Carisma Therapeutics (CARM) 10-Q 2019 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-36296

Sesen Bio, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE	26-2025616
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

245 First Street, Suite 1800 Cambridge, MA	02142
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (617) 444-8550

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.    x  Yes   o  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x  Yes    o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated filer	o
Non-accelerated filer	o
Accelerated filer	x
Smaller reporting company	x
Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    

o   Yes      x  No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	SESN	The Nasdaq Stock Market

Number of outstanding shares of Common Stock as of May 8, 2019: 77,464,781

SESEN BIO, INC.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018	2
	Condensed Statement of Shareholders' Equity for the Three Months Ended March 31, 2019 and 2018	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	31

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company,” “Sesen,” “we,”

“us,” and “our” include Sesen Bio, Inc. and its subsidiaries.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future product research or development, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “goals,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

• our expected future loss and accumulated deficit levels;

• our projected financial position and estimated cash burn rate;

• our estimates regarding expenses, future revenues, capital requirements and needs for, and ability to obtain, additional financing;

• our ability to continue as a going concern;

• our need to raise substantial additional capital to fund our operations;

• the potential impairment of our goodwill and our indefinite-lived intangible assets;

• the effect of recent changes in our senior management team on our business;

• the success, cost and timing of our pre-clinical studies and clinical trials in the United States, Canada and in other foreign jurisdictions;

• the potential that results of pre-clinical studies and clinical trials indicate our product candidates are unsafe or ineffective;

• our dependence on third parties, including contract research organizations, or CROs, in the conduct of our pre-clinical studies and clinical trials;

• the difficulties and expenses associated with obtaining and maintaining regulatory approval of our product candidates and companion diagnostics, if any, in the United States, Canada and in other foreign jurisdictions, and the labeling under any approval we may obtain;

• our plans and ability to develop and commercialize our product candidates;

• our ability to achieve certain future regulatory, development and commercialization milestones under our license agreement, which we refer to as the License Agreement, with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc., or collectively, Roche;

• the timing and costs associated with our manufacturing process and technology transfer to FUJIFILM Diosynth Biotechnologies U.S.A., Inc., or Fujifilm, and our reliance on Fujifilm to perform under our agreement;

• market acceptance of our product candidates, the size and growth of the potential markets for our product candidates, and our ability to serve those markets;

• obtaining and maintaining intellectual property protection for our product candidates and our proprietary technology;

• the successful development of our commercialization capabilities, including sales and marketing capabilities; and

• the success of competing therapies and products that are or become available.

Our product candidates are investigational biologics undergoing clinical development and have not been approved by or submitted for approval to the U.S. Food and Drug Administration, or FDA, Health Canada, or the European Commission. Our product candidates have not been, nor may they ever be, approved by any regulatory agency or competent authorities nor marketed anywhere in the world.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and our stockholders should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this

i

Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

ii

PART I—FINANCIAL INFORMATION

Item 1.         Financial Statements

SESEN BIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)

	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	42,437		$	50,422
Prepaid expenses and other current assets	3,014			1,334
Total current assets	45,451			51,756
Property and equipment, net	272			321
Restricted cash	20			20
Intangible assets	46,400			46,400
Goodwill	13,064			13,064
Other assets	232			—
Total assets	$	105,439		$	111,561
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,683		$	1,367
Accrued expenses	5,234			4,746
Other current liabilities	136			—
Total current liabilities	7,053			6,113
Other liabilities	398			313
Deferred tax liability	12,528			12,528
Contingent consideration	47,400			48,400
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized at March 31, 2019 and December 31, 2018 and no shares issued and outstanding at March 31, 2019 and December 31, 2018	—			—
Common stock, $0.001 par value per share; 200,000,000 shares authorized at March 31, 2019 and December 31, 2018 and 77,464,781 and 77,456,180 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	77			77
Additional paid-in capital	230,487			230,154
Accumulated deficit	(192,504		)	(186,024		)
Total stockholders’ equity	38,060			44,207
Total liabilities and stockholders’ equity	$	105,439		$	111,561

See accompanying notes.

1

SESEN BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except per share data)

	Three Months Ended March 31,
	2019			2018
Operating expenses:
Research and development	4,686			3,255
General and administrative	3,055			1,952
Gain from change in fair value of contingent consideration	(1,000		)	(1,200		)
Total operating expenses	6,741			4,007
Loss from operations	(6,741		)	(4,007		)
Other income:
Other income, net	261			44
Total other income, net	261			44
Net loss and comprehensive loss	$	(6,480	)	$	(3,963	)
Net loss per share — basic and diluted	$	(0.08	)	$	(0.11	)
Weighted-average number of common shares used in net loss per share — basic and diluted	77,458			35,674

See accompanying notes.

2

SESEN BIO, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Stockholders’ Equity
	Shares	Amount
	(in thousands, except share data)
Balance at December 31, 2018	77,456,180	77		230,154		(186,024		)	44,207
Issuance of common stock pursuant to the 2014 ESPP	8,601	—		7		—			7
Stock-based compensation expense	—	—		326					326
Net loss	—	—		—		(6,480		)	(6,480		)
Balance at March 31, 2019	77,464,781	$	77	$	230,487	$	(192,504	)	$	38,060

	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Stockholders’ Equity
	Shares	Amount
	(in thousands, except share data)
Balance at December 31, 2017	34,702,565	35		170,330		(152,331		)	18,034
Exercise of stock options and vesting of restricted stock awards	4,430	—		—		—			—
Issuance of common stock pursuant to the 2014 ESPP	9,565	—		10		—			10
Exercise of common stock warrants	420,778	—		336		—			336
Issuance of common stock and common stock warrants, net of issuance costs	7,968,128	8		9,032		—			9,040
Stock-based compensation expense	—	—		401					401
Net loss	—	—		—		(3,963		)	(3,963		)
Balance at March 31, 2018	43,105,466	$	43	$	180,109	$	(156,294	)	$	23,858

See accompanying notes.

3

SESEN BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended March 31,
	2019			2018
Operating activities
Net loss	$	(6,480	)	$	(3,963	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	49			49
Stock-based compensation expense	326			401
Change in fair value of warrant liability	—			—
Gain from change in fair value of contingent consideration	(1,000		)	(1,200		)
Gain on sale of equipment	—			(5		)
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(1,912		)	(236		)
Accounts payable	316			486
Accrued expenses and other liabilities	709			85
Net cash used in operating activities	(7,992		)	(4,383		)
Investing activities
Sales of equipment	—			5
Net cash provided by investing activities	—			5
Financing activities
Proceeds from issuance of common stock and the issuance and exercise of common stock warrants, net of issuance costs	—			9,376
Proceeds from sale of common stock pursuant to 2014 ESPP	7			10
Net cash provided by financing activities	7			9,386
Net increase (decrease) in cash, cash equivalents and restricted cash	(7,985		)	5,008
Cash, cash equivalents and restricted cash at beginning of period	50,442			14,690
Cash, cash equivalents and restricted cash at end of period	$	42,457		$	19,698
Supplemental non-cash operating activities
Right-of-use assets obtained in exchange for new operating lease	$	236,480		—
Cash paid for amounts included in the measurement of liabilities	$	38,202		—

See accompanying notes.

4

SESEN BIO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Basis of Presentation

Sesen Bio, Inc. (the “Company”), a Delaware corporation, is a late-stage clinical company developing targeted fusion protein therapeutics ("TFPTs") composed of an anti-cancer antibody fragment tethered to a protein toxin for the treatment of cancer. The Company genetically fuses the cancer-targeting antibody fragment and the cytotoxic protein payload into a single molecule which is produced through the Company's proprietary one-step manufacturing process. The Company targets tumor cell surface antigens with limited expression on normal cells. Binding of the target antigen by the TFPT allows for rapid internalization into the targeted cancer cell. The Company has designed its targeted fusion proteins to overcome the fundamental efficacy and safety challenges inherent in existing antibody-drug conjugates ("ADCs"), where a payload is chemically attached to a targeting antibody.

Basis of presentation

The condensed consolidated financial statements as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018 and the related information contained within the notes to the condensed consolidated financial statements are unaudited. The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting standards applicable to interim financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s consolidated financial position as of March 31, 2019, its results of operations for the three months ended March 31, 2019 and 2018, its statement of shareholders' equity for the three months ended March 31, 2019 and 2018, and its cash flows for the three months ended March 31, 2019 and 2018. The financial data and the other financial information disclosed in these notes to the condensed consolidated financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other future annual or interim period. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 that was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019 (the "2018 Form 10-K").

The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, Viventia Bio Inc. ("Viventia"), and its indirect subsidiaries, Viventia Bio USA Inc. and Viventia Biotech (EU) Limited. All inter-company transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.

The functional currency of Viventia, Viventia Bio USA Inc. and Viventia Biotech (EU) Limited is the U.S. dollar.

Liquidity

The Company has financed its operations to date primarily through private placements of its common stock and preferred stock, and convertible bridge notes, venture debt borrowings, its initial public offering ("IPO"), follow-on public offerings, sales effected in an "at-the-market" offering, and the License Agreement (the "License Agreement") with F. Hoffmann La-Roche Inc. (collectively, "Roche"). As of March 31, 2019, the Company had cash and cash equivalents totaling $42.4 million, net working capital of $38.4 million and an accumulated deficit of $192.5 million.

