 31, 2011, 2010 and 2009 respectively because their effect was anti-dilutive.
For all periods presented, shares contingently issuable in connection with the May 2, 2001 Merck KGaA agreement (discussed below), contingently issuable shares in connection with the October 30, 2006 ProlX acquisition, have been excluded from the calculation of diluted (loss) per share because the effect would have been anti-dilutive.
In May 2001, under the terms of a common stock purchase agreement, the Company issued to Merck KGaA 318,702 shares of Company common stock for proceeds of $15.0 million net of issuance costs of $9,000. Upon the first submission of a biologics license application, or BLA for Stimuvax, if any, the Company is required to sell and Merck KGaA is required to purchase from the Company a number of shares of Company common stock equal to (1) $1.5 million divided by (2) 115% of the 90-day weighted average per share price of such shares immediately prior to such submission date. During periods presented, no additional common shares were issued to Merck KGaA under such agreement.
8. STOCK-BASED COMPENSATION
Stock option plan
The Company sponsors a stock option plan (the “Option Plan”) under which a maximum fixed reloading percentage of 10% of the issued and outstanding common shares of the Company may be granted to employees, directors, and service providers. Prior to April 1, 2008, options were granted with a per share exercise price, in Canadian dollars, equal to the closing market price of the Company’s shares of common stock on the Toronto Stock Exchange on the date immediately preceding the date of the grant. After April 1, 2008, options were granted with a per share exercise price, in U.S. dollars, equal to the closing price of the Company’s shares of common stock on The NASDAQ Global Market on the date of grant. Canadian dollar amounts reflected in the tables below, which approximates their U.S. dollar equivalents as differences between the U.S. dollar and Canadian dollar
F-26
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
exchange rates for the periods reflected below are not material. In general, options granted under the Option Plan begin to vest after one year from the date of the grant, are exercisable in equal amounts over four years on the anniversary date of the grant, and expire eight years following the date of grant. The current maximum number of shares of common stock reserved for issuance under the Option Plan is 4,361,310. As of December 31, 2011, 1,919,585 shares of common stock remain available for future grant under the Option Plan.
A summary of the status of the Option Plan as of December 31, 2011, and changes during such year is presented below. As described above, prior to April 1, 2008, exercise prices were denominated in Canadian dollars and in U.S. dollars thereafter. The weighted average exercise prices listed below are in their respective dollar denominations.
| 2011 | ||||||||
| Stock Options | Weighted Average Exercise Price | |||||||
Outstanding, beginning of year $CDN | 815,275 | $ | 8.24 | |||||
Outstanding, beginning of year $US | 1,259,750 | 3.71 | ||||||
Granted $US | 426,250 | 6.78 | ||||||
Exercised $US | (12,708 | ) | 3.12 | |||||
Forfeited $US | (1,250 | ) | 3.08 | |||||
Expired $CDN | (45,592 | ) | 11.17 | |||||
Balance, end of the year $CDN | 769,683 | 8.07 | ||||||
Balance, end of the year $US | 1,672,042 | 4.50 | ||||||
Options exercisable, end of year $CDN | 768,558 | 8.07 | ||||||
Options exercisable, end of year $US | 540,323 | $ | 3.78 | |||||
As of December 31, 2011, there were 1,601,104 U.S. dollar denominated options vested and expected to vest with a weighted-average exercise price of $4.48, a weighted-average remaining contractual term of 6.50 years and an aggregate intrinsic value of $5.0 million. For the same period, there were 769,683 Canadian dollar denominated options vested and expected to vest with a weighted-average exercise price of CDN $8.07, a weighted-average remaining contractual term of 2.64 years and an aggregate intrinsic value of zero.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for all options that were in-the-money at December 31, 2011. The aggregate intrinsic value at December 31, 2011 for options outstanding was $5.2 million and for options exercisable was $2.1 million. 12,708 options were exercised in 2011 with aggregate intrinsic value of $0.03 million. The aggregate intrinsic value of options exercised under the Option Plan was immaterial during 2010 and 2009.
There were 12,708, 2,500 and 250 stock options exercised in 2011, 2010 and 2009, respectively. As of December 31, 2011, there were 1,066,696 exercisable, in-the-money options based on the Company’s closing share price of $7.58 on The NASDAQ Global Market.
F-27
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
The following tables summarize information on stock options outstanding and exercisable at December 31, 2011. The range of exercise prices and weighted average exercise prices are listed in their respective dollar denominations.
