Cascadian Therapeutics
Oncothyreon Inc. (Form: 10-Q, Received: 11/06/2014 17:01:22)
Table of Contents

 

 

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 September 30, 2014

or

 

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

For the transition period from                      to                     

Commission file number: 001-33882

 

 

ONCOTHYREON INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-0868560

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2601 Fourth Ave., Suite 500

Seattle, Washington

  98121
(Address of principal executive offices)   (Zip Code)

(206) 801-2100

(Registrant’s telephone number, including area code)

 

 

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, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes   ¨     No   x

As of November 6, 2014, the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 91,555,975.

 

 

 


Table of Contents

ONCOTHYREON INC.

FORM 10-Q FOR THE QUARTER ENDED September 30, 2014

INDEX

 

     Page  

PART I—FINANCIAL INFORMATION

     1   

Item 1. Financial Statements (Unaudited)

     1   

Condensed Consolidated Balance Sheets

     1   

Condensed Consolidated Statements of Operations

     2   

Condensed Consolidated Statements of Comprehensive Loss

     3   

Condensed Consolidated Statements of Cash Flows

     4   

Notes to the Condensed Consolidated Financial Statements

     5   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     26   

Item 4. Controls and Procedures

     26   

PART II—OTHER INFORMATION

     27   

Item 1. Legal Proceedings

     27   

Item 1A. Risk Factors

     27   

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

     41   

Item 3. Defaults Upon Senior Securities

     41   

Item 4. Mine Safety Disclosure

     41   

Item 5. Other Information

     41   

Item 6. Exhibits

     42   

Signatures

     43   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

ONCOTHYREON INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

     September 30,
2014
    December 31,
2013
 
     (Unaudited)        
ASSETS     

Current:

    

Cash and cash equivalents

   $ 34,242      $ 9,279   

Short-term investments

     46,520        50,748   

Accounts and other receivables

     309        197   

Prepaid and other current assets

     887        720   
  

 

 

   

 

 

 

Total current assets

     81,958        60,944   

Long-term investments

     10,483        12,535   

Property and equipment, net

     1,655        1,695   

Indefinite-lived intangible assets

     19,738        —     

Goodwill

     16,659        2,117   

Other assets

     453        455   
  

 

 

   

 

 

 

Total assets

   $ 130,946      $ 77,746   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current:

    

Accounts payable

   $ 303      $ 533   

Accrued and other liabilities

     3,028        2,622   

Accrued compensation and related liabilities

     1,222        1,311   

Current portion of restricted share unit liability

     156        194   
  

 

 

   

 

 

 

Total current liabilities

     4,709        4,660   

Deferred rent

     363        439   

Restricted share unit liability

     157        143   

Warrant liability

     383        924   

Deferred tax liability

     6,908        —    

Class UA preferred stock, 12,500 shares authorized, 12,500 shares issued and outstanding

     30        30   

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.0001 par value; Authorized: 10,000,000 shares; Issued and outstanding:

     —         —    

Series A Convertible Preferred Stock—10,000 shares and zero shares as of September 30, 2014 and December 31, 2013, respectively

     —         —    

Common stock, $0.0001 par value; 200,000,000 shares and 100,000,000 shares authorized as of September 30, 2014 and December 31, 2013, respectively; 91,555,975 shares and 70,673,143 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

     353,856        353,854   

Additional paid-in capital

     224,059        154,832   

Accumulated deficit

     (454,469     (432,085

Accumulated other comprehensive loss

     (5,050     (5,051
  

 

 

   

 

 

 

Total stockholders’ equity

     118,396        71,550   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 130,946      $ 77,746   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

ONCOTHYREON INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  
     (Unaudited)  

Operating expenses

        

Research and development

   $ 5,663      $ 5,517      $ 15,876      $ 27,374   

General and administrative

     2,357        2,085        7,101        6,266   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,020        7,602        22,977        33,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (8,020     (7,602     (22,977     (33,640
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

        

Investment and other income (expenses), net

     11        66        52        118   

Change in fair value of warrant liability

     1,273        (174     541        1,126   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses), net

     1,284        (108     593        1,244   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (6,736   $ (7,710   $ (22,384   $ (32,396
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

   $ (0.09   $ (0.12   $ (0.31   $ (0.54
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute basic and diluted net loss per share

     77,237,246        63,886,874        72,919,829        59,962,328   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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ONCOTHYREON INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  
     (Unaudited)  

Net loss

   $ (6,736   $ (7,710   $ (22,384   $ (32,396

Other comprehensive income (loss):

        

Available-for-sale securities:

        

Unrealized gain (loss) during the period, net

     (1     22        1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (1     22        1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (6,737   $ (7,688   $ (22,383   $ (32,395
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

ONCOTHYREON INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

     Nine months ended
September 30,
 
     2014     2013  
     (Unaudited)  

Cash flows from operating activities

    

Net loss

   $ (22,384   $ (32,396

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     373        367   

Amortization of premiums and accretion of discounts on securities

     443        473   

Share-based compensation expense

     1,751        1,628   

Change in fair value of warrant liability

     (541     (1,126

Cash settled on conversion of restricted share units

     (96     (11

Other

     (1     (45

Net change in assets and liabilities:

    

Accounts and other receivable

     (112     84   

Prepaid expenses and other current assets

     (167     (208

Other long term assets

     2        (132

Accounts payable

     (230     (456

Accrued and other liabilities

     162        1,068   

Accrued compensation and related liabilities

     (89     23   

Deferred rent

     (76     (70
  

 

 

   

 

 

 

Net cash used in operating activities

     (20,965     (30,801
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (34,007     (50,190

Redemption of investments

     39,847        52,066   

Purchases of property and equipment, net

     (332     (253

Cash assumed in connection with the acquisition of Alpine Bioscience, Inc.

     104        —     
  

 

 

   

 

 

 

Net cash provided by investing activities

     5,612        1,623   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock, net of issuance cost

     21,622        19,686   

Proceeds from issuance of convertible preferred stock, net of issuance cost

     18,693        —     

Proceeds from stock options exercised

     1        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     40,316        19,686   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     24,963        (9,492

Cash and cash equivalents, beginning of period

     9,279        22,266   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 34,242      $ 12,774   
  

 

 

   

 

 

 

Non-cash activities

    

Issuance of common stock in connection with the acquisition of Alpine

   $ 27,233      $ —     
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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ONCOTHYREON INC.

Notes to the Condensed Consolidated Financial Statements

Three and nine months ended September 30, 2014 and September 30, 2013

(Unaudited)

 

1. DESCRIPTION OF BUSINESS

Oncothyreon Inc. (the Company) is a clinical-stage biopharmaceutical company incorporated in the State of Delaware on September 7, 2007. The Company is focused primarily on the development of therapeutic products for the treatment of cancer. The Company’s goal is to discover, develop and commercialize compounds that have the potential to improve the lives and outcomes of cancer patients. The Company’s operations are not subject to any seasonality or cyclicality factors.

 

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements. The accounting principles and methods of computation adopted in these condensed consolidated financial statements are the same as those of the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities Exchange Commission (the SEC) on March 13, 2014.

Omitted from these statements are certain information and note disclosures normally included in the audited consolidated financial statements prepared in accordance with U.S. GAAP. The Company believes all adjustments necessary for a fair statement of the results for the periods presented have been made, and such adjustments consist only of those considered normal and recurring in nature. The financial results for the three and nine months ended September 30, 2014 are not necessarily indicative of financial results for the full year. The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements at that date. The unaudited condensed consolidated financial statements and notes presented should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 13, 2014.

Accumulated Other Comprehensive Income (Loss)

Comprehensive income or loss is comprised of net income or loss and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on the Company’s available-for-sale investments. In addition to unrealized gains and losses on investments, accumulated other comprehensive income or loss consists of foreign currency translation adjustments which arose from the conversion of the Canadian dollar functional currency consolidated financial statements to the U.S. dollar reporting currency consolidated financial statements prior to January 1, 2008. Should the Company liquidate or substantially liquidate its investments in its foreign subsidiaries, the Company would be required to recognize the related cumulative translation adjustments pertaining to the liquidated or substantially liquidated subsidiaries, as a charge to earnings in the Company’s condensed consolidated statements of operations and comprehensive loss.

There were no reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2014. The tables below show the changes in accumulated balances of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2014 and September 30, 2013:

 

     Three months ended September 30, 2014  
     Net unrealized
gains/(losses)  on
Available-for-sale
Securities
    Foreign
Currency
Translation
Adjustment
    Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at July 1, 2014

   $ 17      $ (5,066   $ (5,049

Current period other comprehensive loss

     (1     —          (1
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 16      $ (5,066   $ (5,050
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Nine months ended September 30, 2014  
     Net unrealized
gains/(losses) on
Available-for-sale
Securities
     Foreign
Currency
Translation
Adjustment
    Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at December 31, 2013

   $ 15       $ (5,066   $ (5,051

Current period other comprehensive income

     1         —          1   
  

 

 

    

 

 

   

 

 

 

Balance at September 30, 2014

   $ 16       $ (5,066   $ (5,050
  

 

 

    

 

 

   

 

 

 

 

     Three months ended September 30, 2013  
     Net unrealized
gains/(losses) on
Available-for-sale
Securities
     Foreign
Currency
Translation
Adjustment
    Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at July 1, 2013

   $ 9       $ (5,066   $ (5,057

Current period other comprehensive income

     22         —          22   
  

 

 

    

 

 

   

 

 

 

Balance at September 30, 2013

   $ 31       $ (5,066   $ (5,035
  

 

 

    

 

 

   

 

 

 

 

     Nine months ended September 30, 2013  
     Net unrealized
gains/(losses) on
Available-for-sale
Securities
     Foreign
Currency
Translation
Adjustment
    Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at December 31, 2012

   $ 30       $ (5,066   $ (5,036

Current period other comprehensive income

     1         —          1   
  

 

 

    

 

 

   

 

 

 

Balance at September 30, 2013

   $ 31       $ (5,066   $ (5,035
  

 

 

    

 

 

   

 

 

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This standard applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact this standard will have on the consolidated financial position or results of operations.

In May 2014, FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) that will supersede most revenue recognition standards. Under the new standard, an entity will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the entity expects to be entitled in exchange for those goods or services. An entity would recognize revenue through a five-step process: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This standard also requires enhanced disclosures and provides more comprehensive guidance for transactions such as service revenue and contract modifications. Guidance for multiple-element arrangements also has been enhanced. The standard will take effect for public entities for annual reporting periods beginning after December 15, 2016, including interim reporting periods. Early application is not permitted. The Company is currently evaluating the impact this standard will have on the consolidated financial position or results of operations.

 

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In July 2013, FASB issued guidance on presentation of an unrecognized tax benefit in financial statements when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for an NOL carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The guidance does not require new recurring disclosures. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public entities. Early adoption and retrospective application are permitted. The Company adopted this standard on January 1, 2014. The adoption of this standard had no impact on the presentation of the Company’s unrecognized tax benefits or on the consolidated financial position or results of operations.

 

4. FAIR VALUE MEASUREMENTS

The Company measures certain financial assets and liabilities at fair value in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs which reflect the Company’s market assumptions when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

    Level 1—quoted prices in active markets for identical assets or liabilities;

 

    Level 2—observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

    Level 3—unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial assets and liabilities measured at fair value consisted of the following as of September 30, 2014 and December 31, 2013:

 

     September 30, 2014      December 31, 2013  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets:

                       

Money market funds

   $ 29,280       $ —        $ —        $ 29,280       $ 6,058       $ —        $ —        $ 6,058   

Debt securities of U.S. government agencies

     —          41,936         —          41,936         —          49,890         —          49,890   

Corporate bonds

     —          15,067         —          15,067         —          13,393         —          13,393   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 29,280       $ 57,003       $ —        $ 86,283       $ 6,058       $ 63,283       $ —        $ 69,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

                       

Restricted share units

   $ 313       $ —        $ —        $ 313       $ 337       $ —        $ —        $ 337   

Warrants

   $ —        $ —        $ 383       $ 383       $ —        $ —        $ 924       $ 924   

If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. These investments are included in Level 2 and consist of debt securities of U.S government agencies and corporate bonds. There were no transfers between Levels 1 and 2 during the three and nine month period ended September 30, 2014. The Company classifies its warrant liability within Level 3 because the warrant liability is valued using valuation models with significant unobservable inputs. The estimated fair value of warrants accounted for as liabilities was determined on the issuance date and are subsequently remeasured to fair value at each reporting date. The change in fair value of the warrants is recorded in the statement of operations as other income or other expense estimated by using the Black-Scholes option-pricing model. A discussion of the valuation techniques and inputs to determine fair value of these instruments is included in Note 9.

 

5. FINANCIAL INSTRUMENTS

Financial instruments consist of cash and cash equivalents, investments and accounts and other receivables that will result in future cash receipts, as well as accounts payable, accrued and other liabilities, restricted share unit liabilities, warrant liabilities and Class UA preferred stock that may require future cash outlays.