The future success of the Company is dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations. In order to commercialize its product candidates, the Company needs to complete clinical development and comply with comprehensive regulatory requirements. The Company is subject to a number of risks similar to other late-stage clinical companies, including, but not limited to, successful discovery and development of its product candidates, raising additional capital with favorable terms, development by its competitors of new technological innovations, protection of proprietary technology and market acceptance of the Company’s products. The successful discovery and development of product candidates requires substantial working capital which may not be available to the Company on favorable terms or not at all.

To date, the Company has no revenue from product sales and management expects continuing operating losses in the future. As of March 31, 2019, the Company had available cash and cash equivalents of $42.4 million, which it does not believe is sufficient to fund the Company’s current operating plan for at least the next twelve months after the date of this Form 10-Q filing. Management expects to seek additional funds through equity or debt financings or through additional collaboration, licensing transactions or other sources. The Company may be unable to obtain equity or debt financings or enter into additional collaboration or licensing transactions and, if necessary, the Company will be required to implement cost reduction strategies.

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These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

2. Significant Accounting Policies and Recent Accounting Pronouncements

Recently adopted accounting standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 addresses the financial reporting of leasing transactions. Under past guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update requires the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability are expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability is recognized separately from the amortization of the right-of-use asset in the statement of operations and the repayment of the principal portion of the lease liability is classified as a financing activity while the interest component is included in the operating section of the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018 including interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-10, Leases (Topic 842), Codification Improvements (“ASU 2018-10”), ASU No. 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”), and ASU No. 2019-01 Leases (Topic 842), Codification Improvements to provide additional guidance for the adoption Accounting Standards Codification (“ASC”) of Topic 842, Leases (“ASC 842”). ASU 2018-10 clarifies certain provisions and corrects unintended applications of the guidance, such as the rate implicit in a lease, impairment of the net investment in a lease, lessee reassessment of lease classifications, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. The amendments in ASU 2018-11 allow for an additional transition method, whereby at the adoption date the entity recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, while the comparative period disclosures continue recognition under ASC 840, Leases (“ASC 840”). Additionally, ASU 2018-11 includes a practical expedient for separating contract components for lessors. The Company adopted ASC 842 using the optional transition method outlined in ASU 2018-11 as of January 1, 2019. The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets of approximately $236,000 and corresponding lease liabilities of approximately $236,000. The adoption of these ASUs did not have a material impact on the Company’s financial condition or results of operations, however, the adoption resulted in significant changes to the Company’s financial statement disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. The Company adopted this guidance effective January 1, 2019. We do not expect an impact upon adoption of ASU 2017-04 on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718) (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted this standard effective during the three months ended March 31, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial position or results of operations.

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). ASU 2018-09 provides amendments to a wide variety of topics in the FASB’s Accounting Standards Codification, which applies to all reporting entities within the scope of the affected accounting guidance. The transition and effective date guidance are based on the facts and circumstances of each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance of ASU 2018-09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. ASU 2018-09 did not have a material impact on the Company’s financial statements and related disclosures.

Recently issued accounting pronouncements

6

In August 2018, the FASB issued ASU 2018-13— Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurements ("ASU 2018-13"). ASU 2018-13 modifies fair value measurement disclosure requirements. The effective date for ASU 2018-13 is for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to defer and recognize as an asset. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning January 1, 2020, and is to be applied using a modified retrospective transition method. Earlier adoption is permitted. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.

Critical accounting policies

The Company’s significant accounting policies are described in Note 2, Significant Accounting Policies, in the 2018 Annual Report on Form 10-K. During the three months ended March 31, 2019, the Company adopted the following additional significant accounting policies:

Leases

Effective January 1, 2019, the Company adopted ASC 842 using the optional transition method. The adoption of ASC 842 represents a change in accounting principle that aims to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet for both operating and finance leases. In addition, the standard requires enhanced disclosures that meet the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases. The reported results for the three months ended March 31, 2019 reflect the application of ASC 842 guidance, while the reported results for prior periods were prepared in conjunction with ASC 840.

As part of the ASC 842 adoption, the Company utilized certain practical expedients outlined in the guidance. These practical expedients include:

• Accounting policy election to use the short-term lease exception by asset class;

• Election of the practical expedient package during transition, which includes:

◦ An entity need not reassess whether any expired or existing contracts are or contain leases.

◦ An entity need not reassess the classification for any expired or existing leases. As a result, all leases that were classified as operating leases in accordance with ASC 840 are classified as operating leases under ASC 842, and all leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases under ASC 842.

◦ An entity need not reassess initial direct costs for any existing leases.

◦ An entity need not separate out non-lease components from lease components, for all classes of underlying assets

The Company’s lease portfolio as of the adoption date includes: a property lease for its manufacturing facility, a property lease for its headquarters in Cambridge, MA, and a property lease for office space in Philadelphia, PA. The Company determines if an arrangement is a lease at the inception of the contract. The asset components of the Company’s operating leases are recorded as operating lease right-of-use assets and reported within Other assets in the Company's condensed consolidated balance sheets. The short term and long term liability components are recorded in Other current liabilities and Other liabilities, respectively, in the Company’s condensed consolidated balance sheets. As of March 31, 2019, the Company did not have any finance leases.

Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at the commencement date. Existing leases in the Company’s lease portfolio as of the adoption date were valued as of

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January 1, 2019. The Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, if an implicit rate of return is not provided with the lease contract. Operating lease right-of-use assets are adjusted for incentives received.

Operating lease costs are recognized on a straight-line basis over the lease term, in accordance with ASC 842, and also includes variable operating costs incurred during the period. Lease costs also include amounts related to short term leases.

3. Fair Value of Financial Instruments

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value. The Company determines the fair value of contingent consideration using Level 3 inputs.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis at March 31, 2019 (in thousands):

Description	March 31, 2019		Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	42,437	$	42,437	$	—	$	—
Restricted cash	20		20		—		—
Total assets	$	42,457	$	42,457	$	—	$	—
Liabilities:
Contingent consideration	47,400		—		—		47,400
Total liabilities	$	47,400	$	—	$	—	$	47,400

The following table summarizes the assets and liabilities measured at fair value on a recurring basis at December 31, 2018 (in thousands):

Description	December 31, 2018		Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	50,422	$	50,422	$	—	$	—
Restricted cash	20		20		—		—
Total assets	$	50,442	$	50,442	$	—	$	—
Liabilities:
Contingent consideration	48,400		—		—		48,400
Total liabilities	$	48,400	$	—	$	—	$	48,400

Contingent consideration

In 2016, the Company acquired Viventia through the issuance of common stock and contingent consideration (the "Acquisition"), pursuant to the terms of a share purchase agreement (the "Share Purchase Agreement"). The Company has valued the acquired assets and liabilities based on their estimated fair values as of September 20, 2016 and finalized its purchase accounting for the Acquisition during the third quarter of 2017. The contingent consideration relates to amounts potentially payable to Viventia's shareholders pursuant to the terms of the Share Purchase Agreement. Contingent consideration

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is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained. Future changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the condensed consolidated statements of operations and comprehensive loss.

Contingent consideration may change significantly as development progresses and additional data are obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability and the timing in which they are expected to be achieved. In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates. The following table sets forth a summary of changes in the fair value of the Company's contingent consideration liability (in thousands):

Beginning balance, December 31, 2018	$	48,400
Gain from change in fair value of contingent consideration	(1,000		)
Ending balance, March 31, 2019	$	47,400

The fair value of the Company’s contingent consideration was determined using probabilities of successful achievement of regulatory milestones and commercial sales, the period in which these milestones and sales are expected to be achieved ranging from 2021 to 2033, the level of commercial sales of Vicinium^®, and discount rates ranging from 6.6% to 13.7% as of December 31, 2018 and 6.2% to 11.7% as of March 31, 2019. Significant changes in any of these assumptions would result in a significantly higher or lower fair value measurement.

There have been no changes to the valuation methods utilized during the three months ended March 31, 2019. The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of assets or liabilities between levels during the three months ended March 31, 2019.

4. License Agreement with Roche

On June 10, 2016, the Company entered into the License Agreement with Roche, which became effective on August 16, 2016. Under the License Agreement, the Company granted Roche an exclusive, worldwide license, including the right to sublicense, to its patent rights and know-how related to the Company’s monoclonal antibody EBI-031 or all other IL-6 antagonistic anti-IL-6 monoclonal antibodies , to make, have made, use, have used, register, have registered, sell, have sold, offer for sale, import and export any product containing such an antibody or any companion diagnostic used to predict or monitor response to treatment with such a product (collectively, the “Licensed Intellectual Property”).