| Stock Options Outstanding | Stock Options Exercisable | |||||||||||||||||||||||||||
Range of Exercise Prices ($CDN per share) | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | ||||||||||||||||||||||
$4.60 | — | 7.50 | 471,665 | 2.71 | $ | 7.33 | 470,540 | 2.70 | $ | 7.34 | ||||||||||||||||||
7.51 | — | 10.00 | 234,173 | 3.05 | 8.09 | 234,173 | 3.05 | 8.09 | ||||||||||||||||||||
10.01 | — | 16.02 | 63,845 | 0.60 | 13.44 | 63,845 | 0.60 | 13.44 | ||||||||||||||||||||
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| 769,683 | 2.64 | $ | 8.07 | 768,558 | 2.63 | $ | 8.07 | |||||||||||||||||||||
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| |||||||||||||||||||||||||
Range of Exercise Prices ($USD per share) | ||||||||||||||||||||||||||||
$1.10 | — | 3.00 | 164,500 | 5.20 | $ | 1.11 | 82,250 | 5.20 | $ | 1.11 | ||||||||||||||||||
3.01 | — | 4.00 | 531,042 | 6.51 | 3.36 | 179,073 | 6.05 | 3.39 | ||||||||||||||||||||
4.01 | — | 5.00 | 534,500 | 5.92 | 4.73 | 265,250 | 5.91 | 4.73 | ||||||||||||||||||||
5.01 | — | 6.56 | 442,000 | 7.76 | 6.85 | 13,750 | 5.62 | 6.45 | ||||||||||||||||||||
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| 1,672,042 | 6.52 | $ | 4.50 | 540,323 | 5.84 | $ | 3.78 | |||||||||||||||||||||
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A summary of the status of non-vested stock options as of December 31, 2011 and changes during 2011 is presented below:
| Number of Non-Vested Options | Weighted Average Grant Date Fair Value $ | |||||||
Balance at December 31, 2010 $CDN | 45,508 | $ | 6.16 | |||||
Balance at December 31, 2010 $US | 1,030,250 | 2.78 | ||||||
Granted $US | 426,250 | 4.76 | ||||||
Vested $CDN | (44,383 | ) | 6.22 | |||||
Vested $US | (323,531 | ) | 2.83 | |||||
Forfeited $US | (1,250 | ) | 2.18 | |||||
Expired $CDN | — | — | ||||||
Expired $USD | — | — | ||||||
Balance at December 31, 2011 $CDN | 1,125 | 3.84 | ||||||
Balance at December 31, 2011 $US | 1,131,719 | $ | 3.52 | |||||
Stock based compensation expense related to the stock option plan of $1.1 million, $0.9 million and $1.0 million was recognized in 2011, 2010 and 2009, respectively. Total compensation cost related to non-vested stock options not yet recognized was $3.1 million as of December 31, 2011, which will be recognized over the next 37 months on a weighted-average basis.
F-28
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
The Company uses the Black-Scholes option pricing model to value options upon grant date, under the following weighted average assumptions:
| 2011 | 2010 | 2009 | ||||||||||
Weighted average grant-date fair value per stock option $US | $ | 4.76 | $ | 2.49 | $ | 3.03 | ||||||
Expected dividend rate | — | — | — | |||||||||
Expected volatility | 82.63 | % | 89.11 | % | 92.46 | % | ||||||
Risk-free interest rate | 1.29 | % | 2.00 | % | 2.47 | % | ||||||
Expected life of options in years | 6.0 | 6.0 | 6.0 | |||||||||
The expected life of options in years is determined utilizing the “simplified” method, which calculates the expected life as the average of the vesting term and the contractual term of the option. The expected volatility is based on the historical volatility of the Company’s common stock for a period equal to the stock option’s expected life. The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.
Stock-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on its historical experience.
Restricted share unit plan
The Company also sponsors a Restricted Share Unit Plan (the “RSU Plan”) for non-employee directors that was established in 2005. The RSU Plan provides for grants to be made from time to time by the Board of Directors or a committee thereof. Each grant will be made in accordance with the RSU Plan and terms specific to that grant and will be converted into one common share of common stock at the end of the grant period (not to exceed five years) without any further consideration payable to the Company in respect thereof. The current maximum number of common shares of the Company reserved for issuance pursuant to the RSU Plan is 466,666. As of December 31, 2011, 200,922 shares of common stock remain available for future grant under the RSU Plan.
Pursuant to an October 2011 amendment to the RSU Plan, the Company is required to settle 25% of the shares of common stock of the Company otherwise deliverable in connection with the vesting of any RSU and deliver to each non-employee director an amount in cash equal to the fair market value of the shares on the vesting date. The amendment is designed to facilitate the satisfaction of the non-employee directors’ U.S. federal income tax obligation with respect to the vested RSUs. This modification resulted in the RSUs being classified as a liability. The outstanding RSU awards are required to be remeasured at each reporting date, or until settlement of the award, and any changes in valuation are recorded as compensation expense for the period.
The company recognized approximately $0.8 million in expense related to the remeasurement of the awards for the year ended December 31, 2011. As of December 31, 2011, the liability related to the unsettled awards was approximately $1.1 million.
F-29
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
A summary of the status of the Company’s RSU Plan as of December 31, 2011, and changes during such year is presented below:
| Restricted Share Units | Weighted Average Fair Value per Unit | |||||||
Outstanding, beginning of year | 217,198 | $ | 3.81 | |||||
Granted | 47,690 | 6.77 | ||||||
Converted | (121,393 | ) | 7.47 | |||||
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Outstanding, end of year | 143,495 | 7.58 | ||||||
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Stock based compensation expense of $1.1 million, $0.1 million and $0.3 were recognized on the RSU Plan in 2011, 2010 and 2009 respectively, representing the fair value of restricted share units granted. During the year ended December 31, 2011, the Company’s RSU compensation expense of $1.1 million included $0.7 million related to the revaluation of outstanding RSUs.