 

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Investments

Investments are classified as available-for-sale securities and are carried at fair value with unrealized temporary holding gains and losses, where applicable, excluded from net income or loss and reported in other comprehensive income or loss and also as a net amount in accumulated other comprehensive income or loss until realized. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect an other-than-temporary impairment. The Company determined that the unrealized losses on its marketable securities as of September 30, 2014 were temporary in nature, and the Company currently does not intend to sell these securities before recovery of their amortized cost basis. All short-term investments are limited to a final maturity of less than one year from the reporting date. The Company’s long-term investments are investments with maturities exceeding 12 months but less than five years from the reporting date. The Company is exposed to credit risk on its cash equivalents, short-term investments and long-term investments in the event of non-performance by counterparties, but does not anticipate such non-performance and mitigates exposure to concentration of credit risk through the nature of its portfolio holdings. If a security falls out of compliance with the Company’s investment policy, it may be necessary to sell the security before its maturity date in order to bring the investment portfolio back into compliance. The cost basis of any securities sold is determined by specific identification. The fair value of available-for-sale securities is based on prices obtained from a third-party pricing service. The Company utilizes third-party pricing services for all of its marketable debt security valuations. The Company reviews the pricing methodology used by the third-party pricing services including the manner employed to collect market information. On a periodic basis, the Company also performs review and validation procedures on the pricing information received from the third-party pricing services. These procedures help ensure that the fair value information used by the Company is determined in accordance with applicable accounting guidance. The amortized cost, unrealized gain or losses and fair value of the Company’s cash, cash equivalents and investments for the periods presented are summarized below:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (In thousands)  

As of September 30, 2014

          

Cash

   $ 4,962       $ —        $ —       $ 4,962   

Money market funds

     29,280         —           —          29,280   

Debt securities of U.S. government agencies

     41,925         13         (2     41,936   

Corporate bonds

     15,062         11         (6     15,067   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 91,229       $ 24       $ (8   $ 91,245   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2013

          

Cash

   $ 3,221       $ —         $ —        $ 3,221   

Money market funds

     6,058         —           —          6,058   

Debt securities of U.S. government agencies

     49,878         18         (6     49,890   

Corporate bonds

     13,390         4         (1     13,393   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 72,547       $ 22       $ (7   $ 72,562   
  

 

 

    

 

 

    

 

 

   

 

 

 

The following table summarizes the Company’s available-for-sale securities by contractual maturity:

 

     As of September 30, 2014      As of December 31, 2013  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  
     (In thousands)  

Less than one year

   $ 75,783       $ 75,800       $ 56,789       $ 56,806   

Greater than one year but less than five years

     10,484         10,483         12,537         12,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 86,267       $ 86,283       $ 69,326       $ 69,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Accounts and Other Receivables, Accounts Payable and Accrued and Other Liabilities

The carrying amounts of accounts and other receivables, accounts payable and accrued and other liabilities approximate their fair values due to the short-term nature of these financial instruments.

Class UA Preferred Stock

The fair value of class UA preferred stock is assumed to be equal to its carrying value as the amounts that will be paid and the timing of the payments cannot be determined with any certainty.

 

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Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment; therefore, they cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

6. NET LOSS PER SHARE

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by adjusting the numerator and denominator of the basic net loss per share calculation for the effects of all potentially dilutive common shares. Potential dilutive shares of the Company’s common stock include stock options, restricted share units, warrants, Series A convertible preferred stock and shares granted under the 2010 Employee Stock Purchase Plan (ESPP). The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, adjustments to net loss used in the calculation are required to remove the change in fair value of the warrants for the period. Furthermore, adjustments to the denominator are required to reflect the addition of the related dilutive shares.

The following table is a reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share for the three and nine months ended September 30, 2014 and September 30, 2013:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
                2014                             2013                             2014                             2013              
    (in thousands, except share and per share amounts)  

Numerator

       

Net loss used to compute net loss per share:

       

Basic

  $ (6,736   $ (7,710   $ (22,384   $ (32,396

Adjustments for change in fair value of warrant liability

    —         —         —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (6,736   $ (7,710   $ (22,384   $ (32,396
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

       

Weighted average shares outstanding used to compute net loss per share:

       

Basic

    77,237,246        63,886,874        72,919,829        59,962,328   

Dilutive effect of warrants

    —         —         —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    77,237,246        63,886,874        72,919,829        59,962,328   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

  $ (0.09   $ (0.12   $ (0.31   $ (0.54
 

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the number of shares that were excluded from the number of shares used to calculate diluted net loss per share:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
                2014                             2013                             2014                             2013              

Director and employee stock options

    4,050,033        2,909,699        4,050,033        2,909,699   

Warrants

    8,230,848        10,922,090        8,230,848        10,922,090   

Series A convertible preferred stock (as converted to common stock)

    10,000,000        —          10,000,000        —     

Non-employee director restricted share units

    163,204        215,829        163,204        215,829   

Employee stock purchase plan

    23,780        23,374        23,780        23,374   

 

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7. ACQUISITION

On August 8, 2014, the Company entered into an Agreement and Plan of Reorganization (Merger Agreement) with Alpine Biosciences, Inc. (Alpine), a privately held biotechnology company developing protocells, a nanoparticle capable of delivery of nucleic acids, proteins, peptides and small molecules. Pursuant to the terms and conditions set forth in the Merger Agreement, on August 8, 2014, the Company, through a wholly-owned subsidiary of the Company, consummated the acquisition of Alpine. The merger consideration received by Alpine stockholders was 10% of the Company’s total capital stock determined on a fully-diluted basis immediately following the closing of the merger (Merger Consideration). The total value of the acquisition was approximately $27.2 million based on the closing price of Oncothyreon’s common stock on the day of the merger, which was $2.93 per share. An amount of stock equal to 12.5% of the Merger Consideration was placed in escrow as security for the indemnification obligations of Alpine’s stockholders. The Company intends to utilize the protocell technology to develop new product candidates for the treatment of cancer and rare diseases, either on its own or with partners.

The transaction has been accounted for using the acquisition method of accounting. This method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their estimated fair values as of the acquisition date and that intangible assets with indefinite lives be recorded at fair value on the balance sheet for in-process research and development (IPR&D) activities, regardless of the likelihood of success of the related product or technology. The excess of the aggregate fair value of consideration exchanged for an acquired business over the fair value of assets acquired including tangible assets and indefinite-lived intangible assets and liabilities assumed is recorded as Goodwill. Goodwill represents the anticipated synergies from combining the acquired assets with the Company.

Recognition and Measurement of Assets Acquired and Liabilities Assumed at Estimated Fair Value

The total purchase consideration has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. Goodwill was derived from the excess of the aggregate fair value of consideration exchanged for the acquisition of Alpine over the fair value of assets acquired and liabilities assumed. Based upon the fair values determined by the Company, in which the Company considered or relied in part upon a valuation report of a third-party expert. These fair value measurements were based on Level 3 measurements under the fair value hierarchy. The following table summarizes the preliminary allocation of the purchase price for the acquisition pending final adjustments to working capital (in thousands):

 

Indefinite-lived intangible assets

   $ 19,738   

Goodwill

     14,542   

Net tangible assets

     (139

Deferred tax liabilities

     (6,908
  

 

 

 

Total purchase price allocation

   $ 27,233   
  

 

 

 

Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 were as follows (in thousands):

 

Balance as of December 31, 2013

   $ 2,117   

Goodwill recorded in connection with the acquisition of Alpine

     14,542   
  

 

 

 

Balance as of September 30, 2014

   $ 16,659   
  

 

 

 

The goodwill recognized from the acquisition of Alpine is not deductible for tax purposes.

Intangible Assets with Indefinite Lives

Intangible assets with indefinite lives represent the value assigned to IPR&D that, as of the acquisition date, the Company determined that technological feasibility had not been established, and the IPR&D had no alternative future use. IPR&D represents a series of awarded patents and filed patent applications that are the basis of the platform which forms a major part of the planned future products. The indefinite-lived intangible assets will be subject to annual impairment testing until completion or abandonment of the projects. Upon completion of the project, the Company will make a separate determination of useful life of the indefinite-lived intangible assets and the related amortization will be recorded as an expense over the estimated useful life.

 

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The fair value of the indefinite-lived intangible assets of $19.7 million was determined by the Company, which relied upon a valuation report from an independent third party valuation expert using the income approach and estimates and assumptions provided by the Company’s management. The income approach is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. The rates utilized to discount net cash flows to their present values were based on a range of discount rates of 40% to 60% applied to the intangible assets to reflect the risk of the asset revenues derived from the respective intangible asset. Subsequent to the closing of the merger, research and development cost incurred on the IPR&D and general and administrative expenses associated with salaries and legal costs are expensed as incurred. From August 8, 2014 to September 30, 2014, the Company incurred nominal expenses from Alpine.

Deferred Tax Liabilities

Deferred tax liabilities of $6.9 million were the result of book versus tax difference attributable to the identifiable intangible asset multiplied by the statutory tax rate for the relevant jurisdiction.

Acquisition-Related Expenses

Acquisition-related expenses of $0.5 million, including legal and regulatory costs, were expensed as incurred and recorded in general and administrative expense in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2014.

Unaudited Pro Forma Financial Information

The following pro forma condensed combined financial information gives effect to the acquisition of Alpine as if it were consummated on January 1, 2013 (the beginning of the comparable prior reporting period), and includes pro forma adjustments related to share-based compensation expense and direct and incremental transaction costs reflected in the historical financial statements. The pro forma condensed combined financial information is presented for informational purposes only. The pro forma condensed combined financial information is not intended to represent or be indicative of the results of operations that would have been reported had the acquisition occurred on January 1, 2013 and should not be taken as representative of future results of operations of the combined company.

The following table presents the unaudited pro forma condensed combined financial information (in thousands, except per share amounts):

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
            2014                     2013                     2014                     2013          
                (Unaudited)        

Net loss

  $ (6,800   $ (7,832   $ (23,722   $ (32,717

Net loss per share—basic and diluted

  $ (0.08   $ (0.11   $ (0.30   $ (0.47

 

8. EQUITY

Amended and Restated Certificate of Incorporation

On June 6, 2014, the stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of the Company’s authorized common shares from 100,000,000 to 200,000,000. On June 6, 2014, the Company filed a Certificate of Amendment with the Delaware Secretary of State to effect such amendment.

 

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Certificate of Designation

On September 22, 2014, in connection with the public offering of 10,000 shares of the Company’s Series A convertible preferred stock, the Company designated 10,000 shares of its authorized and unissued preferred stock as Series A convertible preferred stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock with the Delaware Secretary of State. Each share of Series A convertible preferred stock is convertible into 1,000 shares of the Company’s common stock at any time at the holder’s option. The holder, however, will be prohibited from converting Series A convertible preferred stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% of the shares of the Company’s common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series A convertible preferred stock will receive a payment equal to $0.0001 per share of Series A convertible preferred stock before any proceeds are distributed to the holders of common stock, but after any proceeds are distributed to the holder of the Company’s Class UA preferred stock. Shares of Series A convertible preferred stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series A convertible preferred stock will be required to amend the terms of the Series A convertible preferred stock. Shares of Series A convertible preferred stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors, and will rank:

 

    senior to all common stock;

 

    senior to any class or series of capital stock hereafter created specifically ranking by its terms junior to the Series A convertible preferred stock;

 

    on parity with any class or series of capital stock hereafter created specifically ranking by its terms on parity with the Series A convertible preferred stock; and

 

    junior to the Company’s Class UA preferred stock and any class or series of capital stock hereafter created specifically ranking by its terms senior to the Series A convertible preferred stock;

in each case, as to distribution of assets upon the Company’s liquidation, dissolution or winding up whether voluntarily or involuntarily.

“At-the-Market” Equity Offering Program

On February 3, 2012, the Company entered into a Sales Agreement (the Sales Agreement) with Cowen and Company, LLC (Cowen) to sell shares of the Company’s common stock, having aggregate gross sales proceeds up to $50,000,000, from time to time, through an “at-the-market” equity offering program under which Cowen acted as sales agent. Under the Sales Agreement, the Company set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Sales Agreement provided that Cowen would be entitled to compensation for its services that would not exceed, but could be lower than, 3.0% of the gross sales price per share of all shares sold through Cowen under the Sales Agreement. On July 1, 2013, the Company commenced selling its common stock through the “at the market” equity offering program under the Sales Agreement. On September 17, 2014, the Company terminated the Sales Agreement in connection with the Company’s September 2014 equity offering as described in the following paragraph. The Company was not subject to any termination penalties related to termination of the Sales Agreement. As of September 17, 2014, the Company had sold an aggregate of 8,364,379 shares of its common stock under the Sales Agreement for gross proceeds of $16.6 million. The net proceeds from the sale of the shares, after deducting commission of approximately $0.5 million, were approximately $16.1 million.

Equity Financing

On September 18, 2014, the Company entered into two underwriting agreements (each, an Underwriting Agreement) with Cowen as representative of the underwriters named therein (Underwriters) for concurrent but separate offerings of the Company’s securities. On September 23, 2014, the Company closed concurrent but separate underwritten offerings of 10,000,000 shares of its common stock at a price of $2.00 per share, for gross proceeds of $20 million, and 10,000 shares of its Series A convertible preferred stock at a price of $2,000 per share, for gross proceeds of $20 million. Each share of Series A convertible preferred stock is non-voting and convertible into 1,000 shares of the Company’s common stock at any time at the option of the holder, provided that conversion will be prohibited if, as a result, the holder and its affiliates would beneficially own more than 4.99% of the common stock then outstanding. As part of the common stock offering, the Company also granted the underwriters, and the underwriters exercised, a 30-day option to purchase 1,500,000 additional shares of the Company’s common stock. Aggregate gross proceeds from the offerings was approximately $43.0 million. Aggregate net proceeds from the offerings, after commissions and estimated expenses of $2.8 million, was approximately $40.2 million which included $21.6 million from the Company’s common stock offering and $18.6 million from the Company’s Series A convertible preferred stock offering.

 

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On June 4, 2013, the Company closed a registered direct offering of 5,000,000 units, with each unit consisting of one share of the Company’s common stock and a warrant to purchase one share of the Company’s common stock, at $2.00 per unit for gross proceeds of $10 million. The warrants are exercisable at an exercise price of $5.00 per share any time on or after December 5, 2013 and expire December 5, 2018. The shares and warrants were sold to Biotechnology Value Fund, L.P. and other affiliates of BVF Partners L.P. in a registered direct offering conducted without an underwriter or placement agent. The net proceeds from the offering, after deducting estimated offering expenses, were approximately $9.9 million.