During 2016, the Company received an upfront license fee of $7.5 million and a milestone payment of $22.5 million. The Company is entitled to receive up to $240.0 million in additional consideration upon the achievement of specified regulatory, development and commercial milestones. Specifically, an aggregate amount of up to $175.0 million is payable to the Company for the achievement of specified milestones with respect to the first indication: $50.0 million in development milestones, $50.0 million in regulatory milestones and $75.0 million in commercialization milestones. Additional amounts of up to $65.0 million are payable upon the achievement of specified development and regulatory milestones in a second indication. In addition, the Company is entitled to receive royalty payments in accordance with a tiered royalty rate scale, with rates ranging from 7.5% to 15% for net sales of potential future products containing EBI-031 and up to 50% of these rates for net sales of potential future products containing other IL-6 compounds, with each of the royalties subject to reduction under certain circumstances and to buy-out options.

The License Agreement is subject to the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606"), which was adopted effective January 1, 2018 utilizing a modified retrospective method. The Company concluded that all performance obligations had been achieved as of the adoption date and therefore the full transaction price was considered earned. The transaction price was determined to be the $30.0 million received in 2016. Additional consideration to be paid to the Company upon the achievement of certain milestones will be included if it is expected that the amounts will be received and the amounts would not be subject to a constraint. As of the date of the adoption, no amounts were expected to be received from the achievement of any milestones due to the nature of the milestones and the development status of the product candidates at the time of the adoption. As a result, there were no amounts required to be

9

recorded as a cumulative adoption adjustment as the consideration recognized under ASC 606 was consistent with the amounts recognized under the previous accounting literature.

As of March 31, 2019 and March 31, 2018, the Company concluded that there would be no adjustments to the transaction price as the Company continued to not expect any amounts to be received from any milestones within the License Agreement. This is due to the nature of the milestones and the development status of the product candidates as of the end of each reporting period. As a result, no revenue was recognized during the three-month periods ended March 31, 2019 and March 31, 2018 as all performance obligations had been previously achieved and there was no change in the transaction price during the period.

5. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	March 31, 2019		December 31, 2018
Development costs	$	3,542	$	2,928
Employee compensation	491		1,045
Severance to former CEO and other employees	610		278
Professional fees	519		464
Other	72		31
	$	5,234	$	4,746

Stephen A. Hurly departed as the President and Chief Executive of the Company, effective as of August 7, 2018. In connection with his departure, Mr. Hurly and the Company entered into a separation agreement and general release, dated September 28, 2018 (the “Separation Agreement”), which sets forth the terms of Mr. Hurly’s separation from the Company. Pursuant to the Separation Agreement, which includes Mr. Hurly's agreement to a release of claims and complying with certain other continuing obligations contained therein, the Company is obligated to pay Mr. Hurly a total amount of $637,500, less applicable withholdings and deductions, which consists of the equivalent of twelve months of Mr. Hurly’s base salary ($425,000) immediately prior to his departure and Mr. Hurly’s annual target bonus for 2018 ($212,500). In addition, the Company, to the extent allowed by applicable law and the applicable plan documents, will continue to provide Mr. Hurly and certain of his dependents with group health and dental insurance for a period of up to twelve months after the effective date of the Separation Agreement. Accrued severance related to this agreement is $158,000 for the period ended March 31, 2019. The remaining amounts of accrued severance as of March 31, 2019 relate to terminations of other employees within the period.

6. Shareholder Equity

Equity Financings

During the three months ended March 31, 2018, the Company raised approximately $9.0 million of net proceeds from the sale of 7,968,128 shares of common stock at a price of $1.13 per share in a registered direct public offering and the sale of common stock purchase warrants to purchase 7,968,128 shares of common stock at a price of $0.125 per warrant in a concurrent private placement (collectively, the “March 2018 Financing”). Subject to certain ownership limitations, the common stock purchase warrants issued in the March 2018 Financing were exercisable immediately upon issuance at an exercise price equal to $1.20 per share of common stock, subject to adjustments as provided under the terms of such common stock purchase warrants. The common stock purchase warrants are exercisable for five years from March 23, 2018. In addition, during the three months ended March 31, 2018, the Company received proceeds of $0.3 million from the issuance of 420,778 shares of its common stock upon the cash exercise of common stock purchase warrants issued in connection with its underwritten public offering in November 2017.

Pursuant to the terms of the Company's 2014 Stock Incentive Plan (the "2014 Plan"), the number of shares authorized for issuance automatically increases on the first day of each fiscal year. On January 1, 2019, the number of shares reserved for issuance under the 2014 Plan increased by 1,102,362 shares. As of March 31, 2019, the total number of shares of common stock available for issuance under the 2014 Plan was 1,319,184.

Share-Based Payments

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In September 2016, the Company issued 650,000 inducement equity awards outside the 2014 Plan in accordance with Nasdaq Listing Qualifications Department (“Nasdaq”) Listing Rule 5635(c)(4). The inducement equity awards were approved and recommended by the Company's Compensation Committee, approved by the Board of Directors and were made as an inducement material to certain individuals’ acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). In August 2018, the Company issued 1,350,000 inducement equity awards outside the 2014 Plan in accordance with Nasdaq Listing Rule 5635(c)(4). The inducement equity awards were approved and recommended by the Company's Compensation Committee, approved by the Board of Directors and were made as an inducement material to Dr. Cannell’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). In December 2018, the Company issued 425,000 inducement equity awards outside the 2014 Plan in accordance with Nasdaq Listing Rule 5635(c)(4). The inducement equity awards were approved and recommended by the Company's Compensation Committee, approved by the Board of Directors and were made as an inducement material to Dr. Kim’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). As of March 31, 2019, the total amount of shares outstanding classified as inducement awards was 1,937,500.

The Company also maintains the Company's 2009 Stock Incentive Plan, as amended and restated, and the Company's 2014 Employee Stock Purchase Plan (the "2014 ESPP").

Stock-Based Compensation Expense

Stock-based compensation expense by award type was as follows (in thousands):

	Three Months Ended March 31,
	2019		2018
Stock options	$	325	$	375
Restricted stock	—		23
Employee stock purchase plan	1		3
	$	326	$	401

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

	Three Months Ended March 31,
	2019		2018
Research and development expense	$	52	$	165
General and administrative expense	274		236
	$	326	$	401

At March 31, 2019, there was $3.4 million of total unrecognized compensation expense related to unvested stock options for employee and non-employee consultants and shares issued pursuant to the 2014 ESPP. This unrecognized compensation expense is expected to be recognized over a weighted-average period of 3.33 years.

Stock Options

A summary of the stock option activity is presented below:

	Shares		Weighted-Average Exercise Price
Outstanding at December 31, 2018	3,941,947		$	2.12
Granted	2,110,115		0.85
Exercised	—		—
Cancelled or forfeited	(363,500	)	2.44
Outstanding at March 31, 2019	5,688,562		$	1.62
Exercisable at March 31, 2019	1,076,840		$	3.13

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In October 2017, the Company issued stock option awards to certain employees which contained performance vesting conditions. These options vested in installments based on the achievement of certain strategic and clinical milestones. In January 2018, March 2018 and June 2018, the Compensation Committee of our Board determined that certain performance milestones were met, and management believes the last performance condition is also probable of being achieved. Stock-based compensation expense associated with these performance-based stock options is recognized over the service and performance period if any performance condition is considered probable of achievement using management’s best estimate. For these performance-based awards, the Company recorded ($18,000) of expense (due to forfeited awards) in the three months ended March 31, 2019. The Company recorded $211,000 of expense in the three months ended March 31, 2018. As of March 31, 2019, there was $2,000 of unrecognized compensation expense remaining related to performance-based awards.

Restricted Stock

From time to time, upon approval by the Board, certain employees, directors and advisors have been granted restricted shares of common stock and restricted stock units. As of March 31, 2019, the Company does not have any outstanding restricted stock awards or restricted stock units.

Employee Stock Purchase Plan

On March 14, 2019, the Company issued and sold 8,601 shares of its common stock pursuant to the 2014 ESPP at a purchase price of $0.8356 per share. On March 14, 2018, the Company issued and sold 9,565 shares of its common stock pursuant to the 2014 ESPP at a purchase price of $0.9800 per share. The Company estimates the number of shares to be issued at the end of an offering period and recognizes expense over the requisite service period.

7. Net (Loss) Income Per Share

Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. Diluted net (loss) income per share is calculated by adjusting weighted-average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net (loss) income per share calculation, stock options, unvested restricted stock, and common stock warrants are considered to be common stock equivalents. Warrants to purchase the Company’s common stock participate in any dividends declared by the Company and are therefore considered to be participating securities. Participating securities have the effect of diluting both basic and diluted earnings per share during periods of income. During periods of loss, no loss is allocated to the participating securities since they have no contractual obligation to share in the losses of the Company.

The following common stock equivalents were excluded from the calculation of diluted net (loss) income per share for the periods indicated because including them would have had an anti-dilutive effect or the exercise prices were greater than the average market price of the common shares.

	Three Months Ended March 31,
	2019	2018
Stock options	5,688,562	2,648,004
Unvested restricted stock	—	—
Common stock warrants	9,257,632	17,602,350
	14,946,194	20,250,354

8. Cash, cash equivalents and restricted cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):

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	March 31,	December 31,
	2019	2018
Cash and cash equivalents	42,437	$	50,422
Restricted cash	20	20
Total cash, cash equivalents and restricted cash	42,457	50,442

Amounts included in restricted cash represent cash held to collateralize a credit limit with Silicon Valley Bank of $20,000 as of March 31, 2019 and December 31, 2018, respectively.