RSUs are converted into common stock upon vesting. Pursuant to the October 2011 amendment to the RSU plan described above, the Company is required to settle 25% of the shares of common stock of the Company otherwise deliverable in connection with the vesting of any RSU and deliver to each non-employee director an amount in cash equal to the fair market value of the shares on the vesting date in order to facilitate the satisfaction of the non-employee directors’ U.S. federal income tax obligation with respect to the vested RSUs.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan (“ESPP”) on June 3, 2010, pursuant to which a total of 900,000 shares of common stock were reserved for sale to employees of the Company. The ESPP is administered by the compensation committee of the board of directors and is open to all eligible employees of the Company. Under the terms of the ESPP, eligible employees may purchase shares of the Company’s common stock at six month intervals during 18-month offering periods through their periodic payroll deductions, which may not exceed 15% of any employee’s compensation and may not exceed a value of $25,000 in any calendar year, at a price not less than the lesser of an amount equal to 85% of the fair market value of the Company’s common stock at the beginning of the offering period or an amount equal to 85% of the fair market value of the Company’s common stock on each purchase date. The maximum aggregate number of shares that may be purchased by each eligible employee during each offering period is 15,000 shares of the Company’s common stock. For the year ended December 31, 2011 and 2010, expense related to this plan was $153,000 and $54,000, respectively. Under the ESPP, the Company issued 70,934 and 1,035 shares to employees at a purchase price of $2.82 and $6.27 per share respectively during 2011. During 2010, the Company issued 20,434 shares to employees at a purchase price of $2.82 per share. There are 807,597 shares reserved for future purchases as of December 31, 2011.
9. COLLABORATIVE AND LICENSE AGREEMENTS
2001 Merck KGaA Agreements
On May 3, 2001, the Company entered into a collaborative arrangement with Merck KGaA to pursue joint global product research, clinical development, and commercialization of two of the Company’s product candidates, Stimuvax and Theratope. The collaboration covered
F-30
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
the entire field of oncology for these two product candidates and was documented in collaboration and supply agreements (the “2001 Agreements”). The Company’s deliverables under the 2001 Agreements included (1) the license of rights to the product candidates, (2) collaboration with Merck KGaA, including shared responsibilities for the clinical development and post-commercialization promotion of the product candidates, (3) participation in a joint steering committee, (4) participation in a manufacturing/CMC Project team, (5) delivery of any improvements of Stimuvax to Merck and (6) manufacturing of the product candidates.
Pursuant to the 2001 collaboration agreement, the Company granted a co-exclusive license to Merck KGaA with respect to the clinical development and commercialization of such product candidates in North America and an exclusive license with respect to the clinical development and commercialization of such product candidates in the rest of the world. Merck KGaA did not obtain the right to sublicense the rights licensed to it pursuant to the 2001 collaboration agreement. The license term commenced as of the effective date of the 2001 collaboration agreement. The exclusivity provisions of such license were to remain in effect during the period beginning on the effective date of such license agreement and ending, on a product-by-product and country-by-country basis, on the latter of (1) the expiration of patent rights with respect to the applicable product candidate and (2) the 15th anniversary of the product launch. After the expiration of such period, such license would be perpetual and non-exclusive.
Under the 2001 Agreements, the parties agreed to collaborate in substantially all aspects of the clinical development and commercialization of the product candidates and coordinate their activities through a joint steering committee. Pursuant to the 2001 collaboration agreement, the parties agreed to share the responsibilities and obligations, for the clinical development and commercialization of the product candidates in North America (other than with respect to the right to promote product candidates in Canada, which was retained by the Company). In the rest of the world, Merck KGaA was responsible for the clinical development of the product candidates (although the Company agreed to reimburse Merck KGaA for 50% of the clinical development and regulatory costs) and commercialization of the product candidates. The 2001 collaboration agreement’s term corresponded with the exclusivity period of the Company’s license to the product candidates. Additionally, Merck KGaA was, and is, entitled to terminate the agreements with the Company with respect to a particular product candidate upon 30 days prior written notice to the Company, if, in the exercise of Merck KGaA’s reasonable judgment, it determined that there were issues concerning the safety or efficacy of such product candidate that would materially adversely affect the candidate’s medical, competitive or economic viability. If the agreements are terminated by Merck KGaA in accordance with their terms, the Company does not have legal recourse against Merck KGaA with respect to contingent or other future payments.
Pursuant to the 2001 supply agreement, the Company was responsible for the manufacturing of the clinical and commercial supply of the product candidates for which Merck KGaA agreed to reimburse the Company for its manufacturing costs. The 2001 supply agreement’s term corresponded to the exclusivity period of the Company’s license to the product candidates.
In connection with the execution of the 2001 collaboration agreement and supply agreement, the Company received up-front cash payments of $2.8 million ($1.0 million for executing the agreement and $1.8 million as reimbursement of pre-agreement clinical development expenses incurred by the Company) and $4.0 million, respectively. In
F-31
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
addition, under the 2001 Agreements the Company was entitled to receive (1) a $5.0 million payment contingent upon enrollment of the first patient in a Phase 3 clinical trial, (2) various additional contingent payments, up to a maximum of $90.0 million in the aggregate (excluding payments payable with respect to Theratope, the development of which was discontinued in 2004), tied to BLA submission for first and second cancer indications, for regulatory approval for first and second cancer indications, and for various sales milestones, and (3) royalties in the low twenties based on net sales outside of North America. Under the 2001 supply agreement, the Company was entitled to receive reimbursements from Merck KGaA for a portion of the Stimuvax manufacturing costs.
The Company recorded the payments received in connection with the execution of the 2001 Agreements as deferred revenue and initially recognized such revenue ratably over the period from the date of the 2001 Agreements to 2011. The Company determined that the estimated useful life of the products and estimated period of its ongoing obligations corresponded to the estimated life of the issued patents for such products. The Company chose that amortization period because, at the time, the Company believed it reflected an anticipated period of “market exclusivity” based upon the Company’s expectation of the life of the patent protection, after which the market entry of competitive products would likely occur. The Company did not receive any contingent payments or royalties under the 2001 Agreements. For more information regarding the Company’s revenue recognition policies, see “Note 2 — Significant Accounting Policies — Revenue Recognition.”