 

9. WARRANTS

Warrants consist of liability-classified warrants and equity-classified warrants. As of September 30, 2014, warrants to purchase a total of 8,230,848 shares of the Company’s common stock were outstanding. During the nine months ended September 30, 2014, liability-classified warrants to purchase 2,691,242 shares of the Company’s common stock expired and no warrants were exercised. During the three months ended September 30, 2014 and the three and nine months ended September 30, 2013, no warrants were exercised or expired.

Equity-Classified Warrants

Equity-classified warrants consist of warrants issued in connection with the Company’s registered direct offering to Biotechnology Value Fund, L.P. and other affiliates of BVF Partners L.P. (collectively, BVF) and warrants issued in connection with a term loan with General Electric Capital Corporation (GECC). In June 2013, the Company issued warrants to purchase 5,000,000 shares of common stock at an exercise price of $5.00 per share in connection with a registered direct offering to BVF. The warrants expire on December 5, 2018. In February 2011, the Company issued warrants to purchase 48,701 shares of common stock at an exercise price of $3.08 per share in connection with a loan and security agreement entered into with GECC. The warrants expire on February 8, 2018. As of September 30, 2014, warrants to purchase 5,048,701 shares of common stock were outstanding and classified as equity.

Liability-Classified Warrants

Liability-classified warrants consist of warrants issued in conjunction with an equity financing in September 2010. The warrants issued in September 2010 have been classified as liabilities, as opposed to equity, due to potential cash settlements upon the occurrence of certain transactions specified in the warrant agreement. As of September 30, 2014, warrants to purchase 3,182,147 shares of the Company’s common stock from the September 2010 financing that expire on October 12, 2015 were outstanding and classified as a liability. Warrants to purchase 2,691,242 shares of the Company’s common stock from a May 2009 financing expired on May 26, 2014.

The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. The change in the estimated fair value of such warrants is recorded in the condensed consolidated statement of operations as other income (expenses). The fair value of the warrants is estimated using the Black-Scholes option-pricing model with the following inputs for the warrants:

 

     As of September 30, 2014  
     September 2010
Warrants
 

Exercise price

   $ 4.24   

Market value of stock at end of period

   $ 1.92   

Expected dividend rate

     0.0

Expected volatility

     68.3

Risk-free interest rate

     0.1

Expected life (in years)

     1.03   

 

     As of December 31, 2013  
     May 2009
Warrants
    September 2010
Warrants
 

Exercise price

   $ 3.74      $ 4.24   

Market value of stock at end of period

   $ 1.76      $ 1.76   

Expected dividend rate

     0.0     0.0

Expected volatility

     45.3     77.4

Risk-free interest rate

     0.1     0.3

Expected life (in years)

     0.4 0        1.78   

 

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The fair value of the warrant liability and the changes in its fair value during the three and nine months ended September 30, 2014 and September 30, 2013 were as follows:

 

    Three months ended September 30,  
                2014                             2013              
    (In thousands)  

Balance at beginning of period

  $ 1,656      $ 1,951   

Change in fair value of warrant liability included in:

   

Other expense (income)

    (1,273     174   
 

 

 

   

 

 

 

Balance at the end of period

  $ 383      $ 2,125   
 

 

 

   

 

 

 

 

    Nine months ended September 30,  
                2014                             2013              
    (In thousands)  

Balance at beginning of period

  $ 924      $ 3,251   

Change in fair value of warrant liability included in:

   

Other expense (income)

    (541     (1,126
 

 

 

   

 

 

 

Balance at the end of period

  $ 383      $ 2,125   
 

 

 

   

 

 

 

Expected volatility is an unobservable input that is inter-related with the market value or price of the Company’s stock, since the calculation of volatility is based on the Company’s historical closing prices. If volatility were to increase or decrease by 10%, the value of the warrant liability would increase or decrease respectively, by approximately $0.1 million.

 

10. SHARE-BASED COMPENSATION

Share Option Plan

The Company sponsors an option plan (the Share Option Plan) under which a maximum fixed reloading percentage of 10% of the issued and outstanding common stock of the Company may be granted to employees, directors and service providers. Options granted under the Share Option Plan prior to January 2010 began vesting after one year from the date of grant, are exercisable in equal amounts over four years on the anniversary date of the grant, and expire eight years following the date of grant. Options granted under the Share Option Plan after January 2010 vest 25% on the first anniversary of the vesting commencement date, with the balance vesting in monthly increments for 36 months following the first anniversary of hiring, and expire eight years following the date of grant. As of September 30, 2014, the number of shares of common stock reserved for issuance under the Share Option Plan was 9,155,597. As of September 30, 2014, 2,998,360 shares of common stock remained available for future grant under the Share Option Plan.

During the three months ended September 30, 2014 and September 30, 2013, the Company granted 104,000 and 10,000 stock options, respectively. Stock compensation expense was $0.4 million in each of the three months ended September 30, 2014 and September 30, 2013. During the nine months ended September 30, 2014 and September 30, 2013, the Company granted 185,500 and 10,000 stock options, respectively. Stock compensation expense was $1.3 million in each of the nine months ended September 30, 2014 and September 30, 2013. The number of stock options granted during the three and nine months ended September 30, 2014 was higher primarily due to the stock options issued as new hire grants in conjunction with the acquisition of Alpine during the period. Zero and 1,000 stock options were exercised during the three and nine months ended September 30, 2014, respectively. No stock options were exercised during the three and nine months ended September 30, 2013.

The Company uses the Black-Scholes option pricing model to value the options at each grant date, using the following weighted average assumptions:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

Weighted average grant-date fair value for stock options granted

   $ 1.58      $ 1.27      $ 1.50      $ 1.27   

Expected dividend rate

     0.00     0.00     0.00     0.00

Expected volatility

     82.02     89.64     75.10     89.64

Risk-free interest rate

     1.91     1.80     1.42     1.80

Expected life of options (in years)

     6.00        6.00        4.59        6.00   

 

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The expected life represents the period that the Company’s stock options are expected to be outstanding and was determined based on the simplified method, which calculates the expected life as the average of the vesting term and the contractual term of the option. The Company’s historical stock option exercise data was impacted by a restructuring of its business in 2008. Because the Company does not have sufficient historical stock option exercise data to accurately estimate the expected term used for its valuation of stock options, the Company continues to use the simplified method to calculate the expected term of new stock option grants to employees. As the Company accumulates more data and history related to the exercises of stock option awards, the Company will reassess its use of the simplified method to determine the expected term. The expected volatility is based on the historical volatility of the Company’s common stock for a period equal to the stock option’s expected life. The risk-free interest rate is based on the yield at the time of grant of a U.S. Treasury security with an equivalent expected term of the option. The Company does not expect to pay dividends on its common stock. The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.

Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on its historical experience.

Employee Stock Purchase Plan

The Company adopted an Employee Stock Purchase Plan (ESPP) on June 3, 2010, pursuant to which a total of 900,000 shares of common stock were reserved for sale to employees of the Company. The ESPP is administered by the compensation committee of the board of directors and is open to all eligible employees of the Company. Under the terms of the ESPP, eligible employees may purchase shares of the Company’s common stock at six month intervals during 18-month offering periods through periodic payroll deductions, which may not exceed 15% of any employee’s compensation and may not exceed a value of $25,000 in any calendar year, at a price not less than the lesser of an amount equal to 85% of the fair market value of the Company’s common stock at the beginning of the offering period or an amount equal to 85% of the fair market value of the Company’s common stock on each purchase date. The maximum aggregate number of shares that may be purchased by each eligible employee during each offering period is 15,000 shares of the Company’s common stock. For the three and nine months ended September 30, 2014, expense related to this plan was $19,103 and $83,633, respectively. For the three and nine months ended September 30, 2013, expense related to this plan was $44,273 and $107,847, respectively. Under the ESPP, the Company did not issue any shares to employees during each of the three month periods ended September 30, 2014 and September 30, 2013. The Company issued 36,434 shares and 35,895 shares to employees during the nine months ended September 30, 2014 and September 30, 2013, respectively. There are 640,910 shares reserved for future issuances under the ESPP as of September 30, 2014.

Restricted Share Unit Plan

The Company also sponsors a restricted share unit plan (RSU Plan) for non-employee directors that was established in 2005. The RSU Plan provides for grants to be made from time to time by the board of directors or a committee thereof. Each restricted stock unit granted will be made in accordance with the RSU Plan and terms specific to that grant and will be converted into one share of common stock less the cash payment provisions described below at the end of the grant period (not to exceed five years) without any further consideration payable to the Company in respect thereof. On June 6, 2014, the Company’s stockholders approved an increase of 500,000 shares in the number of shares of the Company’s common stock reserved for issuance under the RSU Plan. The current maximum number of common shares of the Company reserved for issuance pursuant to the RSU Plan is 966,666. As of September 30, 2014, 530,910 shares of common stock remain available for future grant under the RSU Plan. The Company did not grant any RSUs during the three months ended September 30, 2014 and September 30, 2013. The Company granted 81,695 restricted share units (RSUs) with a fair value of $250,000 during the nine months ended September 30, 2014 and 80,210 RSUs with a fair value of $150,000 during the nine months ended September 30, 2013. No shares were issued upon conversion of RSUs for the three months ended September 30, 2014 and September 30, 2013. 110,104 shares and 22,690 shares were issued upon conversion of RSUs for the nine months ended September 30, 2014 and September 30, 2013, respectively. The fair value of each RSU has been determined to be the closing trading price of the Company’s common shares on the date of grant as quoted in NASDAQ Global Market.

Approximately 25% of each RSU represents a contingent right to receive cash upon vesting, and the Company is required to deliver an amount in cash equal to the fair market value of such shares on the vesting date to facilitate the satisfaction of the non-employee directors’ U.S. federal income tax obligation with respect to the vested RSUs. The outstanding RSU awards are required to be remeasured at each reporting date until settlement of the award, and changes in valuation are recorded as compensation expense for the period. To the extent that the liability recorded in the balance sheet is less than the original award value, the difference is recognized in equity. The fair value of the outstanding RSUs on the reporting date is determined to be the closing trading price of the Company’s common shares on that date.

 

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The remeasurement of the outstanding RSUs together with the grant and conversion of the RSUs resulted in a reduction of $0.2 million and an additional $0.4 million in share-based compensation expense recorded in general and administrative expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2014, respectively. The remeasurement of the outstanding RSUs together with the grant and conversion of the RSUs resulted in an additional $0.1 million and $0.2 million in share-based compensation expense recorded in general and administrative expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2013, respectively.

 

11. CONTINGENCIES, COMMITMENTS, AND GUARANTEES

Pursuant to various license agreements, the Company is obligated to make payments based both on the achievement of certain milestones and a percentage of revenues derived from the licensed technology and royalties on net sales.

In the normal course of operations, the Company indemnifies counterparties in transactions such as purchase and sale contracts for assets or shares, service agreements, director/officer contracts and leasing transactions. These indemnification agreements may require the Company to compensate the counterparties for costs incurred as a result of various events, including environmental liabilities, changes in (or in the interpretation of) laws and regulations, or as a result of litigation claims or statutory sanctions that may be suffered by the counterparties as a consequence of the transaction. The terms of these indemnification agreements vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amount that could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnification agreements and no amounts have been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification guarantees.

 

12. COLLABORATIVE AND LICENSE AGREEMENTS

Array BioPharma Inc.

On May 30, 2013, the Company entered into a collaborative agreement with Array BioPharma Inc. (Array). Under the agreement, Array and the Company will collaborate to develop and commercialize, an orally active, reversible and selective small-molecule HER2 inhibitor which the Company refers to as ONT-380. HER2, also known as ErbB2, is a receptor tyrosine kinase that is over-expressed in breast cancer and other cancers such as gastric and ovarian cancer. Array previously completed a Phase 1 clinical trial of ONT-380 in patients with heavily pre-treated metastatic breast cancer which demonstrated that the compound was well tolerated and had anti-tumor activity.

In June 2013, the Company paid Array an upfront fee of $10 million, which was recorded as part of research and development expense upon initiation of the collaboration. Under the agreement, the Company will fund and conduct the clinical development of ONT-380 through an agreed, defined set of combination proof-of-concept trials in patients with metastatic breast cancer, including patients with brain metastases.

The Company and Array intend to jointly conduct Phase 3 development supported by the proof-of-concept studies, with each party retaining the right to opt out of further development and commercialization in exchange for a significant royalty. Array is responsible for worldwide commercialization of the product. The Company has a co-promotion right in the United States and the two companies will share the cost of U.S. commercialization, including any profit, equally. Outside of the United States, the Company will receive a double-digit royalty on net sales intended to approximate a fifty percent profit share, and the two companies will share equally the proceeds from any sublicense of marketing rights.

Celldex Therapeutics, Inc.

On May 28, 2014, the Company entered into a Co-Development Agreement with Celldex Therapeutics, Inc. (Celldex) to collaborate on a combined Phase 1b clinical trial of ONT-10 and varlilumab. The primary objective of the trial is to determine the safety and tolerability of the combined therapy. Additional objectives include evaluations of the impact of combination treatment on MUC1-specific humoral and cellular immune responses and anti-tumor effects.

The agreement provides that the Company will supply ONT-10 and Celldex will supply varlilumab. The Phase 1b trial will be conducted and funded by the Company. The Company and Celldex will jointly own the data from the trial and will make any plans for potential future development of the combination therapy together.

 

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STC.UNM

Effective June 30, 2014, Alpine entered into an exclusive license agreement with STC.UNM, by assignment from The Regents of the University of New Mexico, to license the rights to use certain technology relating to protocells and mesoporous silica nanoparticle delivery platform. Under the terms of the license agreement, the Company, as successor to Alpine, has the right to conduct research, clinical development and commercialize all inventions and products that are developed from the platform technology in certain fields of use as described in the license agreement. In exchange for the exclusive license, the Company is obligated to make a series of payments including on-going annual license payments, reimbursement of patent costs, success based milestones, and royalty payments based on net sales, if any. In addition, Alpine issued STC.UNM a number of shares of common stock such that STC.UNM owned 5% of the outstanding equity of Alpine prior to the merger between the Company and Alpine. As of September 30, 2014, the total liabilities under this agreement were approximately $97,000 and related to patent costs. Please refer to “Note 7—Acquisition” of the unaudited financial statements included in this report for additional information regarding the Company’s acquisition of Alpine.