9. Related Party Transactions

The Company leases an approximately 31,100 square foot manufacturing, laboratory, and office facility in Winnipeg, Manitoba, from an affiliate of Leslie L. Dan, a director of the Company, under a five-year renewable lease through September 2020 with a right to renew the lease for one subsequent five-year term. Operating lease cost under this lease, which includes related operating expenses, was $75,000 for the three months ended March 31, 2019. Under ASC 840, rent expense for this lease was $81,000 for the three months ended March 31, 2018.

The Company pays fees, under an intellectual property license agreement, to Protoden Technologies, Inc. (“Protoden”), a company owned by Clairmark Investments Ltd. (“Clairmark”), an affiliate of Mr. Dan, under an intellectual property licensing agreement. Pursuant to the agreement, the Company has an exclusive, perpetual, irrevocable and non-royalty bearing license, with the right to sublicense, under certain patents and technology to make, use and sell products that utilize such patents and technology. The annual fee is $100,000. Upon expiration of the term, the licenses granted to the Company will require no further payments to Protoden. During each of the three-month periods ended March 31, 2019 and 2018, $100,000 was paid to Clairmark under the license agreement.

10. Operating Leases

On January 1, 2019, the Company adopted ASC 842 using the optional transition method. The Company’s lease portfolio includes: an operating lease for its manufacturing facility in Winnipeg, Manitoba, a short-term property lease for its headquarters in Cambridge, MA and a short-term property lease for office space in Philadelphia, PA. The asset component of the Company’s operating leases is recorded as operating lease right-of-use assets and reported within other assets in the Company's condensed consolidated balance sheets. The short term and long term liability components are recorded in other current liabilities and other liabilities, respectively, in the Company’s condensed consolidated balance sheets.

Operating lease cost is recognized on a straight-line basis over the lease term. The components of lease cost for the three months ended March 31, 2019 are as follows (in thousands):

	Three months ended March 31, 2019
Lease Cost:
Operating lease cost (including related operating costs)	75
Short-term lease cost	76
Total lease cost	151

Supplemental Information:	Three months ended March 31, 2019
Weighted-average remaining lease term - operating leases (in years)	1.5
Weighted-average discount rate - operating leases	12	%

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Future minimum lease payments under non-cancelable operating leases under ASC 842 as of March 31, 2019 are as follows (in thousands):

	Operating lease payments
2019 (1)	116
2020	116
2021	—
Total future minimum lease payments	232
Less: amounts representing present value adjustment	21
Operating lease liabilities as of March 31, 2019	211
Less: current portion of operating lease liabilities	136
Operating lease liabilities, net of current portion	75

(1) Amounts are for the remaining nine months ending December 31, 2019

The Company leases a manufacturing facility located in Winnipeg, Manitoba Canada, which consists of an approximately 31,100 square foot manufacturing, laboratory, warehouse and office facility, under a five-year renewable lease through September 2020 with a right to renew the lease for one subsequent five-year term. The minimum monthly rent under this lease is approximately $12,900 per month. The Company expects to incur approximately $12,500 in related operating expenses per month. Operating lease cost under this lease, including the related operating costs, was $75,000 for the three months ended March 31, 2019. Under ASC 840, rent expense for this lease, including related operating costs, was $81,000 for the three months ended March 31, 2018.

The Company leases its current corporate headquarters in Cambridge, Massachusetts under a short-term lease that was renewed as of January 1, 2019. The minimum monthly rent for this office space is approximately $10,000 per month. The Company recorded $27,000 in short-term lease cost for the three months ended March 31, 2019. Under ASC 840, the Company recorded $26,000 in rent expense for the three months ended March 31, 2018 for this lease.

The Company leases office space in Philadelphia, PA, where it occupies office space under a short-term lease that extends through August 2019. Currently, the minimum monthly rent under this lease is approximately $10,000 per month. The Company recorded $49,000 in short term lease cost for the month ended March 31, 2019. Under ASC 840, the Company recorded $24,000 in rent expense for the three months ended March 31, 2018 for this lease.

11. Subsequent Events

On April 29, 2019, the Company received written notice from Nasdaq that for 10 consecutive business days, from April 12, 2019 to April 26, 2019, the closing bid price of the Company’s common stock was at $1.00 per share or greater and that, as a result, the Company had regained compliance with Nasdaq Listing Rule 5450(a)(1), which requires the Company to maintain the minimum bid price of $1.00 per share.

The Company previously had received a notice from Nasdaq on February 19, 2019 indicating its failure to meet the continued listing requirement for minimum bid price for a period of 30 consecutive business days, and was given 180 calendar days to regain compliance.

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Item 2.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 condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2018 included in our Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q and in Part I, Item IA, “Risk Factors” of our Annual Report on Form 10-K which are incorporated herein by reference, our actual results could differ materially from the results described in or implied by the forward-looking statements.

Overview

We are a late-stage clinical company developing targeted fusion protein therapeutics, or TFPTs, composed of an anti-cancer antibody fragment tethered to a protein toxin for the treatment of cancer. We genetically fuse the cancer-targeting antibody fragment and the cytotoxic protein payload into a single molecule which is produced through our proprietary one-step manufacturing process. We target tumor cell surface antigens with limited expression on normal cells. Binding of the target antigen by the TFPT allows for rapid internalization into the targeted cancer cell. We have designed our targeted proteins to overcome the fundamental efficacy and safety challenges inherent in existing antibody-drug conjugates, or ADCs, where a payload is chemically attached to a targeting antibody.

Our most advanced product candidate VB4-845, also known as Vicinium^®, is a locally-administered targeted fusion protein composed of an anti-EPCAM, or epithelial cell adhesion molecule, antibody fragment tethered to a truncated form of Pseudomonas exotoxin A for the treatment of high-risk, non-muscle invasive bladder cancer, or NMIBC.

We have an ongoing single-arm, multi-center, open-label Phase 3 clinical trial of Vicinium as a monotherapy in patients with high-risk, bacillus Calmette-Guérin, or BCG, unresponsive NMIBC, called the VISTA Trial. The VISTA Trial completed enrollment in April 2018 with a total of 133 patients across three cohorts based on histology and time to disease recurrence after adequate BCG treatment (at least two courses of BCG with at least five doses in the first course and two in the second):

• Cohort 1 (n=86): Patients with carcinoma in situ, or CIS,with or without papillary disease that was determined to be refractory or recurred within six months of their last course of adequate BCG

• Cohort 2 (n=7): Patients with CIS or without papillary disease that was determined to be refractory or recurred after six months, but less than 11 months, after their last course of adequate BCG

• Cohort 3 (n=40): Patients with high-risk papillary disease without CIS that was determined to be refractory or recurred within six months of their last course of adequate BCG

The primary and secondary endpoints for the VISTA Trial are as follows:

Dose	30 mg of Vicinium (in 50 mL of saline)
Estimated total enrollment	Approximately 134 patients, including 77 CIS patients whose disease is refractory to or relapsed within 6 months of the last dose of adequate BCG treatment
Primary endpoint	•	Complete response rate in patients with CIS (with or without papillary disease) whose disease is refractory or relapsed in six months or less following adequate BCG treatment, which is defined as at least two courses of full dose BCG; and
	•	Duration of response will be estimated (Kaplan-Meier Estimate) for those patients with CIS whose disease is refractory to or relapsed within 6 months of the last dose of adequate BCG treatment (with or without papillary disease) who experience a complete response.

Patients with CIS will be considered to have a complete response if at the time of any disease status evaluation (per protocol every 13 weeks or any unscheduled evaluation) there is no evidence of high-grade disease (CIS, high-grade Ta or high-grade T1 disease) or disease progression (e.g., to muscle invasive disease). Low-grade disease is not considered a treatment failure in these patients and they may remain on study treatment following TURBT.

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Secondary endpoints	•	Complete response rate and duration of response in patients with CIS whose disease is refractory to or relapsed within 6 months of the last dose of adequate BCG treatment (with or without papillary disease) whose disease is refractory or relapsed from six months to 11 months following adequate BCG treatment;
	•	Complete response rate and duration of response in all patients with CIS (with or without papillary disease) following adequate BCG treatment;
	•	Event-free survival, or EFS, in all patients;
	•	Complete response rate in patients at three, six, nine, 12, 15, 18, 21, and 24 months in patients with CIS whose disease is refractory to or relapsed within 6 months of the last dose of adequate BCG treatment;
	•	Time to cystectomy in all patients;
	•	Time to disease recurrence in all patients;
	•	Progression-free survival, or PFS, in all patients;
	•	Overall survival, or OS, in all patients; and
	•	Safety and tolerability of Vicinium therapy in all patients.
Exploratory endpoint	To evaluate biomarkers that may be associated with response or disease progression or treatment failure, which may include, for example, EpCAM status, tumor subtype morphology, furin levels in tumor cell endosomes, presence of a glycosaminoglycan coat, and presence of receptors that could impede a host anti-tumor immune response such as PD-L1.