In June 2004, following the failure of Theratope in a Phase 3 clinical trial, Merck KGaA returned to the Company all rights to Theratope and development of Theratope was discontinued; however, the parties continued to collaborate under the terms of the 2001 Agreements with respect to the development of Stimuvax, which in 2004 had shown positive results in a Phase 2 clinical trial. In connection with the discontinuation of Theratope, the Company accelerated recognition of approximately $4.5 million in previously deferred revenue, which corresponded to the portion of the up-front cash payments under the 2001 Agreements that was allocated to Theratope. The remaining deferred revenue related to Stimuvax was then amortized over a period to end in 2018, the period estimated by management to represent the estimated useful life of the product and estimated period of its ongoing obligations, which corresponded to the estimated life of the issued patents for Stimuvax.
2006 Merck KGaA LOI
On January 26, 2006, the parties entered into a binding letter of intent (the “LOI”) pursuant to which the 2001 Agreements were amended in part and the parties agreed to negotiate in good faith to amend and restate the 2001 collaboration and supply agreements, as necessary, to implement the provisions contemplated by the LOI. The Company’s deliverables under the 2001 Agreements, as amended by the LOI, remained (1) the license of rights to Stimuvax, (2) participation in a joint steering committee, (3) participation in a manufacturing/CMC Project team, (4) delivery of any improvements of Stimuvax to Merck and (5) manufacturing of the product candidate.
Pursuant to the LOI, in addition to the rights granted pursuant to the 2001 Collaboration Agreement, the Company granted to Merck KGaA an exclusive license with respect to the clinical development and commercialization of Stimuvax in the United States and, subject to certain conditions, to act as a secondary manufacturer of Stimuvax. The Company’s right to commercialize Stimuvax in Canada remained unchanged. The license grant was effective as of March 1, 2006. The exclusivity period of such license corresponded to that under the 2001 collaboration agreement.
F-32
ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
Pursuant to the LOI, the joint steering committee continued to meet and served as the vehicle through which Merck KGaA provided updates and shared information regarding clinical development and marketing; however, it ceased to be a decision-making body. The Company continued to have responsibility for manufacturing. Further, the parties’ collaboration, including the term of the 2001 collaboration agreement, was not otherwise affected.
Pursuant to the LOI, the Company continued to be responsible for the manufacturing of the clinical supply of Stimuvax for which Merck KGaA agreed to pay the Company its cost of manufacturing. The 2001 supply agreement’s term was not modified by the LOI.
Further, under the LOI, the $5.0 million contingent payment payable to the Company under the 2001 Agreements upon enrollment of the first patient in a Phase 3 clinical trial was amended such that the Company was entitled to receive a $2.5 million contingent payment upon the execution of the amended and restated collaboration and supply agreements contemplated by the LOI and a $2.5 million contingent payment upon enrollment of the first patient in such Phase 3 clinical trial. In addition, under the LOI the Company was entitled to receive (1) various additional contingent payments tied to the same events and up to the same maximum amounts as under the 2001 Agreements, (2) royalties based on net sales outside of North America at the same rates as under the 2001 Agreements and (3) royalties based on net sales inside of the North America ranging from a percentage in the high-twenties to the mid-twenties, depending on the territory in which the net sales occur. The royalty rate was higher in North America than in the rest of the world in return for the Company relinquishing its rights to Stimuvax in the United States. In February 2007, the Company announced that the first patient had been enrolled in the global Phase 3 Stimuvax clinical trial for non-small cell lung cancer (“NSCLC”), triggering the contingent payment by Merck KGaA to the Company of $2.5 million. This payment was received in March 2007.
The Company assessed whether objective and reliable evidence of fair value of the undelivered elements under the 2001 Agreements, as amended by the LOI, existed as the manufacturing deliverable was shipped, and concluded such evidence did not exist. As a result, it was concluded that all deliverables in the arrangement were to be considered a single unit of accounting.
The Company recorded the payments received under the LOI as deferred revenue and recognized such revenue ratably over the remaining estimated product life of Stimuvax, which was until 2018. The Company did not receive any royalties under the LOI. For more information regarding the Company’s revenue recognition policies, see “Note 2 — Significant Accounting Policies — Revenue recognition.”
2007 Merck KGaA Agreements
On August 8, 2007, the parties amended and restated the collaboration and supply agreements (as amended and restated, the “2007 Agreements”), which restructured the 2001 Agreements and formalized the terms set forth in the LOI. The Company’s deliverables under the 2007 Agreements remained (1) the license of rights to Stimuvax, (2) participation in a joint steering committee, (3) participation in a manufacturing/CMC Project team, (4) delivery of any improvements of Stimuvax to Merck and (5) manufacturing of the product candidates.
Under the 2007 collaboration agreement, in addition to the rights granted pursuant to the 2001 collaboration agreement (as modified by the LOI), the Company granted to Merck KGaA an exclusive license to develop and commercialize Stimuvax in Canada. For accounting purposes, the license grant to develop Stimuvax in Canada was effective as of
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
the date of the 2007 collaboration agreement. As a result, Merck KGaA obtained an exclusive world-wide license with respect to the development and commercialization of Stimuvax. The exclusivity period of such license corresponded to that under the 2001 collaboration agreement; however, whereas the license was perpetual and was subject to termination by Merck KGaA the Company believed that the appropriate amortization period, and therefore the period of performance under the agreements, for amounts arising under the contract corresponds to the estimated product life of Stimuvax, or until 2018.