Merck KGaA

The Company has granted an exclusive, worldwide license to Merck KGaA for the development, manufacture and commercialization of tecemotide (formerly known as L-BLP25 or Stimuvax) , a therapeutic vaccine targeting MUC1. The Company has no continuing involvement in the ongoing development, manufacturing or commercialization of tecemotide. In September 2014, Merck KGaA announced that its biopharmaceutical division Merck Serono will discontinue the clinical development program of tecemotide as a monotherapy in Stage III non-small cell lung cancer (NSCLC). As a result, the Company does not anticipate future payments under this license agreement. No amounts were recognized in connection with this agreement during the three and nine months ended September 30, 2014 and September 30, 2013.

 

13. INCOME TAX

Due to projected and actual losses for the years ended December 31, 2014 and 2013, respectively, and the Company’s history of losses, the Company has not recorded an income tax benefit for the three and nine months ended September 30, 2014 and September 30, 2013. The Company has recognized a full valuation allowance on its deferred tax assets. The Company’s net deferred tax assets and net deferred tax liabilities were recorded in other assets and accrued and other liabilities, respectively on the Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013. Additional deferred tax liabilities, which related to indefinite lived intangible assets acquired in the nontaxable acquisition of Alpine on August 8, 2014, were recorded to long term deferred tax liability on the Condensed Consolidated Balance Sheets as of September 30, 2014. Because the reversal periods of deferred tax liabilities related to indefinite lived intangibles is not certain, these deferred tax liabilities are not considered a source of income for valuation allowance determination. Therefore, there was no change to the preexisting valuation allowance as a result of the acquisition, and a net deferred tax liability in the amount of $6.9 million was recorded during the quarter through an adjustment to goodwill. The estimated annual effective tax rate used in the quarter was zero and the Alpine acquisition is not expected to have a material effect on the Company’s forecasted tax rate due to expected losses.

 

14. SUBSEQUENT EVENTS

None

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information in this Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements or incorporates by reference forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our, or in some cases, our partners’ future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements regarding:

 

    the results we anticipate from our pre-clinical development activities and the clinical trials of our product candidates;

 

    our belief that our product candidates could potentially be useful for many different oncology indications that address large markets;

 

    our ability to manage our growth;

 

    the size of the markets for the treatment of conditions our product candidates target;

 

    our ability to acquire or in-license additional product candidates and technologies;

 

    our ability to manage our relationship with Array to develop and commercialize ONT-380;

 

    our ability to generate future revenue;

 

    financing to support our operations, clinical trials and commercialization of our products;

 

    our ability to adequately protect our proprietary information and technology from competitors and avoid infringement of proprietary information and technology of our competitors;

 

    the possibility that government-imposed price restrictions may make our products, if successfully developed and commercialized following regulatory approval, unprofitable;

 

    potential exposure to product liability claims and the impact that successful claims against us will have on our ability to commercialize our product candidates;

 

    our ability to obtain on commercially reasonable terms adequate product liability insurance for our commercialized products;

 

    the possibility that competing products or technologies may make our products, if successfully developed and commercialized following regulatory approval, obsolete;

 

    our ability to succeed in finding and retaining joint venture and collaboration partners to assist us in the successful marketing, distribution and commercialization of our products;

 

    our ability to attract and retain highly qualified scientific, clinical, manufacturing, and management personnel;

 

    our ability to identify and capitalize on possible collaboration, strategic partnering, acquisition or divestiture opportunities; and

 

    potential problems with third parties, including suppliers and key personnel, upon whom we are dependent.

All forward-looking statements are based on information available to us on the date of this quarterly report and we will not update any of the forward-looking statements after the date of this quarterly report, except as required by law. Our actual results could differ materially from those discussed in this quarterly report. The forward-looking statements contained in this quarterly report, and other written and oral forward-looking statements made by us from time to time, are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this quarterly report in Part II, Item 1A—“Risk Factors,” and elsewhere in this quarterly report.

 

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Overview

We are a clinical-stage biopharmaceutical company focused primarily on the development of therapeutic products for the treatment of cancer. Our goal is to discover, develop and commercialize novel compounds that have the potential to improve the lives and outcomes of cancer patients. Our current clinical-stage product candidates include ONT-380, an orally active and selective small-molecule HER2 inhibitor, and ONT-10, a therapeutic vaccine targeting MUC1. We are developing preclinical product candidates in oncology, and potentially certain rare diseases, using our recently acquired protocell technology. We also collaborate with partners to discover and develop additional product candidates.

We are collaborating with Array BioPharma Inc. (Array) to develop and commercialize ONT-380, an orally active, reversible and selective small-molecule HER2 inhibitor. HER2, also known as ErbB2, is a receptor tyrosine kinase that is over-expressed in breast cancer and other cancers such as gastric and ovarian cancer. Array previously completed a Phase 1 clinical trial of ONT-380 in patients with heavily pre-treated metastatic breast cancer which demonstrated that the compound was well tolerated and had anti-tumor activity. Under our collaboration agreement with Array, we will fund and conduct the clinical development of ONT-380 through an agreed defined set of combination proof-of-concept trials in patients with metastatic breast cancer, including patients with brain metastases. As part of this program, we have initiated two Phase 1b trials of ONT-380, one in combination with Kadcyla ® (ado-trastuzumab emtansine or TDM-1) and another in combination with Xeloda ® (capecitabine) and/or Herceptin ® (trastuzumab). ONT-380 has demonstrated superior activity, based on overall survival, compared to Tykerb ® (lapatinib) and to the investigational drug, neratinib, in an intracranial HER2+ breast cancer xenograft model. This provides a rationale to explore whether ONT-380 can provide benefit to patients with brain metastases, which occur in approximately one-third of women with metastatic HER2+ breast cancer.

We and Array intend to jointly conduct Phase 3 development supported by the proof-of-concept studies. Array is responsible for worldwide commercialization of the product. We hold a co-promotion right in the United States, and the two companies will share the cost of U.S. commercialization, including any profit, equally. Outside of the United States, we will receive a double-digit royalty on net sales intended to approximate a fifty percent profit share, and the two companies will share equally the proceeds from any sublicense of marketing rights. Upon completion of the proof-of-concept studies, each party retains the right to opt out of further development and commercialization in exchange for a significant royalty.

We are conducting a Phase 1 trial for ONT-10, a cancer vaccine directed against the Mucin 1 peptide antigen (MUC1). Results from this trial have demonstrated that ONT-10 activates the humoral arm of the immune system and elicits antibodies specific for MUC1. Natural antibodies against MUC1 have been shown to correlate with improved survival in patients with tumors expressing MUC1. We are continuing the ongoing Phase 1 trial, which is also the first-in-man trial for our novel vaccine adjuvant PET-Lipid A, a fully-synthetic toll-like receptor 4 agonist. We have recently initiated a Phase 1b trial of ONT-10 in combination with the T-cell agonist antibody varlilumab in collaboration with Celldex Therapeutics, Inc. (Celldex).

We are focused on expanding our pipeline of product candidates through both internal research and collaborative efforts. To support our internal efforts we recently acquired Alpine Biosciences, Inc., of Seattle, Washington (Alpine), a privately held biotechnology company developing protocells, a nanoparticle platform technology designed to enable the targeted delivery of multiple therapeutic agents, including nucleic acids, proteins, peptides and small molecules. We intend to utilize the protocell technology to develop new product candidates for the treatment of cancer and rare diseases, either on our own or with partners. We are also collaborating with Sentinel Oncology Ltd., of Cambridge, United Kingdom, for the development of novel Chk1 kinase inhibitors.

We have not developed a therapeutic product to the commercial stage. As a result, our revenue has been limited to date, and we do not expect to recognize any material revenue for the foreseeable future. In particular, our ability to generate revenue in future periods will depend substantially on the progress of ongoing and/or future clinical trials for ONT-10 and ONT-380, Array’s or our success in obtaining regulatory approval for ONT-380, our success in obtaining regulatory approval for ONT-10, and Array’s and our respective abilities to establish commercial markets for these drugs. As ONT-380 and ONT-10 are in early clinical development, we do not expect to realize any revenues associated with the commercialization of these product candidates for the foreseeable future.

The continued research and development of our product candidates will require significant additional expenditures, including preclinical studies, clinical trials, manufacturing costs and the expenses of seeking regulatory approval. We rely on third parties to conduct a portion of our preclinical studies, all of our clinical trials and all of the manufacturing of current good manufacturing practice (cGMP) material. We expect expenditures associated with these activities to increase in future years as we continue the development of ONT-380 and ONT-10, and as we advance the development of our preclinical product candidates.

 

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We have incurred substantial losses since our inception. As of September 30, 2014, our accumulated deficit totaled $454.5 million. We incurred a net loss of $22.4 million for the nine months ended September 30, 2014 compared to a net loss of $32.4 million for the same period in 2013. The decrease in loss for the nine months ended September 30, 2014 was primarily due to lower research and development expenses, primarily as a result of the upfront payment of $10.0 million to Array in connection with our collaborative agreement in May 2013. See the section captioned “Note 12—Collaborative and License Agreements” of the unaudited financial statements included in this report for additional information. The decrease in loss was partly offset by increases in general and administrative expenses and lower non-cash income from the change in the fair value of our warrant liability, which was $0.5 million for the nine months ended September 30, 2014 compared to $1.1 million for the nine months ended September 30, 2013. The change in the fair value of our warrant liability is attributable to changes in our stock price, volatility and expected life of our warrants that were classified as liabilities. In addition, the change in fair value was also due to the expiration of our May 2009 warrants. In future periods, we expect to continue to incur substantial net losses as we expand our research and development activities with respect to our product candidates. To date we have funded our operations principally through the sale of our equity securities, cash received through our strategic alliance with Merck KGaA, government grants, debt financings and equipment financings.

Key Financial Metrics

Expenses

Research and Development . Research and development expense consists of costs associated with research activities as well as costs associated with our product development efforts, conducting preclinical studies and clinical trial and manufacturing costs. These expenses primarily include external research and development expenses incurred pursuant to collaboration agreements; agreements with third-party manufacturing and contract research organizations; technology access and licensing fees related to the use of proprietary third-party technologies; employee related expenses, including salaries, share-based compensation expense, benefits and related costs; allocated facility overhead which includes depreciation and amortization; and third-party consulting and supplier expenses. We recognize research and development expenses, including those paid to third parties, as they have been incurred.

General and Administrative . General and administrative expense consists principally of salaries, benefits, share-based compensation expense and related costs for personnel in our executive, business development, finance, accounting, legal, human resource functions and information technology services. Other general and administrative expenses include professional fees for legal, consulting, accounting services and allocation of our facility costs, which includes depreciation and amortization.

Investment and Other Income (Expense), Net . Net investment and other income (expense) consisted of interest and other income on our cash and short-term and long-term investments, debt, foreign exchange gains and losses and other non-operating income (expense). Our investments consist of debt securities of U.S government agencies and corporate bonds.

Change in Fair Value of Warrants . Warrants issued in connection with our securities offerings in May 2009 and September 2010 are classified as a liability due to their potential settlement in cash and other terms, and as such, were recorded at their estimated fair value on the date of the closing of the respective transactions. The May 2009 warrants expired in May 2014. The warrants are marked to market for each financial reporting period, with changes in estimated fair value recorded as a gain or loss in our condensed consolidated statements of operations. The fair value of the warrants is determined using the Black-Scholes option-pricing model, which requires the use of significant judgment and estimates for the inputs used in the model. For more information, see “Note 9—Warrants” of the unaudited financial statements included in this report.

 

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Intangible Assets with Indefinite Lives

Indefinite-lived Intangible Assets. The intangible assets with indefinite lives, acquired from Alpine, represent a series of awarded patents and filed patent applications that are the basis of the platform which form a major part of the planned future products. As part of the purchase price allocation with respect to the Alpine acquisition, the fair value of the indefinite-lived intangible assets of $19.7 million was determined using the income approach, which discounts expected future cash flows to present value. We estimated the fair value using a range of present value discount rate of 40% to 60%, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Alpine. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value the indefinite-lived intangible assets. The projected cash flows from the indefinite-lived intangible assets were based on key assumptions, including: estimates of revenues and operating profits related to each project considering its stage of development on the acquisition date; the time and resources needed to complete the development and approval of the product candidate; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining marketing approval from the FDA and other regulatory agencies; and risks related to the viability of and potential alternative treatments in any future target markets. Indefinite-lived intangible assets will be considered to be indefinite-lived until the IPR&D is fully developed, at which time a life will be assigned and amortization will begin. If the IPR&D is abandoned, the carrying value of the asset will be expensed. All research and development costs incurred subsequent to the acquisition of Alpine are expensed as incurred.

Critical Accounting Policies and Significant Judgments and Estimates

We have prepared this Management’s Discussion and Analysis of Financial Condition and Results of Operations based on our condensed consolidated financial statements, which have been included elsewhere in this report and which have been prepared in accordance with generally accepted accounting principles in the United States. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of our consolidated financial statements as well as the reported amounts of revenue and expense during the periods presented. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable. We believe that the estimates and judgments upon which we rely are reasonable based upon historical experience and information available to us at the time that we make these estimates and judgments. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. Although we believe that our judgments and estimates are appropriate, actual results may differ from these estimates.

Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 13, 2014. There have been no material changes in our critical accounting policies and judgments since that date except for intangible assets with indefinite lives.

Intangible assets with indefinite lives represent the value assigned to IPR&D that, as of the acquisition date, the Company determined that technological feasibility had not been established, and the IPR&D had no alternative future use. The indefinite-lived intangible assets will be subject to annual impairment testing until completion or abandonment of the projects. Upon completion of the project, the Company will make a separate determination of useful life of the indefinite-lived intangible assets and the related amortization will be recorded as an expense over the estimated useful life.