As of a March 1, 2019 data cutoff date, preliminary primary and secondary endpoint data for each of the trial cohorts were as follows:

Cohort 1 (n=86) Complete Response Rate

Time point	Evaluable Patients	Complete Response Rate
3-months	n=86	37%
6-months	n=86	26%
9-months	n=85	19%
12-months	n=84	15%

Cohort 2 (n=7) Complete Response Rate

Time point	Evaluable Patients	Complete Response Rate
3-months	n=7	57%
6-months	n=7	57%
9-months	n=7	43%
12-months	n=7	14%

Pooled Cohorts 1 and 2 (n=93) Complete Response Rate

Time point	Evaluable Patients	Complete Response Rate (95% Confidence Interval)
3-months	n=93	39% (29%- 49%)
6-months	n=93	28% (19%-38%)
9-months	n=92	21% (13%-30%)
12-months	n=91	15% (9%-24%)

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• Duration of Response:The median duration of response for patients in Cohort 1 (n=86) is 287 days (95% confidence interval, or CI, 127-NA), using the Kaplan-Meier method. The Kaplan-Meier method is a non-parametric statistical analysis used to estimate survival times and times to event when incomplete observations in data exist. Additional ad hoc analysis of pooled data for all patients with CIS (Cohorts 1 and 2, n=93) shows that among patients who achieved a complete response at 3 months, 54% had a complete response for a total of 12 months or longer after starting therapy, using the Kaplan-Meier method.

• Time to Disease Recurrence: High-grade papillary (Ta or T1) NMIBC is associated with higher rates of progression and recurrence. Therefore, time to disease recurrence is a key secondary endpoint for patients with high-risk papillary-only NMIBC. The median time to disease recurrence for patients in Cohort 3 (n=40) is 436 days (95% CI, 224-648), using the Kaplan-Meier method.

• Time to Cystectomy: The first FDA guidance on treatment of BCG-unresponsive NMIBC patients states that the goal of therapy in such patients is to avoid cystectomy. Therefore, time to cystectomy is a key secondary endpoint in the VISTA Trial. Across all 133 patients treated with Vicinium in the VISTA Trial, greater than 75% of all patients are estimated to remain cystectomy-free at 2.5 years, using the Kaplan-Meier method. Additional ad hoc analysis of responders and non-responders for all patients shows that responders are approximately 15 times more likely to remain cystectomy-free at 2.5 years compared to non-responders.

• Progression-Free Survival:Greater than85% of all 133 patients treated with Vicinium in the VISTA Trial are estimated to remain progression-free at 2 years, using the Kaplan-Meier method. Progression-free is defined as the time from the date of first dose of study treatment to disease progression (e.g. T2 or more advanced disease) or death as a first event.

• Event-Free Survival: Approximately 30% of all 133 patients treated with Vicinium in the VISTA Trial are estimated to remain event-free at 12 months, using the Kaplan-Meier method. Event-free survival is defined as the time from the date of first dose of study treatment to disease recurrence, progression, or death as a first event.

• Overall Survival:Approximately 90% of all 133 patients treated with Vicinium in the VISTA Trial have an overall survival of greater than 2.5 years, using the Kaplan-Meier method. Overall survival is defined as the time from the date of first dose of study treatment to death from any cause.

Preliminary Safety Results

As of the March 1, 2019 data cut off, in patients across all cohorts (n=133), 78% of adverse events were Grade 1 or 2. The most commonly reported treatment-related adverse events were dysuria (13%), hematuria (12%) and urinary tract infection (11%) - all of which are consistent with the profile of bladder cancer patients and the use of catheterization for treatment delivery. These adverse events were determined by the clinical investigators to be manageable and reversible, and only five patients (4%) discontinued treatment due to an adverse event. Serious adverse events, regardless of treatment attribution, were reported in 14% of patients. There were four treatment-related serious adverse events reported in three patients including acute kidney injury (Grade 3), pyrexia (Grade 2), cholestatic hepatitis (Grade 4) and renal failure (Grade 5). There were no age-related increases in adverse events observed in the Phase 3 VISTA trial.

We expect to report final 12-month topline efficacy and safety data during the third quarter of 2019.

Other Vicinium Development Activity

In October 2018, we entered our Master Bioprocessing Services Agreement, or Fujifilm MSA, with FUJIFILM Diosynth Biotechnologies U.S.A., Inc., or Fujifilm, for the manufacturing process and technology transfer of Vicinium production. In April 2019, the first full, commercial-scale GMP run was completed at Fujifilm. Preliminary indicators of success, including the bacterial growth and purification profiles, support Fujifilm’s ability to produce the bulk drug substance form of Vicinium for commercial purposes if we receive regulatory approval to market Vicinium. Full quality release testing is underway, and results are expected to be completed during May 2019.

We have scheduled an initial Type C CMC Meeting with the FDA in late May 2019.In conjunction with the technology transfer of Vicinium production with Fujifilm, we will seek alignment with the FDA on an analytical comparability plan that can be used to assess comparability between the supply used in clinical trials and the potential commercial supply produced by Fujifilm. We have also scheduled a Pre-BLA meeting with the FDA in early June 2019. In concurrence with the FDA’s recommendation that we schedule a meeting in mid-2019, we have confirmed a meeting date with the FDA in June to discuss our intended registration strategy for Vicinium for the treatment of high-risk NMIBC.

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In August 2018, we received Fast Track designation from the U.S. Food and Drug Administration, or FDA, for Vicinium for the treatment of high-risk NMIBC.

In June 2017, we entered into a Cooperative Research and Development Agreement, or CRADA, with the National Cancer Institute, or NCI, for the development of Vicinium in combination with AstraZeneca’s immune checkpoint inhibitor, durvalumab, for the treatment of NMIBC. Under the terms of the CRADA, the NCI will conduct a Phase 1 clinical trial in patients with high-risk NMIBC to evaluate the safety, efficacy and biological correlates of Vicinium in combination with durvalumab. This Phase 1 clinical trial is open and is actively recruiting patients.

Vicinium has also been evaluated for the treatment of squamous cell carcinoma of the head and neck, or SCCHN. Vicinium for the treatment of SCCHN had previously been designated as Proxinium™ to indicate its different fill volume and vial size as well as its different route for local administration via intratumoral injection.

In addition to our locally-administered TFPTs, our pipeline also includes systemically-administered TFPTs in development that are built around our proprietary de-immunized variant of the plant-derived cytotoxin bouganin, or deBouganin. One of these products, VB6-845d, is a TFPT consisting of an EpCAM targeting Fab genetically linked to deBouganin, a novel plant derived cytotoxic payload that we have optimized for minimal immunogenic potential and is administered by intravenous infusion.

We have deferred further development of Vicinium for the treatment of SCCHN and VB6-845d in order to focus our efforts and our resources on our ongoing development of Vicinium for the treatment of high-risk NMIBC. We are also exploring collaborations for Vicinium for the treatment of SCCHN and VB6-845d.

We maintain global development, marketing and commercialization rights for all of our TFPT-based product candidates. We intend to explore various commercialization strategies to market our approved products. If we obtain regulatory approval for Vicinium for the treatment of high-risk NMIBC, we may build a North American specialty urology sales force to market the product or seek commercialization partners. If we obtain regulatory approval for Vicinium for the treatment of SCCHN or for our other product candidates, including VB6-845d, we may seek partners with oncology expertise in order to maximize the commercial value of each asset or a portfolio of assets. We also own or exclusively license worldwide intellectual property rights for all of our TFPT-based product candidates, covering our key patents with protection ranging from 2018 to 2036.

On June 10, 2016, we entered into a License Agreement, or the License Agreement, with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc., or collectively, Roche, pursuant to which we licensed our monoclonal antibody EBI-031 and all other IL-6 antagonistic anti-IL-6 monoclonal antibody technology owned by us. Under the License Agreement, Roche is required to continue developing EBI-031 and pursue ongoing patent prosecution at its cost. At the time of the License Agreement, EBI-031, which was derived using our previous AMP-Rx platform, was in pre-clinical development as an intravitreal injection for diabetic macular edema and uveitis. We have received $30.0 million in payments from Roche pursuant to the License Agreement, including a $7.5 million upfront payment and a $22.5 million milestone payment as a result of the investigational new drug application for EBI-031 becoming effective. We are also entitled to receive up to an additional $240.0 million upon the achievement of other specified regulatory, development and commercial milestones, as well as royalties based on net sales of potential future products containing EBI-031 or any other potential future products containing other IL-6 compounds.

Our operations to date have been limited to organizing and staffing our company, acquiring rights to intellectual property, business planning, raising capital, developing our technology, identifying potential product candidates, undertaking pre-clinical studies and conducting clinical trials. To date, we have financed our operations primarily through debt and equity offerings and collaboration and licensing arrangements. We have devoted substantially all of our financial resources and efforts to research and development activities. We have not completed development of any of our product candidates. We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

Liquidity

Since inception, we have incurred significant operating losses and expect to continue to incur operating losses for the foreseeable future. We had a net loss of $6.5 million for the three months ended March 31, 2019. As of March 31, 2019, we had an accumulated deficit of $192.5 million.