Under the 2007 collaboration agreement, the joint steering committee continued to meet and serve as the vehicle through which Merck KGaA provided updates and shared information regarding clinical development and marketing; however, it ceased to be a decision-making body. The Company continued to have responsibility for the development of the manufacturing process and plans for the scale-up for commercial manufacturing and the parties’ collaboration was not otherwise materially affected from the LOI. The 2007 collaboration agreement’s term corresponded to that under the 2001 collaboration agreement.
Under the 2007 supply agreement, the Company continued to be responsible for the manufacturing of the clinical and commercial supply of Stimuvax for which Merck KGaA agreed to pay the Company its cost of goods (which included amounts owed to third parties) and provisions for certain contingent payments to the Company related to manufacturing scale-up and process transfer were added. The 2007 supply agreement’s term corresponded to that under the 2001 collaboration agreement.
The entry into the 2007 Agreements triggered a payment to the Company of $2.5 million. Such payment was received in September 2007 and recorded as deferred revenue and recognized ratably over the remaining estimated product life of Stimuvax, which was until 2018. In addition, under the 2007 Agreements, the Company was entitled to receive (1) a $5.0 million payment tied to the transfer of certain assays and methodology related to the manufacturing of Stimuvax, a $3.0 million payment tied to the transfer of certain Stimuvax manufacturing technology and a $2.0 million payment tied to the receipt of the first manufacturing run at commercial scale of Stimuvax (provided that, in each case, such payments would have been payable by December 31, 2009, regardless of whether the applicable triggering event had been met), (2) various additional contingent payments tied to the same events and up to the same maximum amounts as under the 2001 Agreements, (3) royalties based on net sales outside of North America at the same rates as under the 2001 Agreements and (4) royalties based on net sales inside of North America with percentages in the mid-twenties, depending on the territory in which the net sales occur. If the manufacturing process payments due by December 31, 2009 were paid in full, the royalty rates would be reduced in all territories by 1.25%, relative to the 2001 Agreements and the LOI. In December 2007 and May 2008, the Company received from Merck KGaA a $5.0 million and a $3.0 million payment, respectively, related to the transfer of certain manufacturing information and technology.
The Company assessed whether objective and reliable evidence of fair value of the undelivered elements under the 2007 Agreements existed as the manufacturing deliverable was shipped, and concluded such evidence did not exist. As a result, it was concluded that all deliverables in the arrangement was to be considered a single unit of accounting.
The Company recorded the manufacturing process transfer payments received under the 2007 Agreements as deferred revenue and recognized such revenue ratably over the remaining estimated product life of Stimuvax. After execution of the 2007 supply agreement, the Company reported revenue and associated clinical trial material costs
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
related to the supply of Stimuvax separately in the consolidated statements of operations as contract manufacturing revenue and manufacturing expense, respectively. Under the 2007 supply agreement, the Company was entitled to invoice and receive a specified upfront payment on the contractual purchase price for Stimuvax clinical trial material after the receipt of Merck KGaA’s quarterly 12-month rolling forecast requirements. The Company invoiced the remaining balance of the contractual purchase price after shipment of the clinical trial material to Merck KGaA. The upfront entitlements were recorded as deferred revenue and such entitlements and the remaining balance of the purchase price were recognized as contract manufacturing revenue after shipment to Merck KGaA upon the earlier of (1) the expiration of a 60-day return period (since returns could not be reasonably estimated) and (2) formal acceptance of the clinical trial material by Merck KGaA. Concurrently, the associated costs of the clinical trial material was removed from inventory and recorded as manufacturing expense. The Company did not receive any royalties under the 2007 Agreements. For more information regarding the Company’s revenue recognition policies, see “Note 2 — Significant Accounting Policies — Revenue recognition.”
2008 Merck KGaA Agreements
On December 18, 2008, the Company entered into a license agreement with Merck KGaA which replaced the 2007 Agreements. Pursuant to the 2008 license agreement, in addition to the rights granted pursuant to the 2007 collaboration agreement, the Company granted to Merck KGaA the exclusive right to manufacture Stimuvax and the right to sublicense to other persons all such rights licensed to Merck KGaA. The license grant was effective as of the date of the 2008 license agreement. The exclusivity period of such license corresponded to that under the 2007 collaboration agreement.
In addition, (1) the joint steering committee was abolished, (2) the Company transferred certain manufacturing know-how to Merck KGaA, (3) the Company agreed not to develop any product that is competitive with Stimuvax, other than its product candidate ONT-10, (4) the Company granted to Merck KGaA a right of first negotiation in connection with any contemplated collaboration or license agreement with respect to the development or commercialization of ONT-10 and (5) the Company sold other Stimuvax-related assets as described in further detail below.
The only deliverable under the 2008 license agreement was the license grant. Upon the execution of the agreements with Merck KGaA in December 2008, all future Company performance obligations related to the collaboration for the clinical development and development of the manufacturing process of Stimuvax were removed and continuing involvement by the Company in the development and manufacturing of Stimuvax ceased (although the Company continues to be entitled to certain information rights with respect to clinical testing, development and manufacture of Stimuvax).
In return for the license of manufacturing rights and transfer of manufacturing know-how under the 2008 license agreement, the Company received an up-front cash payment of approximately $10.5 million. In addition, under the 2008 license agreement (1) the provisions with respect to contingent payments under the 2007 Agreements remained unchanged and (2) the Company is entitled to receive royalties based on net sales of Stimuvax ranging from a percentage in mid-teens to high single digits, depending on the territory in which the net sales occur. The royalties rates under the 2008 license agreement were reduced by a specified amount which management believes is consistent with the estimated costs of goods, manufacturing scale up costs and certain other expenses assumed by Merck KGaA. Since the Company had no further deliverables under the 2008
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
License Agreement, the Company (1) recognized as revenue the balance of all previously deferred revenue of $13.2 million relating to the Merck KGaA collaboration and (2) the final $2.0 million manufacturing process transfer payment was recognized as revenue when received in December 2009. For more information regarding the Company’s revenue recognition policies, see “Note 2 — Significant Accounting Policies — Revenue recognition.”