Results of Operations for the Three and Nine Month Periods Ended September 30, 2014 and September 30, 2013

Overview

The following table sets forth selected consolidated statements of operations data for each of the periods indicated.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
     (In millions)     (In millions)  

Operating expenses

   $ (8.0   $ (7.6   $ (23.0   $ (33.6

Change in fair value of warrant liability—income (expense)

   $ 1.3      $ (0.2   $ 0.5      $ 1.1   

Net loss

   $ (6.7   $ (7.7   $ (22.4   $ (32.4

 

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Operating expenses were higher for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 due to slight increases in general and administrative expenses and research and development expenses. Operating expenses were lower for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 due to lower research and development expenses, primarily as a result of the upfront fee of $10.0 million paid to Array in June 2013. See the section captioned “Note 12—Collaborative and License Agreements” of the unaudited financial statements included in this report for additional information. The decrease was partially offset by slight increases in general and administrative expenses. Based on our development plans for our small molecule and vaccine candidates, we expect to continue to incur operating losses for the foreseeable future.

We incurred a net loss of $6.7 million for the three months ended September 30, 2014 compared to a net loss of $7.7 million for the three months ended September 30, 2013. The decrease in our net loss was primarily due to $1.3 million in non-cash income from the change in the fair value of our warrant liability during the three months ended September 30, 2014 compared to $0.2 million in non-cash expense from the change in the fair value of our warrant liability during the three months ended September 30, 2013. The decrease was partially offset by slight increases in operating expenses.

We incurred a net loss of $22.4 million for the nine months ended September 30, 2014 compared to a net loss of $32.4 million for the nine months ended September 30, 2013. The decrease in our net loss was primarily due to lower operating expenses principally due to an upfront payment of $10.0 million to Array in June 2013, partly offset by lower non-cash income from the change in fair value of warrant liability, which was $0.5 million for the nine months ended September 30, 2014 compared to $1.1 million for the nine months ended September 30, 2013.

Income or expense associated with the change in fair value of the warrant liability is the result of the remeasurement of the fair value of the warrant liability at each reporting date. Changes in the fair value of the warrant liability are attributable to increases or decreases in our stock price, volatility and expected life of our liability-classified warrants. In addition, the change in fair value was also due to the expiration of our May 2009 warrants. For more information, see “Note 9—Warrants” of the unaudited financial statements included elsewhere in this quarterly report on Form 10-Q.

Research and Development Expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  
     (In millions)      (In millions)  

Research and development

   $ 5.7       $ 5.5       $ 15.9       $ 27.4   

Research and development expenses increased by $0.2 million, or 3.6%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, principally due to increase in manufacturing development and preclinical expenses of $0.4 million due to greater activity primarily related to the development of our product candidates and increase in salaries and benefits of $0.1 million attributable to increased headcount. The increase was partly offset by decreases in clinical trial expenses of $0.4 million primarily due to less activity related to the development of prior programs.

Research and development expenses decreased by $11.5 million, or 42.0%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, principally due to an upfront payment of $10.0 million to Array in June 2013. In May 2013, we entered into a collaborative agreement with Array and paid Array an upfront fee of $10.0 million upon initiation of the collaboration. See “Note 12—Collaborative and License Agreements” of the unaudited financial statements included in this report for additional information. In addition, the decrease in research and development expense was also due to decreases in clinical trial expenses of $2.3 million primarily due to less activity related to the development of prior programs. The decreases were partly offset by a $0.4 million increase in salaries and benefits attributable to increased headcount and a $0.3 million increase in manufacturing development and preclinical expenses due to greater activity related to the development of our product candidates.

General and Administrative Expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  
     (In millions)      (In millions)  

General and administrative

   $ 2.4       $ 2.1       $ 7.1       $ 6.3   

 

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The $0.3 million, or 14.3%, increase in general and administrative expense for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was primarily due to a $0.5 million increase in professional fees primarily related to our August 2014 acquisition of Alpine. See “Note 7—Acquisition” of the unaudited financial statements in this report for additional information. In addition, the increase was also due to a $0.1 million increase in salaries and benefits attributable to increased headcount. The increase was partly offset by a $0.3 million decrease in director compensation that was primarily related to the change in fair value of RSUs on remeasurement. The change in fair value of RSUs was attributable to the change in the price of our common stock. See “Note 10—Share-Based Compensation” of the unaudited financial statements in this report for additional information on liability classified RSUs during three months ended September 30, 2014.

The $0.8 million, or 12.7%, increase in general and administrative expense for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was primarily due to a $0.4 million increase in salaries and benefits attributable to increased headcount and a $0.4 million increase in professional fees primarily related to our August 2014 acquisition of Alpine. See “Note 7—Acquisition” of the unaudited financial statements in this report for additional information.

Change in Fair Value of Warrant Liability

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014      2013     2014      2013  
     (In millions)     (In millions)  

Change in fair value of warrant liability—income (expense)

   $ 1.3       $ (0.2   $ 0.5       $ 1.1   

The $1.3 million and $0.5 million non-cash income recorded in the three and nine months ended September 30, 2014, respectively, was due to the change in the estimated fair value of warrant liability during that period. Such change was attributable to the change in the price of our common stock as well as volatility and expected life of the warrants and pertains to warrants issued in connection with the May 2009 financing, which expired on May 26, 2014, and the September 2010 financing. We determined the fair value of the warrants using the Black-Scholes model. For more information, see “Note 9—Warrants” of the unaudited financial statements included in this report.

Liquidity and Capital Resources

Cash, Cash Equivalents, Investments and Working Capital

As of September 30, 2014, our principal sources of liquidity consisted of cash and cash equivalents of $34.2 million, short-term investments of $46.5 million and long-term investments of $10.5 million. Our cash and cash equivalents consist of cash, money market funds and securities with an initial maturity of less than 90 days. Our short-term investments are invested in debt securities of U.S government agencies and corporate bonds with maturities not exceeding 12 months from the reporting date. Our long-term investments are invested in debt securities of U.S government agencies with maturities exceeding 12 months from the reporting date. Our primary source of cash has historically been proceeds from the issuance of equity securities, exercise of warrants, debt and payments to us under grants, licensing and collaboration agreements. These proceeds have been used to fund our operations.

Our cash and cash equivalents were $34.2 million as of September 30, 2014 compared to $9.3 million as of December 31, 2013, an increase of $24.9 million, or 267.7%. The increase was attributable to net proceeds of $40.2 million from our September 2014 concurrent but separate underwritten offerings of our common stock and Series A convertible preferred stock, which resulted in net proceeds of $21.6 million and $18.6 million respectively. In addition, the increase was also the result of net investment redemption of $5.8 million, partly offset by cash used to fund our operations of $21.0 million and equipment purchases of $0.3 million.

As of September 30, 2014, our working capital (defined as current assets less current liabilities) was $77.2 million compared to $56.3 million as of December 31, 2013, an increase of $20.9 million, or 37.1%. The increase in working capital was primarily attributable to an increase in cash and cash equivalents of $25.0 million, partly offset by a decrease in short-term investments of $4.2 million.

 

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On September 23, 2014, we closed concurrent but separate underwritten offerings of 10,000,000 shares of our common stock at a price of $2.00 per share and 10,000 shares of our Series A convertible preferred stock at a price of $2,000 per share. Each share of Series A convertible preferred stock is non-voting and convertible into 1,000 shares of our common stock at the option of the holder, provided that conversion will be prohibited if, as a result, the holder and its affiliates would beneficially own more than 4.99% of our common stock then outstanding. As part of the common stock offering, we also granted the underwriters, and the underwriters exercised, a 30-day option to purchase 1,500,000 additional shares of our common stock. Aggregate gross proceeds from the offerings were approximately $43.0 million. Aggregate net proceeds from the offerings, after commissions and estimated expenses of $2.8 million, were approximately $40.2 million.

On July 1, 2013, we commenced selling our common stock through the “at the market” equity offering program under a Sales Agreement with Cowen and Company, LLC. During the three months ended September 30, 2013, we sold an aggregate of 5,791,697 shares of our common stocks, of which 5,075,576 shares were settled as of September 30, 2013 for net proceeds of $9.8 million. The remaining shares were settled in October 2013 for net proceeds of $1.4 million. In connection with our September 2014 equity offerings, we terminated the Sales Agreement, effective September 17, 2014. See “Note 8—Equity” of the unaudited financial statements in this report for additional information.

On June 4, 2013, we closed a registered direct offering of 5,000,000 units, with each unit consisting of one share of our common stock and a warrant to purchase one share of our common stock, at $2.00 per unit for gross proceeds of $10.0 million. After deducting offering expenses, net proceeds were approximately $9.9 million.

We believe that our currently available cash and cash equivalents and investments will be sufficient to finance our operations for at least the next 12 months. Nevertheless, we expect that we will require additional capital from time to time in the future in order to continue the development of products in our pipeline and to expand our product portfolio. We would expect to seek additional financing from the sale and issuance of equity or debt securities.

Cash Flows from Operating Activities

Cash used by operating activities totaled $21.0 million for the nine months ended September 30, 2014, compared to $30.8 million for the nine months ended September 30, 2013. The decrease was attributable primarily to an upfront payment of $10.0 million to Array in June 2013. See “Note 12—Collaborative and License Agreements” of the unaudited financial statements included in this report for additional information.

Cash Flows from Investing Activities

Cash provided by investing activities was $5.6 million for the nine months ended September 30, 2014, compared to $1.6 million for the nine months ended September 30, 2013. This change was attributable primarily to higher redemption of investments, net of purchases, of $5.8 million for the nine months ended September 30, 2014 as compared to $1.9 million for the nine months ended September 30, 2013.

Cash Flows from Financing Activities

Cash provided by financing activities was $40.3 million during the nine months ended September 30, 2014, which consisted primarily of net proceeds of approximately $40.2 million from our September 2014 concurrent but separate underwritten common stock and Series A convertible preferred stock offerings. Net proceeds from our common stock offering were $21.6 million and net proceeds from our Series A convertible preferred stock offering were $18.6 million.

Cash provided by financing activities was $19.7 million during the nine months ended September 30, 2013, which consisted of net proceeds of $9.8 million received from the sale of our common stock through our “at the market” equity offering program under the Sales Agreement with Cowen, and net proceeds of $9.9 million received from a registered direct offering completed in June 2013.

 

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Contractual Obligations and Contingencies

In our continuing operations, we have entered into long-term contractual arrangements from time to time for our facilities, the provision of goods and services, and acquisition of technology access rights, among others. The following table presents contractual obligations arising from these arrangements as of September 30, 2014:

 

     Payments Due by Period  
     Total      Less than
1 Year
     1-3 Years      3-5 Years      After
5 Years
 
     (In thousands)  

Operating leases

   $ 2,601       $ 607       $ 1,236       $ 758       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In May 2008, we entered into a lease for an office and laboratory facility in Seattle, Washington totaling approximately 17,000 square feet. The lease provides for a base monthly rent of $47,715, increasing to $52,259 in 2018. We also have entered into operating lease obligations through June 2017 for certain office equipment.

Under certain licensing arrangements for technologies incorporated into our product candidates, we are contractually committed to payments for sponsored research collaborations, ongoing licensing fees and royalties, as well as contingent payments when certain milestones (as defined in the agreements) may be achieved.

Guarantees and Indemnification

In the ordinary course of our business, we have entered into agreements with our collaboration partners, vendors, and other persons and entities that include guarantees or indemnity provisions. For example, our agreements with clinical trial sites and third party manufacturers contain certain customary indemnification provisions, and we have entered into indemnification agreements with our officers and directors. Based on information known to us as of September 30, 2014, we believe that our exposure related to these guarantees and indemnification obligations is not material.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.

Recent Accounting Pronouncements

In August 2014, FASB issued Accounting Standard Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This standard applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We are currently evaluating the impact this standard will have on our consolidated financial position or results of operations.

In May 2014, FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) that will supersede most revenue recognition standards. Under the new standard, an entity will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the entity expects to be entitled in exchange for those goods or services. An entity would recognize revenue through a five-step process: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This standard also requires enhanced disclosures and provides more comprehensive guidance for transactions such as service revenue and contract modifications. Guidance for multiple-element arrangements also has been enhanced. The standard will take effect for public entities for annual reporting periods beginning after December 15, 2016, including interim reporting periods. Early application is not permitted. We are currently evaluating the impact this standard will have on our consolidated financial position or results of operations.

 

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In July 2013, FASB issued guidance on presentation of an unrecognized tax benefit in financial statements when a NOL carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for an NOL carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The guidance does not require new recurring disclosures. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public entities. Early adoption and retrospective application are permitted. We adopted this standard on January 1, 2014. The adoption of this standard had no impact on the presentation of our unrecognized tax benefits or on our consolidated financial position or results of operations.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We had cash, cash equivalents, short-term investments and long-term investments totaling $91.2 million and $72.6 million as of September 30, 2014 and December 31, 2013, respectively. We do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates since a majority of these assets are of a short term nature. Declines in interest rates, however, would reduce future investment income. A ten basis point decline in interest rates, occurring January 1, 2014 and sustained throughout the period ended September 30, 2014, would result in a decline in investment income of approximately $61,400 for that same period.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness, as of the end of the period covered by this report, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the SEC under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of September 30, 2014, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position. There are no material proceedings to which any director, officer or any of our affiliates, any owner of record or beneficially of more than five percent of any class of our voting securities, or any associate of any such director, officer, our affiliates, or security holder, is a party adverse to us or our consolidated subsidiary or has a material interest adverse thereto.

 

Item 1A. Risk Factors

Set forth below and elsewhere in this report, and in other documents we file with the SEC are descriptions of risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our results of operations and financial condition.

Risks Relating to our Business

Products that appear promising in research and development may be delayed or may fail to reach later stages of clinical development.