We do not know when, or if, we will generate any revenue from the sale of our product candidates as we seek regulatory approval for, and potentially begin to commercialize, any of our product candidates. We anticipate that we will continue to incur losses for the next several years and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to all of the risks common to the development of new products and we may encounter unforeseen expenses, difficulties, complications,

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delays and other unknown factors that may adversely affect our business. Until we can generate substantial revenue from commercial sales, if ever, we expect to seek additional capital through a combination of private and public equity offerings, debt financings, strategic collaborations and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing shareholders will be diluted and the terms may include liquidation or other preferences that adversely affect the rights of existing shareholders. Debt financing, if available, may involve agreements that include liens or other restrictive covenants limiting our ability to take important actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic collaborations and alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds when needed we may be required to further delay, limit, reduce or terminate our development or commercialization efforts or grant rights to develop and market our technologies that we would otherwise prefer to develop and market ourselves.

Our future capital requirements will depend on many factors, including:

• the scope, initiation, progress, timing, costs and results of pre-clinical development and laboratory testing and clinical trials for our product candidates;

• the cost and timing of any new clinical trials or studies of our product candidates;

• our ability to establish collaborations on favorable terms, if at all, particularly manufacturing, marketing and distribution arrangements for our product candidates;

• the costs and timing of the implementation of commercial-scale manufacturing activities, including those  associated with the manufacturing process and technology transfer to third-party manufacturers to facilitate such commercial-scale manufacturing;

• the costs and timing of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval;

• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

• our obligation to make milestone, royalty and other payments to third party licensors under our licensing agreements;

• the extent to which we in-license or acquire rights to other products, product candidates or technologies;

• the outcome, timing and cost of regulatory review by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities, including Health Canada, to require that we perform more studies or clinical trials than those that we currently expect;

• our ability to achieve certain future regulatory, development and commercialization milestones under the License Agreement with Roche;

• the effect of competing technological and market developments; and

• the revenue, if any, received from commercial sales of any product candidates for which we receive regulatory approval.

Accordingly, until such time that we can generate substantial revenue from product sales, if ever, we expect to finance our operations through public or private equity or debt financings or other sources. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our development programs or commercialization efforts or grant to others rights to develop or market product candidates that we would otherwise prefer to develop and market ourselves. Failure to receive additional funding could cause us to cease operations, in part or in full. Furthermore, even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital due to favorable market conditions or strategic considerations.

We believe that our cash and cash equivalents of $42.4 million as of March 31, 2019 will be sufficient to fund our current operating plan into 2020; however, we have based this estimate on assumptions that may prove to be wrong, and our capital resources may be utilized faster than we currently expect.

Financial Operations Overview

Revenue

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To date, we have not generated any revenue from the sale of products. Substantially all of our revenue to date has been derived from the License Agreement with Roche and, to a lesser extent, from our former collaboration with ThromboGenics N.V., or ThromboGenics. We do not expect to generate significant product revenue unless and until we obtain marketing approval for and commercialize our product candidates.

On June 10, 2016, we entered into the License Agreement with Roche, which became effective on August 16, 2016. Under the License Agreement, we granted Roche an exclusive, worldwide license, including the right to sublicense, to its patent rights and know-how related to our monoclonal antibody EBI-031 or all other IL-6 antagonistic anti-IL-6 monoclonal antibody, to make, have made, use, have used, register, have registered, sell, have sold, offer for sale, import and export any product containing such an antibody or any companion diagnostic used to predict or monitor response to treatment with such a product, which we collectively refer to as the Licensed Intellectual Property.

During 2016, we received an upfront license fee of $7.5 million and a milestone payment of $22.5 million. We are entitled to receive up to $240.0 million in additional consideration upon the achievement of specified regulatory, development and commercial milestones. Specifically, an aggregate amount of up to $175.0 million is payable to us for the achievement of specified milestones with respect to the first indication: $50.0 million in development milestones, $50.0 million in regulatory milestones and $75.0 million in commercialization milestones. Additional amounts of up to $65.0 million are payable upon the achievement of specified development and regulatory milestones in a second indication. In addition, we are entitled to receive royalty payments in accordance with a tiered royalty rate scale, with rates ranging from 7.5% to 15% for net sales of potential future products containing EBI-031 and up to 50% of these rates for net sales of potential future products containing other IL-6 compounds, with each of the royalties subject to reduction under certain circumstances and to buy-out options.

The License Agreement is subject to the provisions of Accounting Standards Codification, or ASC 606, Revenue From Contracts With Customers, which was adopted effective January 1, 2018 utilizing a modified retrospective method. We concluded that all performance obligations had been achieved as of the adoption date and therefore the full transaction price was considered earned. The transaction price was determined to be the $30.0 million received in 2016. Additional consideration to be paid to us upon the achievement of certain milestones will be included if it is expected that the amounts will be received and the amounts would not be subject to a constraint. As of March 31, 2019 and March 31, 2018, we concluded that there would be no adjustments to the transaction price as we continue to not expect any amounts to be received from any milestones within the License Agreement. This is due to the nature of the milestones and the development status of the product candidates as of the end of each reporting period. As a result, no revenue was recognized during the three month periods ended March 31, 2019 and March 31, 2018 as all performance obligations had been previously achieved and there was no change in the transaction price during the periods.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

• employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

• expenses incurred under agreements with contract research organizations, or CROs, and investigative sites that conduct our clinical trials;

• expenses associated with developing manufacturing capabilities and manufacturing clinical study materials;

• facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies; and

• expenses associated with pre-clinical and regulatory activities.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

The successful development and commercialization of any product candidate is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

• the scope, progress, outcome and costs of our clinical trials and other research and development activities;

• the efficacy and potential advantages of our product candidates compared to alternative treatments, including any standard of care;

• the market acceptance of our product candidates;

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• the cost and timing of the implementation of commercial-scale manufacturing of our product candidates;

• obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

• significant and changing government regulation; and

• the timing, receipt and terms of any marketing approvals.

A change in the outcome of any of these variables with respect to the development of any product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate will be required for the completion of clinical development of any product candidate, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

We allocate direct research and development expenses, consisting principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials, and costs related to manufacturing or purchasing clinical trial materials and technology transfer, to specific product programs. We do not allocate employee and contractor-related costs, costs associated with our platform and facility expenses, including depreciation or other indirect costs, to specific product programs because these costs may be deployed across multiple product programs under research and development and, as such, are separately classified. The table below provides research and development expenses incurred for Vicinium for the treatment of high-risk NMIBC and other expenses by category. We have deferred further development of Vicinium for the treatment of SCCHN and VB6-845d in order to focus our efforts and our resources on our ongoing development of Vicinium for the treatment of high-risk NMIBC. We expect our research and development expenses for Vicinium for the treatment of high-risk NMIBC will continue to increase during subsequent periods. We did not allocate research and development expenses to any other specific product program during the periods presented:

	Three Months Ended March 31,
	2019		2018
	(in thousands)
Programs:
Vicinium, for the treatment of high-risk NMIBC	$	2,362	$	1,922
Total direct program expenses	2,362		1,922
Personnel and other expenses:
Employee and contractor-related expenses	1,710		965
Platform-related lab expenses	281		63
Facility expenses	110		95
Other expenses	223		210
Total personnel and other expenses	2,324		1,333
Total research and development expenses	$	4,686	$	3,255

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation, in executive, operational, finance, business development and human resource functions. Other general and administrative expenses include facility-related costs, professional fees for legal, patent, consulting and accounting services and commercial market research.

Changes in Fair Value of Contingent Consideration

In connection with the acquisition of Viventia Bio, Inc., or Viventia, in September 2016, we recorded contingent consideration pertaining to the amounts potentially payable to Viventia's shareholders pursuant to the terms of the share purchase agreement between us, Viventia, and the other signatories thereto and are based on regulatory approval in certain markets and future revenue levels. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized within the condensed consolidated statements of operations and comprehensive income (loss).

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Other Income, Net

Other income, net consists primarily of interest income earned on cash and cash equivalents.

Critical Accounting Policies and Significant Judgments and Estimates

Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our condensed consolidated financial statements. Management has determined that our most critical accounting policies are those relating to revenue recognition, accrued research and development expenses, stock-based compensation, fair value of warrants to purchase common stock, fair value of intangible assets and goodwill, lease accounting, income taxes including the valuation allowance for deferred tax assets, contingent consideration and going concern considerations.