Under the 2008 license agreement, the Company may receive potential payments of up to $90 million upon the occurrence of certain specified events. The payments entail no performance obligation on the part of the Company and are tied solely to regulatory and specific achievements of sales levels. Accordingly, these payments will not be accounted for under the milestone method of revenue recognition, but rather will be recognized as revenue upon the occurrence of the events specified in the 2008 license agreement, assuming the payments are deemed collectible at that time.
The table below presents the roll-forward of the deferred revenue balances resulting from the payments received from Merck KGaA (in thousands):
| 2008 | ||||
Deferred revenue balance, beginning of year | $ | 18,067 | ||
Additional revenues deferred in the year: | ||||
Licensing revenue from collaborative and license agreements | 3,000 | |||
Contract manufacturing | 4,060 | |||
Less revenue recognized in the year: | ||||
Licensing revenue from collaborative and license agreements | (25,009 | ) | ||
Effect of changes in foreign exchange rates | (118 | ) | ||
|
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Deferred revenue — long term | $ | — | ||
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| |||
Manufacturing process transfer payment received and recognized currently | — | |||
In connection with the entry into the 2008 license agreement, the Company also entered into an asset purchase agreement pursuant to which the Company sold to Merck KGaA certain assets related to the manufacture of, and inventory of, Stimuvax, placebo and raw materials, and Merck KGaA agreed to assume certain liabilities related to the manufacturing of Stimuvax and the Company’s obligations related to the lease of the Company’s Edmonton, Alberta, Canada facility.
The plant and equipment in the Edmonton facility and inventory of raw materials, work-in-process and finished goods were sold for a purchase price of $0.6 million (including the assumption of lease obligation of $0.1 million) and $11.2 million, respectively. The purchase price of the inventory was first offset against advances made in prior periods resulting in net cash to the company of $2.0 million. The Company recorded the net gain from the sale of the plant and equipment of $0.1 million in other income and $11.2 million as contract manufacturing revenue in 2008.
As result of the December 2008 transactions, 43 persons who had previously been employed by the Company in its Edmonton facility were transferred to Merck KGaA.
Sanford-Burnham Medical Research Institute Agreement
In September 2011, the Company entered into an exclusive, worldwide license agreement with the Sanford-Burnham Medical Research Institute (“SBMRI”) for certain intellectual property related to SBMRI’s small molecule program based on ONT-701 and related
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
compounds. ONT-701 is a pan-inhibitor of the B-cell lymphoma-2 (“Bcl-2”) family of anti-apoptotic proteins and is currently in pre-clinical development. Because the Company acquired ONT-701 in an early research stage, the Company determined the compound did not have an alternate future use. Under the terms of this agreement, the Company made a payment of $1.5 million to SBMRI, which was recorded as part of research and development expense. In addition, the Company may be required to make milestone payments of up to approximately $26 million upon the occurrence of certain clinical development and regulatory milestones and up to $25 million based on certain net sales targets. The Company would be required to pay a royalty in the low to mid-single digits on net sales of licensed products. In addition, if the Company generates income from a sublicense of any of the licensed rights, it must pay SBMRI a portion of certain income received from the sublicensee at a rate between mid-single digits and 30%, depending on stage of the clinical development of the rights when the sublicense is granted. Unless earlier terminated in accordance with the license agreement, the agreement shall terminate on a country-by-country basis upon the later of (i) 10 years after the first commercial sale of the first licensed product and (ii) the expiration of the last-to-expire patent within the licensed patents.
10. INVESTMENT AND OTHER INCOME (EXPENSE), NET
Net investment and other income (expense) includes the following components for the periods indicated:
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
Government grant | $ | — | $ | 489 | $ | — | ||||||
Investment income (loss), net | 115 | 177 | 82 | |||||||||
Net foreign exchange loss | (9 | ) | (27 | ) | (83 | ) | ||||||
Loss on sale of equipment | — | (6 | ) | (7 | ) | |||||||
Other revenue | 199 | 3 | — | |||||||||
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Total investment and other income (expense), net | $ | 305 | $ | 636 | $ | (8 | ) | |||||
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
11. INCOME TAX
The income tax benefit (provision) consists of the following for year ended December 31, 2011, 2010 and 2009:
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
Federal: | ||||||||||||
Current | $ | — | $ | 200 | $ | (200 | ) | |||||
Deferred | — | — | — | |||||||||
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Income tax benefit (provision) | $ | — | $ | 200 | $ | (200 | ) | |||||
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There is no income tax benefit or provision for the year ended December 31, 2011.
In 2010, the Company recorded a current federal tax benefit of $0.2 million for the year ended December 31, 2010, which consists of recovery of federal alternative minimum tax previously paid.
In 2009, the Company recorded a current federal tax provision of $0.2 million for the year ended December 31, 2009, which consists of federal alternative minimum tax due to limitations on net operating loss usage.