The successful development of pharmaceutical products is highly uncertain. Products that appear promising in research and development may be delayed or fail to reach later stages of development. For example, Merck KGaA recently announced that its biopharmaceutical division Merck Serono decided to discontinue the clinical development program of tecemotide as a monotherapy in Stage III non-small cell lung cancer. The decision to discontinue the current clinical program in NSCLC, which included the Phase III START2 and INSPIRE studies, followed recent results from a planned analysis of EMR 63325-009, a randomized, double-blind, placebo controlled Phase I/II study in Japanese patients. In addition, the ongoing Phase 1 trials for ONT-380 and ONT-10 may fail to demonstrate that either product candidate is sufficiently safe and effective to warrant further development.

Furthermore, decisions regarding the further development of product candidates must be made with limited and incomplete data, which makes it difficult to accurately predict whether the allocation of limited resources and the expenditure of additional capital on specific product candidates will result in desired outcomes. Preclinical and clinical data can be interpreted in different ways, and negative or inconclusive results or adverse medical events during a clinical trial could delay, limit or prevent the development of a product candidate, which could harm our business, financial condition or the trading price of our securities. There can be no assurance as to whether or when we will receive regulatory approvals for any of our product candidates, including ONT-380 or ONT-10.

There is no assurance that ONT-380 will be safe, effective or receive regulatory approval.

ONT-380 is an early stage clinical development candidate and the risks associated with its development are significant. Promising pre-clinical data in animal models and early clinical data may not be predictive of later clinical trial results. Additional clinical data may fail to establish that ONT-380 is effective in treating central nervous system disease or may indicate safety profile concerns not indicated by early clinical data. Data from Phase 1 trials may be inconclusive. Even if Phase 1 data are encouraging, further trials will be necessary to establish safety and efficacy.

If the results of the current Phase 1 ONT-380 trials, or of future ONT-380 trials, do not indicate a favorable safety and efficacy profile for ONT-380, or otherwise fail to support the continued development of ONT-380, a substantial decline in the price of our common stock could result. There can be no assurance as to whether we and Array will be able to successfully develop and commercialize ONT-380.

 

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Our pipeline as a whole is subject to the inherent risks of early stage pharmaceutical development.

As a function of their development stage, preclinical programs and product candidates in early clinical development are inherently subject to a high degree of risk. Because our current product pipeline is comprised of product candidates in pre-clinical development and Phase 1 trials, our business is heavily subject to the risks of early stage pharmaceutical development.

If we are not able to advance our preclinical programs, and our Phase 1 product candidates fail, our pipeline of products in development could be reduced or eliminated. This would cause our stock price to decline and could have a material adverse effect on our business, including but not limited to our ability to raise capital to rebuild our pipeline and develop future product candidates.

We have a history of net losses, we anticipate additional losses and we may never become profitable.

Other than the year ended December 31, 2008, we have incurred net losses in each fiscal year since we commenced our research activities. The net income we realized in 2008 was due entirely to our December 2008 transactions with Merck KGaA, and we do not anticipate realizing net income again for the foreseeable future. As of September 30, 2014, our accumulated deficit was approximately $454.5 million. Our losses have resulted primarily from expenses incurred in research and development of our product candidates. We may make significant capital commitments to fund the development of our product candidates. If these development efforts are unsuccessful, the development costs would be incurred without any future revenue, which could have a material adverse effect on our financial condition. We do not know when or if we will complete our product development efforts, receive regulatory approval for any of our product candidates, or successfully commercialize any approved products. As a result, it is difficult to predict the extent of any future losses or the time required to achieve profitability, if at all. Any failure of our products to complete successful clinical trials and obtain regulatory approval and any failure to become and remain profitable could adversely affect the price of our common stock and our ability to raise capital and continue operations.

If we fail to acquire and develop products or product candidates at all or on commercially reasonable terms, we may be unable to grow our business.

The success of our product pipeline strategy depends, in part, on our ability to identify, select and acquire product candidates. Proposing, negotiating and implementing an economically viable product acquisition or license is a lengthy and complex process. We compete for partnering arrangements and license agreements with pharmaceutical and biotechnology companies and academic research institutions. Our competitors may have stronger relationships with third parties with whom we are interested in collaborating or may have more established histories of developing and commercializing products. As a result, our competitors may have a competitive advantage in entering into partnering arrangements with such third parties. In addition, even if we find promising product candidates, and generate interest in a partnering or strategic arrangement to acquire such product candidates, we may not be able to acquire rights to additional product candidates or approved products on terms that we find acceptable, if at all. If we fail to acquire and develop product candidates from others, we may be unable to grow our business.

We expect that any product candidate to which we acquire rights will require additional development efforts prior to commercial sale, including extensive clinical evaluation and approval by the FDA and non-U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. Even if the product candidates are approved, we can make no assurance that we would be capable of economically producing the product or that the product would be commercially successful.

There is no assurance that we will be granted regulatory approval for any of our product candidates.

We are currently conducting Phase 1 trials for ONT-380 and ONT-10 and collaborating with Celldex to initiate a combined Phase 1b trial of ONT-10 and varlilumab. There can be no assurance that these trials will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals. A number of companies in the biotechnology and pharmaceutical industries, including our company, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. For example, in September 2014, we and Merck KGaA announced that Merck KGaA decided to discontinue the clinical development program of tecemotide in NSCLC, including the Phase III INSPIRE and START2 studies.

 

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Further, we or any of our collaborators may be unable to submit applications to regulatory agencies within the time frame we currently expect. Once submitted, applications must be approved by various regulatory agencies before we or any of our collaborators can commercialize the product described in the application. Additionally, even if applications are submitted, regulatory approval may not be obtained for any of our product candidates, and regulatory agencies could require additional studies to verify safety or efficacy, which could make further development of our product candidates impracticable. If our product candidates are not shown to be safe and effective in clinical trials, we may not receive regulatory approval, which would have a material adverse effect on our business, financial condition and results of operations.

We and our collaborators currently rely on third-party manufacturers to supply our product candidates. Any disruption in production, inability of these third-party manufacturers to produce adequate quantities to meet our needs or our collaborators’ needs or other impediments with respect to development or manufacturing could adversely affect our ability to continue our research and development activities or successfully complete pre-clinical studies and clinical trials, delay submissions of our regulatory applications or adversely affect our ability to commercialize our product candidates in a timely manner, or at all.

Under our collaboration agreement with Array for the development of ONT-380, Array is responsible for the manufacture of ONT-380, which they outsource to third parties. Celldex is responsible for the manufacture of varlilumab for the planned combination trial of ONT-10 and varlilumab. If Array’s or Celldex’s third-party manufacturers cease or interrupt production or if Array’s or Celldex’s third-party manufacturers and other service providers fail to supply materials, products or services to them for any reason, such interruption could delay progress on our programs, with the potential for additional costs. Our product candidates have not yet been manufactured on a commercial scale. In order to commercialize a product candidate, the third-party manufacturer may need to increase its manufacturing capacity, which may require the manufacturer to fund capital improvements to support the scale up of manufacturing and related activities. With respect to certain of our product candidates, we may be required to provide all or a portion of these funds. The third-party manufacturer may not be able to successfully increase its manufacturing capacity for our product candidate for which we obtain marketing approval in a timely or economic manner, or at all. If any manufacturer is unable to provide commercial quantities of a product candidate, we or our collaborative development partner, as applicable, will need to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for a particular product candidate could require us (or our collaborative development partner, as applicable) to conduct comparative studies or use other means to determine equivalence between product candidates manufactured by a new manufacturer and those previously manufactured by the existing manufacturer, which could delay or prevent commercialization of our product candidates. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if alternative arrangements are not established on a timely basis or on acceptable terms, the development and commercialization of our product candidates may be delayed or there may be a shortage in supply.

Any manufacturer of our products must comply with cGMP, requirements enforced by the FDA through its facilities inspection program or by foreign regulatory agencies. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.

Pre-clinical and clinical trials are expensive and time consuming, and any failure or delay in commencing or completing clinical trials for our product candidates could severely harm our business.

We are currently conducting Phase 1 clinical trials for ONT-380 and ONT-10. Each of our product candidates must undergo extensive pre-clinical studies and clinical trials as a condition to regulatory approval. Pre-clinical studies and clinical trials are expensive and take many years to complete. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:

 

    safety issues or side effects;

 

    delays in patient enrollment and variability in the number and types of patients available for clinical trials;

 

    poor effectiveness of product candidates during clinical trials;

 

    governmental or regulatory delays and changes in regulatory requirements, policy and guidelines;

 

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    our or our collaborators’ ability to obtain regulatory approval to commence a clinical trial and conduct a trial in accordance with good clinical practices;

 

    our or our collaborators’ ability to manufacture or obtain from third parties materials sufficient for use in pre-clinical studies and clinical trials; and

 

    varying interpretation of data by the FDA and similar foreign regulatory agencies.

It is possible that none of our product candidates will complete clinical trials in any of the markets in which we or our collaborators intend to sell those product candidates. Accordingly, we or our collaborators may not receive the regulatory approvals necessary to market our product candidates. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for product candidates would prevent or delay their commercialization and severely harm our business and financial condition.

The failure to enroll patients for clinical trials may cause delays in developing our product candidates.

We may encounter delays if we are, or any collaboration partner is, unable to enroll enough patients to timely initiate or complete clinical trials. Patient enrollment depends on many factors, including, the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. Moreover, when one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials. Our product candidates are focused in oncology, which can be a difficult patient population to recruit. If we fail to enroll patients for clinical trials, our clinical trials may be delayed or suspended, which could delay our ability to generate revenues.

We and our collaborators rely on third parties to conduct our clinical trials. If these third parties do not perform as contractually required or otherwise expected, we or our collaborators may not be able to obtain regulatory approval for or be able to commercialize our product candidates.

We and our collaborators rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to assist in conducting our clinical trials. We and our collaborators have, in the ordinary course of business, entered into agreements with these third parties. Nonetheless, we and our collaborators are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us and our collaborators to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us or our collaborators of these responsibilities and requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our and our collaborators’ pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates.

Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.

Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians, patients, third-party payers such as health insurance companies and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. New patterns of care, alternative new treatments or different reimbursement and payor paradigms, possibly due to economic conditions or governmental policies, could negatively impact the commercial viability of our product candidates. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:

 

    our ability to provide acceptable evidence of safety and efficacy;

 

    the prevalence and severity of adverse side effects;

 

    availability, relative cost and relative efficacy of alternative and competing treatments;

 

    the effectiveness of our marketing and distribution strategy;

 

    publicity concerning our products or competing products and treatments; and

 

    our ability to obtain sufficient third-party insurance coverage or reimbursement.

 

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If our product candidates do not become widely accepted by physicians, patients, third-party payers and other members of the medical community, our business, financial condition and results of operations would be materially and adversely affected.

The termination of Merck’s 2008 license agreement with us could harm our business and negatively affect the development prospects for ONT-10.

Pursuant to our 2008 license agreement with Merck KGaA, Merck KGaA has the exclusive right to develop, manufacture and commercialize tecemotide in return for our right to receive cash payments upon the occurrence of certain events and royalties based on net sales. Merck KGaA has the right to terminate the license agreement upon thirty days’ prior written notice if, in its reasonable judgment, it determines there are issues concerning the safety or efficacy of tecemotide that would materially and adversely affect tecemotide’s medical, economic or competitive viability. Merck KGaA recently announced that its biopharmaceutical division Merck Serono decided to discontinue the clinical development program of tecemotide as a monotherapy in Stage III non-small cell lung cancer. Merck KGaA may ultimately decide not to continue development of tecemotide as a combination therapy or in any manner and may terminate the 2008 license agreement. Any future payments under the license agreement, including royalties to us, will depend on whether Merck KGaA decides to advance tecemotide through development and commercialization.

If Merck KGaA terminates the agreement for safety or efficacy reasons, or breaches the agreement, we could become involved in disputes with Merck KGaA, which could lead to delays in or termination of our development and commercialization of tecemotide, if applicable, and time-consuming and expensive litigation or arbitration. If Merck KGaA terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, the likelihood of successfully developing or commercializing tecemotide would be materially and adversely affected.

Merck KGaA’s decisions regarding the development of tecemotide and the license agreement may also negatively impact the development of ONT-10, as both ONT-10 and tecemotide are targeted at the MUC1 antigen. Merck KGaA’s recent announcement of Merck Serono’s decision to discontinue the Phase III START2 and INSPIRE studies of tecemotide substantially decreases the likelihood that Merck KGaA will exercise its right of first negotiation with respect to ONT-10. These developments may also make it more difficult to find other co-development partners for ONT-10. In addition, if Merck KGaA were to terminate the license agreement, we would have to assume certain patent prosecution expenses with respect to ONT-10 that are currently paid for by Merck KGaA.

ONT-10 is based on novel technology, which may raise new regulatory issues that could delay or make FDA or foreign regulatory approval more difficult.

The process of obtaining required FDA, and other regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. ONT-10 is novel; therefore, regulatory agencies may lack experience with similar product candidates, which may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of ONT-10.

To date, the FDA has approved for commercial sale in the United States only one active vaccine designed to stimulate an immune response against cancer. Consequently, there is limited precedent for the successful development or commercialization of products based on technologies in this area. This may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of ONT-10.

Even if regulatory approval is received for our product candidates, the later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions, including withdrawal of the product from the market.

Approval of a product candidate may be conditioned upon certain limitations and restrictions as to the drug’s use, or upon the conduct of further studies, and may be subject to continuous review. After approval of a product, if any, there will be significant ongoing regulatory compliance obligations, and if we or our collaborators, including Array, fail to comply with these requirements, we or any of our collaborators could be subject to penalties, including:

 

    warning letters;

 

    fines;

 

    product recalls;

 

    withdrawal of regulatory approval;

 

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    operating restrictions;

 

    disgorgement of profits;

 

    injunctions; and

 

    criminal prosecution.