Recently adopted accounting standards

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 addresses the financial reporting of leasing transactions. Under past guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update requires the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability are expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability is recognized separately from the amortization of the right-of-use asset in the statement of operations and the repayment of the principal portion of the lease liability is classified as a financing activity while the interest component is included in the operating section of the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018 including interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-10, Leases (Topic 842), Codification Improvements, or ASU 2018-10, ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, or ASU 2018-1, and ASU No. 2019-01 Leases (Topic 842), Codification Improvements to provide additional guidance for the adoption of ASC Topic 842, Leases, or ASC 842. ASU 2018-10 clarifies certain provisions and corrects unintended applications of the guidance, such as the rate implicit in a lease, impairment of the net investment in a lease, lessee reassessment of lease classifications, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. The amendments in ASU 2018-11 allow for an additional transition method, whereby at the adoption date the entity recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, while the comparative period disclosures continue recognition under ASC 840, Leases. Additionally, ASU 2018-11 includes a practical expedient for separating contract components for lessors. We adopted ASC 842 using the optional transition method outlined in ASU 2018-11 as of January 1, 2019. The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets of approximately $236,000 and corresponding lease liabilities of approximately $236,000. The adoption of these ASUs did not have a material impact on our results of operations, however, the adoption resulted in significant changes to our financial statement disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, or ASU 2017-04. ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted and we adopted this guidance effective January 1, 2019. We do not expect an impact upon adoption of ASU 2017-04 on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, or ASU-2018-07, Compensation-Stock Compensation (Topic 718)- Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted but not earlier than an entity’s adoption date of Topic 606. We have adopted this standard effective during the three months ended March 31, 2019. The adoption of ASU 2018-07 did not have a material impact our financial position and results of operations.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, or ASU 2018-09. ASU 2018-09 provides amendments to a wide variety of topics in the FASB’s ASC, which applies to all reporting entities within the scope of the affected accounting guidance. The transition and effective date guidance are based on the facts and circumstances of each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance of ASU 2018-09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. ASU 2018-09 did not have a material impact on the Company’s financial statements and related disclosures.

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Recently issued accounting pronouncements

In August 2018, the FASB issued ASU 2018-13— Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurements ("ASU 2018-13"). ASU 2018-13 modifies fair value measurement disclosure requirements. The effective date for ASU 2018-13 is for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, or ASU 2018-15. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to defer and recognize as an asset. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning January 1, 2020, and is to be applied using a modified retrospective transition method. Earlier adoption is permitted. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.

There have been no significant changes to the Company's critical accounting policies recently disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 that was filed with the Securities and Exchange Commission, or SEC, on March 1, 2019, or 2018 Form 10-K, other than those related to the adoption of ASU 2016-02.

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

	Three Months Ended March 31,
	2019			2018			Change
	(in thousands)
Operating expenses:
Research and development	4,686			3,255			1,431
General and administrative	3,055			1,952			1,103
Gain from change in fair value of contingent consideration	(1,000		)	(1,200		)	200
Total operating expenses	6,741			4,007			2,734
Loss from operations	(6,741		)	(4,007		)	(2,734		)
Other income, net	261			44			217
Net loss and comprehensive loss	$	(6,480	)	$	(3,963	)	$	(2,517	)

Research and development expenses. Research and development expenses were $4.7 million for the three months ended March 31, 2019 compared to $3.3 million for the three months ended March 31, 2018. The increase of $1.4 million was due primarily to increases in technology transfer and manufacturing costs associated with our Master Bioprocessing Services Agreement with FUJIFILM Diosynth Biotechnologies U.S.A., Inc., or Fujifilm MSA, and increases in employee-related compensation.

General and administrative expenses. General and administrative expenses were $3.1 million for the three months ended March 31, 2019 compared to $2.0 million for the three months ended March 31, 2018. The increase of $1.1 million was due primarily to commercial market research ($0.3 million), and increases in employee compensation costs ($0.2 million), professional fees and legal costs ($0.5 million) and insurance of ($0.1 million).

Gain from change in fair value of contingent consideration. The change in fair value of contingent consideration was a $1.0 million gain for the three months ended March 31, 2019 compared to a $1.2 million gain for the three months ended March 31,

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2018. The gain in both periods was due primarily to changes in the discount rates and assumptions related to development and commercialization timelines and estimated sales projections.

Other income (expense), net. Other income, net was $0.3 million for the three months ended March 31, 2019 compared to other income, net of $44,000 for the three months ended March 31, 2018. The change of $0.2 million was due primarily to the increase in interest income on higher cash balances due to an equity financing in June 2018.

Liquidity and Capital Resources

Sources of Liquidity

Since inception, we have incurred significant operating losses and expect to continue to incur operating losses for the foreseeable future. To date, we have financed our operations primarily through debt and equity offerings and collaboration and licensing arrangements.

In June 2016, we entered into the License Agreement with Roche and received an up-front license fee of $7.5 million and up to an additional $262.5 million upon the achievement of specified regulatory, development and commercial milestones with respect to up to two unrelated indications. Specifically, an aggregate amount of up to $197.5 million is payable to us for the achievement of specified milestones with respect to the first indication: consisting of $72.5 million in development milestones, $50.0 million in regulatory milestones and $75.0 million in commercialization milestones. We received the first development milestone payment of $22.5 million as a result of the IND for EBI-031 becoming effective. In addition, we are entitled to receive royalty payments in accordance with a tiered royalty rate scale, with rates ranging from 7.5% to 15% for net sales of potential future products containing EBI-031 and at up to 50% of these rates for net sales of potential future products containing other IL-6 compounds, with each of the royalties subject to reduction under certain circumstances and to the buy-out options of Roche. As of March 31, 2019, none of these additional milestones under the License Agreement have been achieved.

Cash Flows

As of March 31, 2019, we had cash and cash equivalents of $42.4 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.

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

	Three Months Ended March 31,
	2019			2018
	(in thousands)
Net cash (used in) provided by :
Operating activities	$	(7,992	)	$	(4,383	)
Investing activities	—			5
Financing activities	7			9,386
Net decrease in cash and cash equivalents	$	(7,985	)	$	5,008

Operating activities. Net cash used in operating activities was $8.0 million for the three months ended March 31, 2019 and consisted primarily of a net loss of $6.5 million, adjusted for non-cash items, including stock-based compensation expense of $0.3 million, a gain from changes in fair value of contingent consideration of $1.0 million, and a net increase in operating assets and liabilities of $0.9 million.

Net cash used in operating activities was $4.4 million for the three months ended March 31, 2018, and consisted primarily of net loss of $4.0 million resulting from the License Agreement with Roche, adjusted for non-cash items, including stock-based compensation expense of $0.4 million, a gain from changes in the fair value of contingent consideration of $1.2 million, and a net decrease in operating assets and liabilities of $0.3 million.

Investing activities. Net cash provided by investing activities consisted of sales of property and equipment. There were no cash proceeds from the sale of property and equipment for the three months ended March 31, 2019, while there were cash proceeds

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from the sale of property and equipment of approximately $5,000 for the three months ended March 31, 2019 and 2018, respectively.

Financing activities. Net cash provided by financing activities for the three months ended March 31, 2019 consisted of approximately $7,000 of proceeds from the issuance of common stock pursuant to the Company's 2014 Employee Stock Purchase Plan. Net cash provided by financing activities for the three months ended March 31, 2018 consisted of the proceeds from the cash exercise of common stock purchase warrants issued in connection with our underwritten public offering in November 2017, as well as the sale of 7,968,128 shares of our common stock and common stock purchase warrants to purchase 7,968,128 shares of our common stock in our registered direct public offering and concurrent private placement in March 2018.

Funding Requirements

We will incur substantial expenses if and as we:

• continue our Phase 3 clinical trial for Vicinium for the treatment of high-risk NMIBC;

• incur research and pre-clinical and clinical development of our other product candidates;

• seek to discover and develop additional product candidates;

• in-license or acquire the rights to other products, product candidates or technologies;

• seek marketing approvals for any product candidates that successfully complete clinical trials;

• establish sales, marketing and distribution capabilities and scale up and validate external manufacturing capabilities (including initiating and completing the manufacturing process and technology transfer to any third-party manufacturers) to commercialize any products for which we may obtain marketing approval;

• maintain, expand and protect our intellectual property portfolio;

• add equipment and physical infrastructure to support our research and development;

• hire additional clinical, regulatory, quality control, scientific and management personnel; and

• expand our operational, financial and management systems and personnel.

We believe that our cash and cash equivalents of $42.4 million as of March 31, 2019 will be sufficient to fund our current operating plan into 2020; however, we have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.

Our future capital requirements will depend on many factors, including:

• the scope, initiation, progress, timing, costs and results of pre-clinical development and laboratory testing of our pre-clinical product candidates;

• the cost and timing of any new clinical trials or studies of our product candidates;

• our ability to establish collaborations on favorable terms, if at all, particularly manufacturing, marketing and distribution arrangements for our product candidates;

• the costs and timing of the implementation of commercial-scale manufacturing activities;

• the costs and timing of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval;

• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

• our obligation to make milestone, royalty and other payments to third party licensors under our licensing agreements;

• the extent to which we in-license or acquire rights to other products, product candidates or technologies;

• the outcome, timing and cost of regulatory review by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities, including Health Canada, to require that we perform more studies than those that we currently expect;

• our ability to achieve certain future regulatory, development and commercialization milestones under the License Agreement with Roche;

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• the effect of competing technological and market developments; and

• the revenue, if any, received from commercial sales of any product candidates for which we receive regulatory approval.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, collaborations, strategic alliances, licensing arrangements and marketing and distribution arrangements. We do not have any committed external source of funds other than the amounts payable under the License Agreement with Roche. To the extent that we raise additional capital through the sale of equity or debt securities, such as the financings we completed in November 2017, March 2018 and June 2018, our stockholders' ownership interest will be diluted and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights as holders of our common stock. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, collaborations, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

The disclosure of our contractual obligations and commitments is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commitments” in our 2018 Form 10-K.