The benefit (provision) for income taxes is different from applying the statutory federal income tax rate as follows:
| 2011 | 2010 | 2009 | ||||||||||
Tax benefit at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Change in fair value of warrant liability | (14.6 | ) | 6.8 | (12.7 | ) | |||||||
Deferred tax adjustment | 1.0 | 15.0 | 0.0 | |||||||||
Other | (1.6 | ) | 4.0 | (0.8 | ) | |||||||
Change in valuation allowance | (16.4 | ) | (50.2 | ) | (22.9 | ) | ||||||
Expiration of loss carryforwards and credits | (3.4 | ) | (9.2 | ) | 0.0 | |||||||
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Income tax benefit (provision) | 0.0 | % | 1.4 | % | (1.4 | )% | ||||||
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
The Company’s net deferred tax assets consist of the following items at the end of the year:
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
Net deferred tax assets | ||||||||
Stock based compensation | $ | 1,783 | $ | 1,056 | ||||
Intangible assets | 1,275 | 1,409 | ||||||
Other | 259 | 258 | ||||||
Tax benefits from losses carried forward and tax credits | 139,251 | 134,820 | ||||||
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Net deferred income tax asset before allowance | 142,568 | 137,543 | ||||||
Less valuation allowance | (142,568 | ) | (137,543 | ) | ||||
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| $ | — | $ | — | |||||
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Based on the available evidence, the Company has recorded a full valuation allowance against its net deferred income tax assets as it is more likely than not that the benefit of these deferred tax assets will not be realized. The valuation allowance increased by $5.0 million and $13.0 million during the years ended December 31, 2011 and 2010, respectively.
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the carrying amounts and tax bases of assets and liabilities and losses carried forward and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.
The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company does not believe any uncertain tax positions currently pending will have a material adverse effect on its consolidated financial statements nor expects any material change in its position in the next 12 months. Penalties and interest, of which there are none, would be reflected in income tax expense. Tax years are open to the extent the Company has net operating loss carryforwards available to be utilized currently.
The Company has recorded the following uncertain tax positions as of December 31, 2011 (in thousands):
Balance at December 31, 2010 | $ | — | ||
Decrease related to prior year tax positions | — | |||
Increase related to prior year tax positions | 729 | |||
Increase related to current year tax positions | — | |||
Decrease related to current year tax positions | — | |||
Decrease related to settlements with tax authorities | — | |||
Lapses of statute of limitations | — | |||
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Balance at December 31, 2011 | $ | 729 | ||
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
United States
The Company has accumulated net operating losses of $103 million and $82.5 million for United States federal tax purposes at December 31, 2011 and 2010 respectively, some of which may be limited in their utilization pursuant to Section 382 of the Internal Revenue Code, and which may not be available entirely for use in future years. These losses expire in fiscal years 2012 through 2030. The Company has federal research and development tax credit carry forwards of $0.7 million that will expire in fiscal years 2012 through 2022, if not utilized.
Canada
The Company has unclaimed Canada federal investment tax credits of $20.6 million and $20.6 million (CAD) at December 31, 2011 and 2010, respectively that expire in fiscal years 2018 through 2029. The Company has scientific research & experimental development expenditures of $137.9 million and $137.9 million for Canada federal purposes and $60.1 million and $60.1 million for provincial purposes at December 31, 2011 and 2010 respectively. These expenditures may be utilized in any period and may be carried forward indefinitely. The Company also has Canada federal capital losses of $186.4 million and $186.4 million and provincial capital losses of $186.5 million and $186.5 million at December 31, 2011 and 2010 respectively that can be carried forward indefinitely to offset future capital gains. The Company has accumulated net operating losses of $6.5 million and $6.2 million at December 31, 2011 and 2010 for Canada federal tax purposes and $4.2 million and $3.9 million at December 31, 2011 and 2010 for provincial purposes which expire between 2027 and 2030. The Company is subject to examination by the Canada Revenue Agency for years after 2006. However carryforward attributes that were generated prior to 2006 may still be adjusted by a taxing authority upon examination if the attributes have been or will be used in a future period.
Other
The Company files federal and foreign income tax returns in the United States and abroad. The Company is subject to examination for years after 2007. However, carryforward attributes that were generated prior to 2007 may still be adjusted by a taxing authority upon examination if the attributes have been or will be used in a future period.
12. CONTINGENCIES, COMMITMENTS, AND GUARANTEES
Royalties
In connection with the issuance of the Class UA preferred stock (See “Note 7 — Share Capital”), the Company has agreed to pay a royalty in the amount of 3% of the net proceeds of sale of any products sold by the Company employing technology acquired in exchange for the shares. None of the Company’s products currently under development employ the technology acquired.
Pursuant to various license agreements, the Company is obligated to pay royalties based both on the achievement of certain milestones and a percentage of revenues derived from the licensed technology.
Employee benefit plan
Under a defined contribution plan available to permanent employees, the Company is committed to matching employee contributions up to limits set by the terms of the plan, as well as limits set by U.S. tax authorities. The Company’s matching contributions to the plan totaled $0.1 million in each of the years ended December 31, 2011, 2010 and 2009, respectively. There were no changes to the plan during the year ended December 31, 2011.
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
Lease obligations — operating leases
The Company is committed to annual minimum payments under operating lease agreements for its office and laboratory space and equipment) as follows (in thousands):
Year Ending December 31, | ||||
2012 | $ | 577 | ||
2013 | 587 | |||
2014 | 596 | |||
2015 | 604 | |||
Thereafter | 1,830 | |||
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| $ | 4,194 | |||
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Rental expense for operating leases in the amount of $0.5 million, $0.6 million and $0.7 million have been recorded in the consolidated statements of operations in 2011, 2010 and 2009 respectively. In May 2008, the Company entered into a sublease agreement to lease office and laboratory space for its headquarters in Seattle, Washington totaling approximately 17,000 square feet. The sublease expired on December 17, 2011. The sublease provided for a monthly base rent of $33,000 increasing to $36,000. In May 2008, the Company also entered into a lease agreement directly with the landlord beginning on December 18, 2011 for a period of 84 months to December 18, 2017. The lease provides for a monthly base rent of $48,000 increasing to $52,000 in 2017. The Company has also entered into operating lease obligations through September 2015 for certain office equipment, which are included in the table above.