Regulatory agencies may require us or any of our collaborators to delay, restrict or discontinue clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. In addition, all statutes and regulations governing the conduct of clinical trials are subject to change in the future, which could affect the cost of such clinical trials. Any unanticipated delays in clinical studies could delay our ability to generate revenues and harm our financial condition and results of operations.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally.

We intend to have our product candidates marketed outside the United States. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. To date, we have not filed for marketing approval for any of our product candidates and may not receive the approvals necessary to commercialize our product candidates in any market.

The approval procedure varies among countries and may include all of the risks associated with obtaining FDA approval. The time required to obtain foreign regulatory approval may differ from that required to obtain FDA approval, and additional testing and data review may be required. We may not obtain foreign regulatory approvals on a timely basis, if at all. Additionally, approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in other jurisdictions, including approval by the FDA. The failure to obtain regulatory approval in foreign jurisdictions could limit commercialization of our products, reduce our ability to generate profits and harm our business.

Our ability to continue with our planned operations is dependent on our success at raising additional capital sufficient to meet our obligations on a timely basis. If we fail to obtain additional financing when needed, we may be unable to complete the development, regulatory approval and commercialization of our product candidates.

We have expended and continue to expend substantial funds in connection with our product development activities and clinical trials and regulatory approvals. The very limited funds generated currently from our operations will be insufficient to enable us to bring all of our products currently under development to commercialization. Accordingly, we need to raise additional funds from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of our product candidates. We cannot be certain that additional financing will be available when and as needed or, if available, that it will be available on acceptable terms. If financing is available, it may be on terms that adversely affect the interests of our existing stockholders or restrict our ability to conduct our operations. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. We currently propose to enter into business development transactions that license certain rights to our protocell technology to third parties. The protocell technology is an early stage technology and we may not be successful in entering into any capital generating licensing transactions with respect to this technology. If adequate financing is not available, we may need to continue to reduce or eliminate our expenditures for research and development, testing, production and marketing for some of our product candidates. Our actual capital requirements will depend on numerous factors, including:

 

    activities and arrangements related to the commercialization of our product candidates;

 

    the progress of our research and development programs;

 

    the progress of pre-clinical and clinical testing of our product candidates;

 

    the time and cost involved in obtaining regulatory approvals for our product candidates;

 

    the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights with respect to our intellectual property;

 

    our capacity to enter into collaborative or licensing agreements with respect to our protocell technology;

 

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    the effect of competing technological and market developments;

 

    the effect of changes and developments in our existing licensing and other relationships; and

 

    the terms of any new collaborative, licensing and other arrangements that we may establish.

If we require additional financing and cannot secure sufficient financing on acceptable terms, we may need to delay, reduce or eliminate some or all of our research and development programs, any of which would be expected to have a material adverse effect on our business, operating results, and financial condition.

We may expand our business through the acquisition of companies or businesses or by entering into collaborations or in-licensing product candidates that could disrupt our business and harm our financial condition.

We have in the past and may in the future seek to expand our pipeline and capabilities by acquiring one or more companies or businesses, entering into collaborations or in-licensing one or more product candidates. For example, in May 2013, we began collaborating with Array to develop ONT-380 and in August 2014, we acquired Alpine Biosciences, Inc., a biotechnology company developing protocells. Acquisitions, collaborations and in-licenses, including our ONT-380 collaboration and Alpine acquisition, involve numerous risks, including:

 

    substantial cash expenditures;

 

    potentially dilutive issuance of equity securities;

 

    incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;

 

    difficulties in assimilating the operations and technology of the acquired companies;

 

    potential disputes regarding contingent consideration;

 

    the assumption of unknown liabilities of the acquired businesses;

 

    diverting our management’s attention away from other business concerns;

 

    entering markets in which we have limited or no direct experience; and

 

    potential loss of our key employees or key employees of the acquired companies or businesses.

Our experience in making acquisitions, entering collaborations and in-licensing product candidates is limited. We cannot assure you that any acquisition, collaboration or in-license will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business or in-licensed product candidate. In addition, our future success would depend in part on our ability to manage the rapid growth associated with some of these acquisitions, collaborations and in-licenses. We cannot assure you that we would be able to successfully combine our business with that of acquired businesses, manage a collaboration or integrate in-licensed product candidates or that such efforts would be successful. Furthermore, the development or expansion of our business or any acquired business or company or any collaboration or in-licensed product candidate may require a substantial capital investment by us. We may also seek to raise funds by selling shares of our capital stock, which could dilute our current stockholders’ ownership interest, or securities convertible into our capital stock, which could dilute current stockholders’ ownership interest upon conversion.

If we are unable to maintain and enforce our proprietary rights, we may not be able to compete effectively or operate profitably.

Our success is dependent in part on maintaining and enforcing our patents and other proprietary rights and will depend in large part on our ability to:

 

    defend patents once issued;

 

    preserve trade secrets; and

 

    operate without infringing the patents and proprietary rights of third parties.

The degree of future protection for our proprietary rights is uncertain. For example:

 

    we might not have been the first to make the inventions covered by any of our patents, if issued, or our pending patent applications;

 

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    we might not have been the first to file patent applications for these inventions;

 

    under our collaboration agreement with Array, they are responsible for the prosecution of patents related to ONT-380, and they may not effectively prosecute and protect those patents;

 

    others may independently develop similar or alternative technologies or products and/or duplicate any of our technologies and/or products;

 

    it is possible that none of our pending patent applications will result in issued patents or, if issued, these patents may not be sufficient to protect our technology or provide us with a basis for commercially-viable products and may not provide us with any competitive advantages;

 

    if our pending applications issue as patents, they may be challenged by third parties as infringed, invalid or unenforceable under U.S. or foreign laws;

 

    if issued, the patents under which we hold rights may not be valid or enforceable; or

 

    we may develop additional proprietary technologies that are not patentable and which may not be adequately protected through trade secrets, if for example a competitor were to independently develop duplicative, similar or alternative technologies.

The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed in patents or the degree of protection afforded under patents. Although we believe our potential rights under patent applications provide a competitive advantage, it is possible that patent applications owned by or licensed to us will not result in patents being issued, or that, if issued, the patents will not give us an advantage over competitors with similar products or technology, nor can we assure you that we can obtain, maintain and enforce all ownership and other proprietary rights necessary to develop and commercialize our product candidates.

In addition to the intellectual property and other rights described above, we also rely on unpatented technology, trade secrets, trademarks and confidential information, particularly when we do not believe that patent protection is appropriate or available. However, trade secrets are difficult to protect and it is possible that others will independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality and invention assignment agreement at the commencement of an employment or consulting relationship with us. However, it is possible that these agreements will not provide effective protection of our confidential information or, in the event of unauthorized use of our intellectual property or the intellectual property of third parties, provide adequate or effective remedies or protection.

If we are unable to obtain intellectual property rights to develop or market our products or we infringe on a third-party patent or other intellectual property rights, we may need to alter or terminate a product development program.

If our vaccine technology or our product candidates infringe or conflict with the rights of others, we may not be able to manufacture or market our product candidates, which could have a material and adverse effect on us and on our collaboration with Array.

Issued patents held by others may limit our ability to develop commercial products. All issued patents are entitled to a presumption of validity under the laws of the United States. If we need licenses to such patents to permit us to develop or market our product candidates, we may be required to pay significant fees or royalties, and we cannot be certain that we would be able to obtain such licenses on commercially reasonable terms, if at all. Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our products to market, that we use in producing our products, or that we use in treating patients with our products.

We know that others have filed patent applications in various jurisdictions that relate to several areas in which we are developing products. Some of these patent applications have already resulted in the issuance of patents and some are still pending. We may be required to alter our processes or product candidates, pay licensing fees or cease activities. Certain parts of our vaccine technology, including the MUC1 antigen, originated from third-party sources.

 

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These third-party sources include academic, government and other research laboratories, as well as the public domain. If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or product candidates conflict with patent rights of others, third parties could bring legal actions against us, in Europe, the United States and elsewhere, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending applications. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent. As a result, third parties may be able to obtain patents with claims relating to our product candidates, which they could attempt to assert against us. Further, as we develop our products, third parties may assert that we infringe the patents currently held or licensed by them and it is difficult to provide the outcome of any such action. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of claims of patent infringement or violation of other intellectual property rights, which could have a material and adverse effect on our business, financial condition and results of operations.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, and we may be unable to protect our rights in, or to use, our technology.

There has been significant litigation in the biotechnology industry over patents and other proprietary rights and if we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. Others may challenge the validity, inventorship, ownership, enforceability or scope of our patents or other technology used in or otherwise necessary for the development and commercialization of our product candidates. We may not be successful in defending against any such challenges. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses and pay substantial royalties in order to continue to manufacture or market the affected products.

Moreover, the cost of litigation to uphold the validity of patents to prevent infringement or to otherwise protect our proprietary rights can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use the challenged technologies without payment to us. There is also the risk that, even if the validity of a patent were upheld, a court would refuse to stop the other party from using the inventions, including on the ground that its activities do not infringe that patent. There is no assurance that we would prevail in any legal action or that any license required under a third-party patent would be made available on acceptable terms or at all. If any of these events were to occur, our business, financial condition and results of operations would be materially and adversely effected.

If any products we develop become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, our ability to successfully commercialize our products will be impaired.

Our future revenues, profitability and access to capital will be affected by the continuing efforts of governmental and private third-party payers to contain or reduce the costs of health care through various means. We expect a number of federal, state and foreign proposals to control the cost of drugs through government regulation. We are unsure of the impact recent health care reform legislation may have on our business or what actions federal, state, foreign and private payers may take in response to the recent reforms. Therefore, it is difficult to predict the effect of any implemented reform on our business. Our ability to commercialize our products successfully will depend, in part, on the extent to which reimbursement for the cost of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the United States, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, particularly for indications for which there is no current effective treatment or for which medical care typically is not sought. Adequate third-party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product research and development. If adequate coverage and reimbursement levels are not provided by government and third-party payers for use of our products, our products may fail to achieve market acceptance and our results of operations will be harmed.

Governments often impose strict price controls, which may adversely affect our future profitability.

We intend to seek approval to market our future products in both the United States and foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product. In some foreign countries, particularly in the European Union, prescription drug pricing is subject to government control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our future product to other available therapies.

 

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In addition, it is unclear what impact, if any, recent health care reform legislation will have on the price of drugs in the United States. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the United States. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry.

We anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and downward pressure on the price for any approved product, and could seriously harm our prospects. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

    decreased demand for our product candidates;

 

    impairment of our business reputation;

 

    withdrawal of clinical trial participants;

 

    costs of related litigation;

 

    substantial monetary awards to patients or other claimants;

 

    loss of revenues; and

 

    the inability to commercialize our product candidates.

Although we currently have product liability insurance coverage for our clinical trials for expenses or losses up to a $10 million aggregate annual limit, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any or all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.

The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and marketing products designed to address cancer indications for which we are currently developing products or for which we may develop products in the future. Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of our product candidates. We expect any product candidate that we commercialize with our collaborative partners or on our own will compete with existing, market-leading products and products in development.

ONT-380. ONT-380 is an inhibitor of the receptor tyrosine kinase HER2, also known as ErbB2. There are multiple marketed products which target HER2, including the antibodies trastuzumab (Herceptin ® ) and pertuzumab (Perjeta ® ) and the antibody toxin conjugate ado-trastuzumab emtansine (Kadcyla ® ), all from Roche/Genentech. In addition, GlaxoSmithKline markets the dual HER1/HER2 oral kinase inhibitor lapatinib (Tykerb ® ) for the treatment of metastatic breast cancer, and Puma Biotechnology is developing the HER1/HER2/HER4 inhibitor neratinib in Phase 3.

 

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ONT-10. ONT-10 is a MUC1-based liposomal glycolipopeptide cancer vaccine. It is currently in the early stages of development for many indications, for which there are likely to be other competitors.

Many of our potential competitors have substantially greater financial, technical and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to:

 

    design and develop products that are superior to other products in the market;

 

    attract qualified scientific, medical, sales and marketing and commercial personnel;

 

    obtain patent and/or other proprietary protection for our processes and product candidates;

 

    obtain required regulatory approvals; and

 

    successfully collaborate with others in the design, development and commercialization of new products.

Established competitors may invest heavily to quickly discover and develop novel compounds that could make our product candidates obsolete. In addition, any new product that competes with a generic market-leading product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome severe price competition and to be commercially successful. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition and operations will suffer.

If we are unable to enter into agreements with partners to perform sales and marketing functions, or build these functions ourselves, we will not be able to commercialize our product candidates.

We currently do not have any internal sales, marketing or distribution capabilities. In order to commercialize any of our product candidates, we must either acquire or internally develop a sales, marketing and distribution infrastructure or enter into agreements with partners to perform these services for us. Under our agreement with Array, we are responsible for a defined set of proof-of-concept trials for ONT-380, we and Array will jointly conduct any Phase 3 development supported by the proof-of-concept studies and Array is responsible for commercialization of ONT-380 worldwide. Any problems with our relationship with Array could delay the development and commercialization of ONT-380. Additionally, we may not be able to enter into arrangements with respect to our product candidates not covered by the Array agreement on commercially acceptable terms, if at all. Factors that may inhibit our efforts to commercialize our product candidates without entering into arrangements with third parties include:

 

    our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

    the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;

 

    the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

    unforeseen costs and expenses associated with creating a sales and marketing organization.

If we are not able to partner with a third party and are not successful in recruiting sales and marketing personnel or in building a sales and marketing and distribution infrastructure, we will have difficulty commercializing our product candidates, which would adversely affect our business and financial condition.

If we lose key personnel, or we are unable to attract and retain highly-qualified personnel on a cost-effective basis, it would be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.