The following table summarized our contractual obligations at March 31, 2019:

	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
	(in thousands)
Operating lease obligations (1)	$	232	$	155	$	77	$	—	$	—
Short term lease obligations (2)	90		90
License maintenance fees (3)	1,004		182		547		275		—
Total fixed contractual obligations	$	1,326	$	427	$	624	$	275	$	—

(1) We lease our manufacturing facility located in Winnipeg, Manitoba, Canada, which consists of an approximately 31,100 square foot manufacturing, laboratory, warehouse and office facility, under a five-year renewable lease through September 2020. The minimum monthly rent under this lease is approximately $12,900 per month. We also expect to incur approximately $12,500 in related operating expenses per month.

(2) We entered into a short-term lease for office space in Philadelphia, Pennsylvania that has a monthly rent of approximately $10,000 per month. We entered into a short-term lease for office space in Cambridge, Massachusetts that has a monthly rent of approximately $10,000 per month.

(3) We have entered into various license agreements that, upon successful clinical development, contingently trigger payments upon achievement of certain milestones, royalties and other such payments. See ‘‘License Agreements’’ below. Because the achievement of these milestones are uncertain, the amounts have not been included.

We enter into agreements in the normal course of business with CROs for clinical trials and with vendors for pre-clinical studies, license agreements and other services and products for operating purposes which are cancelable by us, upon prior written notice. We have an agreement with a CRO that may be terminated at any time with 30 days’ notice; however, upon termination, we would be required to pay all costs incurred by the CRO up to the termination date, plus an additional fee, which is calculated as an amount equal to either (a) 5% of the unearned fees for services as provided in the budget if we have paid 50% or more of the total fees for services as specified in the work order or (b) 3% of the amount of fees we have paid for services as of the date of termination if we have paid less than 50% of the total fees for services as specified in the work order.

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As of March 31, 2019, we have been invoiced $7.4 million in fees for services from this CRO, which is more than 50% of the total fees for services as specified in the current work order with this CRO. Therefore, as of March 31, 2019, we would have been required to pay a termination fee of 5% of the amount of fees as of the date of termination of this agreement, which would have equaled approximately $182,000 as of March 31, 2019. Amounts owed to such CRO were not included in the ‘‘Contractual Obligations and Commitments’’ table above as it was considered a contingent payment as of March 31, 2019.

In connection with the acquisition of Viventia, we are obligated to pay to the sellers certain post-closing contingent cash payments upon the achievement of specified milestones and based upon net sales, in each case subject to the terms and conditions set forth in the acquisition agreement, including: (i) a one-time milestone payment of $12.5 million payable upon the first sale of Vicinium for the treatment of NMIBC or any variant or derivative thereof, other than Vicinium for the treatment of SCCHN, in the United States, or the Purchased Product; (ii) a one-time milestone payment of $7.0 million payable upon the first sale of the Purchased Product in any one of certain specified European countries; (iii) a one-time milestone payment of $3.0 million payable upon the first sale of the Purchased Product in Japan; and (iv) and quarterly earn-out payments equal to two percent (2%) of net sales of the Purchased Product during specified earn-out periods. Such earn-out payments are payable with respect to net sales in a country beginning on the date of the first sale in such country and ending on the earlier of (i) December 31, 2033 and (ii) fifteen years after the date of such sale, subject to early termination in certain circumstances if a biosimilar product is on the market in the applicable country. Because the achievement of these milestones is uncertain, the amounts have not been included in the ‘‘Contractual Obligations and Commitments’’ table above.

License Agreements

The disclosure of our obligations under our license agreements is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — License Agreements” in our 2018 Form 10-K. During the three-month period ended March 31, 2019, there were no material changes to our obligations under our license agreements previously disclosed in our 2018 Form 10-K.

Off-balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

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Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. As of March 31, 2019, we had cash and cash equivalents of $42.4 million, primarily money market mutual funds consisting of U.S. government-backed securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point (1.0%) change in interest rates would not have a material effect on the fair market value of our portfolio.

Foreign Currency Risk

As our functional currency is in U.S. Dollars, we face foreign exchange rate risk as a result of entering into transactions denominated in Canadian dollars. As a result, our primary foreign currency exposure is to fluctuations in the Canadian dollar relative to the U.S. dollar. A hypothetical 10% change in average foreign currency exchange rates during any of the preceding periods presented would not have a material effect on our net loss. Foreign exchange rates may continue to be a factor in the future periods as we continue to expand and grow our business.

Item 4.         Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)) under Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Notwithstanding our assessment that, as noted below, our internal control over financial reporting was not effective as of December 31, 2018 related to accounting for business combinations, our management concluded that our disclosure controls and procedures were effective at the reasonable assurance level. The material weakness in our internal control over financial reporting was attributable primarily to our lack of expertise in our finance and accounting group related to the accounting for business combinations.

As more fully discussed in our 2018 Form 10-K, to remediate the material weakness referenced above, we have implemented or have plans to implement the remediation initiatives described in Part II, Item 9A of our 2018 Form 10-K and will continue to evaluate the remediation and plan to implement additional measures in the future.

Previously Identified Material Weakness

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) under the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and our board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway

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Commission in Internal Control-Integrated Framework (2013). Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2018.

As of December 31, 2018, there was a material weakness, identified in 2016, in our controls over the financial reporting process related to business combinations. As a result of a lack of expertise in our finance and accounting group related to the accounting for business combinations, we lacked sufficient review of assumptions used and conclusions reached from the perspective of a typical market participant used in the acquisition valuation model. While we implemented processes and controls in 2017 and 2018 to remediate the material weakness over the review of assumptions related to business combinations, there have been no subsequent business combination transactions since the identification of the material weakness in 2016 that could be tested to provide evidence that the new controls operate effectively. As a result, our management concluded that our internal control over financial reporting was not effective as of December 31, 2018.

Remediation Status

As more fully discussed in our 2018 Form 10-K, to remediate the material weaknesses referenced above, we have implemented or have plans to implement the remediation initiatives described in Part II, Item 9A of our 2018 Form 10-K. We also continue to engage independent consultants to aid in the review of our financial reporting process and continue to evaluate steps to remediate the previously identified material weakness.

Changes in Internal Control Over Financial Reporting

During the three months ended March 31, 2019, management continued to implement certain remediation initiatives discussed in Part II, Item 9A of our 2018 Form 10-K. However, there was no change to our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.         Legal Proceedings

We are not currently subject to any material legal proceedings.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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

Other than as previously disclosed on our Current Reports on Form 8-K filed with the SEC, we did not issue any unregistered equity securities during the three months ended March 31, 2019.

Item 3.         Defaults Upon Senior Securities.

Not applicable.

Item 4.         Mine Safety Disclosures.

Not applicable.

Item 5.         Other Information.

Not applicable.

Item 6.        Exhibits

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Restated Certificate of Incorporation of Eleven Biotherapeutics, Inc. Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on February 18, 2014 (File No. 001-36296).
3.2	Amended and Restated By-laws of Eleven Biotherapeutics, Inc. Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on April 16, 2015 (File No. 001-36296).
3.3	Certificate of Amendment of Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on May 17, 2018 (File No. 001-36296).
3.4	Amendment to Amended and Restated By-laws. Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on May 17, 2018 (File No. 001-36296).
4.1	Specimen Stock Certificate evidencing the shares of common stock. Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-1/A filed on January 23, 2014 (Reg. No. 333-193131).
4.2	Amended and Restated Investors’ Rights Agreement of Eleven Biotherapeutics, Inc. Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-1 filed on December 30, 2013 (Reg. No. 333-193131).
4.3	Registration Rights Agreement, dated as of September 20, 2016 by and among Eleven Biotherapeutics, Inc. and the shareholders named therein. Incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on September 21, 2016 (File No. 001-36296).
4.4	Form of Warrant to Purchase Common Stock, by and between Eleven Biotherapeutics, Inc. and the persons party thereto. Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on December 1, 2014 (File No. 001-36296).
4.5	Form of Warrant issued to Silicon Valley Bank and Life Science Loans, LLC dated November 25, 2014. Incorporated by reference to Exhibit 10.23 to our Registration Statement on Form S-1 filed with the SEC on December 19, 2014 (Reg. No. 333-201176).
4.6	Form of Common Warrant. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8‑K filed with the SEC on November 3, 2017 (File. No. 001-36296).
4.7	Form of Warrant. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 23, 2018 (File. No. 001-36296).
10.1*	Employment Agreement, dated September 20, 2016, by and between Eleven Biotherapeutics, Inc. and Glen MacDonald, as amended on February 21, 2017.
31.1*	Rule 13a-14(a) Certification of Principal Executive Officer
31.2*	Rule 13a-14(a) Certification of Principal Financial Officer
32.1**	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. §1350
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.
**	Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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SESEN BIO, INC.
By:	/s/  Thomas R. Cannell, D.V.M.
	Thomas R. Cannell, D.V.M.
	President and Chief Executive Officer
	(Principal Executive Officer and Duly Authorized Officer)

May 10, 2019

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