Guarantees
The Company is contingently liable under a mutual undertaking of indemnification with Merck KGaA for any withholding tax liability that may arise from payments under the license agreement.
In the normal course of operations, the Company provides indemnities to counterparties in transactions such as purchase and sale contracts for assets or shares, service agreements, director/officer contracts and leasing transactions. These indemnification agreements may require the Company to compensate the counterparties for costs incurred as a result of various events, including environmental liabilities, changes in (or in the interpretation of) laws and regulations, or as a result of litigation claims or statutory sanctions that may be suffered by the counterparties as a consequence of the transaction. The terms of these indemnification agreements vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amount that could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnities and no amounts have been accrued in the accompanying consolidated financial statements with respect to these indemnities.
13. SUBSEQUENT EVENTS
On February 3, 2012, the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”) to sell shares of the Company’s common stock , having aggregate gross sales proceeds of $50,000,000, from time to time, through an “at the market” equity offering program under which Cowen will act as sales agent. Under the Sales Agreement, the Company will set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Sales Agreement provides that Cowen will be entitled to compensation for its services that will not exceed, but may be lower than, 3.0% of the gross sales price per share of all shares sold through Cowen under the Sales Agreement. The Company has no obligation to sell any shares under the Sales Agreement, and may at any time suspend solicitation and offers under the Sales Agreement. No shares have been sold under the Sales Agreement to date.
In connection with the entry into the Sales Agreement, the Company determined that it would terminate its committed equity line financing facility (discussed in “Note 7 — Share capital.”). Termination of the equity line financing facility was effective as of February 3, 2012.
In connection with the entry into the Sales Agreement and the termination of the equity line financing facility, the Company amended the terms of its Loan and Security Agreement with GECC (discussed in “Note 6 — Notes payable”) to substitute references to the equity line financing facility with references to the “at the market” equity offering program.
In connection with the Company’s agreement with Merck KGaA, which is discussed further in “Note 9 — Collaborative and License Agreements”, on March 6, 2012, Merck Serono, a division of Merck KGaA of Darmstadt, Germany, informed the Company that the Independent Data Monitoring Committee (the “DMC”) for the Phase 3 START trial of Stimuvax in NSCLC met and the DMC recommendation is to continue the study. Final results from the study are expected in 2013.
On April 3, 2012, the Company closed an underwritten public offering of 13,512,500 shares of its common stock at a price to the public of $4.00 per share for gross proceeds of approximately $54.1 million. The net proceeds from the sale of the shares, after deducting the underwriters’ discounts and other estimated offering expenses payable by the Company, amounted to approximately $50.3 million.
14. CONDENSED QUARTERLY FINANCIAL DATA (unaudited)
The following table contains selected unaudited statement of operations information for each quarter of 2011 and 2010. The unaudited information should be read in conjunction with the Company’s audited financial statements and related notes included elsewhere in this report. The Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarterly Financial Data (in thousands, except per share data):
| Three Months Ended, | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
2011 | ||||||||||||||||
Revenues | $ | 145 | $ | — | $ | — | $ | — | ||||||||
Operating expenses | 6,017 | 5,826 | 6,443 | 6,558 | ||||||||||||
Net income (loss)(1) | (7,116 | ) | (33,973 | ) | 9,937 | (11,504 | ) | |||||||||
Net income (loss) per share — basic | (0.24 | ) | (0.91 | ) | 0.24 | (0.27 | ) | |||||||||
Net income (loss) per share — diluted | (0.24 | ) | (0.91 | ) | (0.15 | )(2) | (0.27 | ) | ||||||||
2010 | ||||||||||||||||
Revenues | $ | 5 | $ | 4 | $ | 4 | $ | 5 | ||||||||
Operating expenses | 5,438 | 4,722 | 4,345 | 4,997 | ||||||||||||
Net loss(3) | (772 | ) | (4,340 | ) | (4,352 | ) | (6,154 | ) | ||||||||
Net loss per share — basic | (0.03 | ) | (0.17 | ) | (0.17 | ) | (0.20 | ) | ||||||||
Net loss per share — diluted | (0.20 | )(2) | (0.17 | ) | (0.17 | ) | (0.20 | ) | ||||||||
| (1) | Net loss for the three months ended March 31, June 30, September 30 and December 31, 2011 includes change in fair value of warrants income (expense) of approximately $(1.5) million, $(28.0) million, $16.6 million and $(4.8) million respectively (see Note 3). |
| (2) | Reflects the effects of the correction of the errors described in “Note 2 — Significant Accounting Policies — Restatement.” Please see Note 2 for a detailed reconciliation of diluted earnings (loss) per share from as originally reported to as restated. |
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ONCOTHYREON INC.
Notes to the Consolidated Financial Statements — (Continued)
| (3) | Net loss for the three months ended March 31, June 30, September 30 and December 31, 2010 includes change in fair value of warrants income (expense) of approximately $4.6 million, $0.4 million, $(0.3) million and $(1.7) million respectively (see Note 3). |
F-43