Our success depends in large part upon our ability to attract and retain highly qualified scientific, clinical, manufacturing, and management personnel. In addition, future growth will require us to continue to implement and improve our managerial, operational and financial systems, and continue to retain, recruit and train additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. Any difficulties in hiring or retaining key personnel or managing this growth could disrupt our operations. The competition for qualified personnel in the biopharmaceutical field is intense. We are highly dependent on our continued ability to attract, retain and motivate highly-qualified management, clinical and scientific personnel. Due to our limited resources, we may not be able to effectively recruit, train and retain additional qualified personnel. If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.

 

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Furthermore, we have not entered into non-competition agreements with all of our key employees. In addition, we do not maintain “key person” life insurance on any of our officers, employees or consultants. The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would harm our research and development programs and our business.

Our business is subject to increasingly complex environmental legislation that has increased both our costs and the risk of noncompliance.

Our business may involve the use of hazardous material, which will require us to comply with environmental regulations. We face increasing complexity in our product development as we adjust to new and upcoming requirements relating to the materials composition of many of our product candidates. If we use biological and hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages. Environmental regulations could have a material adverse effect on the results of our operations and our financial position. We maintain insurance under our general liability policy for any liability associated with our hazardous materials activities, and it is possible in the future that our coverage would be insufficient if we incurred a material environmental liability.

If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business, and our stock price, and could result in litigation or similar actions.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition, and could cause the trading price of our common stock to fall dramatically. Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company will have been detected.

We cannot be certain that the actions we have taken to ensure we have adequate internal controls over financial reporting will be sufficient. In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals any material weaknesses or significant deficiencies, the correction of any such material weaknesses or significant deficiencies could require remedial measures which could be costly and time-consuming. In addition, in such a case, we may be unable to produce accurate financial statements on a timely basis. Any associated accounting restatement could create a significant strain on our internal resources and cause delays in our release of quarterly or annual financial results and the filing of related reports, increase our cost and cause management distraction. Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

We may face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.

We have in the past been, and may in the future become, subject to claims and litigation alleging violations of the securities laws or other related claims, which could harm our business and require us to incur significant costs. For example, in April 2013, a putative shareholder derivative action was filed in the United States District Court for the Western District of Washington, purportedly on behalf of Oncothyreon and naming certain executive officers and the members of our board of directors as defendants. The complaint asserted claims for breaches of fiduciary duty, unjust enrichment, abuse of control, and mismanagement based on allegedly false statements made by us in public filings and press releases in 2011 and 2012. In September 2013, the court entered an order granting our motion to dismiss the lawsuit with prejudice, which means that the plaintiff was not permitted to further amend his complaint to bolster his claims. The period to appeal the dismissal order has now expired, with no appeal being filed, so the lawsuit is concluded. We are generally obliged, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these types of lawsuits. Any future litigation may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations, and cash flows.

 

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Risks Related to the Ownership of Our Common Stock

The trading price of our common stock may be volatile.

The market prices for and trading volumes of securities of biotechnology companies, including our securities, have been historically volatile. In particular, we experienced significant volatility after we and Merck KGaA announced in December 2012 that tecemotide failed to meet its primary endpoint in a Phase 3 trial. We experienced additional volatility in May 2013 following an additional release regarding the Merck KGaA study of tecemotide and the release of the results of our trials of PX-866. The market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common shares may fluctuate significantly due to a variety of factors, including:

 

    the results of pre-clinical testing and clinical trials by us, our collaborators, our competitors and/or companies that are developing products that are similar to ours (regardless of whether such products are potentially competitive with ours);

 

    public concern as to the safety of products developed by us or others;

 

    technological innovations or new therapeutic products;

 

    governmental regulations;

 

    developments in patent or other proprietary rights;

 

    litigation;

 

    comments by securities analysts;

 

    the issuance of additional shares of common stock, or securities convertible into, or exercisable or exchangeable for, shares of our common stock in connection with financings, acquisitions or otherwise;

 

    the incurrence of debt;

 

    general market conditions in our industry or in the economy as a whole; and

 

    political instability, natural disasters, war and/or events of terrorism.

We may seek to raise additional capital in the future; however, such capital may not be available to us on reasonable terms, if at all, when or as we require additional funding. If we issue additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing stockholders would experience further dilution.

We expect that we will seek to raise additional capital from time to time in the future. For example, in connection with our September 2014 public offering, we sold an aggregate of 11,500,000 shares of our common stock and 10,000 shares of our Series A convertible preferred stock. In our June 2013 registered direct offering, we sold an aggregate of 5,000,000 shares of our common stock and warrants to purchase 5,000,000 shares of our common stock. In February 2012 we entered into an agreement with Cowen and Company, LLC (Cowen) to sell shares of our common stock having aggregate sales proceeds of $50,000,000, from time to time, through an “at-the-market” equity offering program under which Cowen acted as sales agent. In July 2013, we commenced selling our common stock through this equity offering program and as of September 30, 2014, we had sold an aggregate of 8,364,379 shares. In connection with our September 2014 public offering, we terminated this equity offering program effective as of September 17, 2014.

Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. Additionally, if we are unable to increase our authorized capital stock, we may not have sufficient authorized but unissued capital stock to issue or sell additional capital stock in potential financings. If we are able to consummate financings, the trading price of our common stock could be adversely affected and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional working capital when required would have a material adverse effect on our business and financial condition and would be expected to result in a decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.

 

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Because we do not expect to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never paid cash dividends on our common shares and have no present intention to pay any dividends in the future. We are not profitable and do not expect to earn any material revenues for at least several years, if at all. As a result, we intend to use all available cash and liquid assets in the development of our business. Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, if any, capital requirements, operating and financial conditions and on such other factors as our board of directors deems relevant. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

We can issue shares of preferred stock that may adversely affect the rights of a stockholder of our common stock.

Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock with designations, rights, and preferences determined from time-to-time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock. For example, an issuance of shares of preferred stock could:

 

    adversely affect the voting power of the holders of our common stock;

 

    make it more difficult for a third party to gain control of us;

 

    discourage bids for our common stock at a premium;

 

    limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or

 

    otherwise adversely affect the market price or our common stock.

We have in the past issued, and we may at any time in the future issue, additional shares of authorized preferred stock. For example, in connection with our September 2014 public offering, we issued and sold 10,000 shares of Series A convertible preferred stock, each share of which is convertible into 1,000 shares of the Company’s common stock, subject to certain ownership restrictions.

We expect our quarterly operating results to fluctuate in future periods, which may cause our stock price to fluctuate or decline.

Our quarterly operating results have fluctuated in the past, and we believe they will continue to do so in the future. Some of these fluctuations may be more pronounced than they were in the past as a result of the issuance by us in September 2010 of warrants to purchase shares of our common stock in connection with equity financings. As of September 30, 2014, there were outstanding warrants from the September 2010 financing exercisable for up to 3,182,147 shares of our common stock. These warrants are classified as a liability. Accordingly, the fair value of the warrants is recorded on our consolidated balance sheet as a liability, and such fair value is adjusted at each financial reporting date with the adjustment to fair value reflected in our consolidated statement of operations. The fair value of the warrants is determined using the Black-Scholes option-pricing model. Fluctuations in the assumptions and factors used in the Black-Scholes model can result in adjustments to the fair value of the warrants reflected on our balance sheet and, therefore, our statement of operations. Due to the classification of such warrants and other factors, quarterly results of operations are difficult to forecast, and period-to-period comparisons of our operating results may not be predictive of future performance. In one or more future quarters, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our common stock could decline. In addition, the market price of our common stock may fluctuate or decline regardless of our operating performance.

 

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Our management will have broad discretion over the use of proceeds from the sale of shares of our common stock and may not use such proceeds in ways that increase the value of our stock price.

In July 2013, we commenced selling our common stock through the “at the market” equity offering program under our Sales Agreement with Cowen. As of September 30, 2014, we had sold an aggregate of 8,364,379 shares under this equity offering program for net proceeds of approximately $16.1 million. In connection with our September 2014 public offering, we terminated the Sales Agreement as of September 17, 2014. In our September 2014 public offering, we sold 11,500,000 shares of our common stock and 10,000 shares of our Series A convertible preferred stock for net proceeds of approximately $40.2 million. We will have broad discretion over the use of proceeds from the sale of those shares, and we could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our product candidates and cause the price of our common stock to decline.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

Not applicable.

 

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Item 6. Exhibits

 

Exhibit
Number

  

Description

    2.1    Agreement and Plan of Reorganization, dated August 8, 2014, among Oncothyreon Inc., AB Acquisition (DE) Corp, Alpine Biosciences, Inc. and Mitchell H. Gold, M.D. as Stockholders’ Agent (incorporated by reference to Exhibit 2.1 of the Form 8-K filed by the registrant with the SEC on August 11, 2014)
    3.1    Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of the Form 8-K filed by the registrant with the SEC on September 23, 2014)
    4.1    Form of Series A Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 of the Form 8-K filed by the registrant with the SEC on September 23, 2014)
    4.2    Piggyback Registration Rights Agreement, dated August 8, 2014 by and between the Company and each of Jay Venkatesan and Mitchell H. Gold
  10.1*    Patent License Agreement between STC.UNM and Alpine Biosciences, Inc. effective June 30, 2014
  10.2    Offer letter between Oncothyreon Inc. and Dr. Jay Vankatesan effective August 8, 2014
  31.1    Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1#    Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2#    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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 Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

# This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act.
* Portions of this exhibit have been omitted based on an application for confidential treatment submitted to the SEC. The omitted portions of this exhibit have been filed separately with the SEC.

 

-42-


Table of Contents

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.

 

    ONCOTHYREON INC.
Date: November 6, 2014    

/s/ Robert L. Kirkman, M.D.

    Robert L. Kirkman, M.D.
   

President, CEO and Director

(Principal Executive Officer)

Date: November 6, 2014    

/s/ Julia M. Eastland

    Julia M. Eastland
   

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

-43-


Table of Contents

INDEX OF EXHIBITS

 

Exhibit
Number

  

Description

    2.1    Agreement and Plan of Reorganization, dated August 8, 2014, among Oncothyreon Inc., AB Acquisition (DE) Corp, Alpine Biosciences, Inc. and Mitchell H. Gold, M.D. as Stockholders’ Agent (incorporated by reference to Exhibit 2.1 of the Form 8-K filed by the registrant with the SEC on August 11, 2014)
    3.1    Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of the Form 8-K filed by the registrant with the SEC on September 23, 2014)
    4.1    Form of Series A Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 of the Form 8-K filed by the registrant with the SEC on September 23, 2014)
    4.2    Piggyback Registration Rights Agreement, dated August 8, 2014 by and between the Company and each of Jay Venkatesan and Mitchell H. Gold
  10.1*    Patent License Agreement between STC.UNM and Alpine Biosciences, Inc. effective June 30, 2014
  10.2    Offer letter between Oncothyreon Inc. and Dr. Jay Vankatesan effective August 8, 2014
  31.1    Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1#    Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2#    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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 Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

# This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act.
* Portions of this exhibit have been omitted based on an application for confidential treatment submitted to the SEC. The omitted portions of this exhibit have been filed separately with the SEC.

 

-44-

Exhibit 4.2

ONCOTHYREON INC.

PIGGYBACK REGISTRATION RIGHTS AGREEMENT

This Piggyback Registration Rights Agreement (this “ Agreement ”) is made and entered into as of August 8, 2014 by and between Oncothyreon Inc., a Delaware corporation (the “ Company ”) and each of Jay Venkatesan and Mitchell H. Gold (collectively, the “ Founders ”).

R E C I T A L S

A. In connection with that certain Agreement and Plan of Reorganization dated as of August 8, 2014, by and among the Company, AB Acquisition (DE) Corp., a Delaware corporation and wholly-owned subsidiary of Acquiror, Alpine Biosciences, Inc., a Delaware corporation and Jay Venkatesan as Stockholders’ Agent (the “ Merger Agreement ”), the Company has agreed to issue to the Founders certain shares of Common Stock (the “ Founders Shares ”).

B. Pursuant to Section 4.6 of the Merger Agreement, the Company has agreed to grant the Founders certain “piggyback” registration rights for the Founders Shares acquired by each of the Founders as more fully described below.

C. The Founders Shares will also be subject to certain lock-up restriction (i.e., lock-up agreements) for a period of 180 days following the Closing (as defined in the Merger Agreement) (the “ Lock-Up Period ”).

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto hereby agree as follows:

1 Definitions .

(a) Common Stock . The term “ Common Stock ” means the Common Stock of the Company and any other common equity securities issued by the Company, and any other shares of stock issued or issuable with respect thereto (whether by way of a stock dividend or stock split or in exchange for or upon conversion of such shares or otherwise in connection with a combination of shares, recapitalization, merger, consolidation or other corporate reorganization).

(b) Exchange Act . The term “ Exchange Act ” means the Securities Exchange Act of 1934, as amended, or any similar successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

(c) Registration . The terms “ register ,” “ registered ” and “ registration ” refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the “ Securities Act ”), and the declaration or ordering of effectiveness of such registration statement.


(d) Registrable Securities . The term “ Registrable Securities ” means (i) the Founders Shares, in each case that are now owned or may hereafter be acquired by Holder or any of Holder’s permitted successors and assigns; (ii) any shares of Common Stock issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, all such Founders Shares described in clause (i) of this subsection (d); excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which rights under this Agreement are not assigned in accordance with this Agreement or any Registrable Securities sold to the public or sold pursuant to Rule 144 promulgated under the Securities Act.

(e) Holder . The term “ Holder ” means any person (i) owning of record Registrable Securities that have not been sold to the public or pursuant to Rule 144 promulgated under the Securities Act and (ii) if such person is not a Founder, then who is an assignee of record of such Registrable Securities to whom rights under this Agreement have been duly assigned in accordance with this Agreement.

(f) SEC . The term “ SEC ” or “ Commission ” means the U.S. Securities and Exchange Commission.

2. Piggyback Registrations . At any time after the Lock-Up Period, the Company will notify all Holders in writing at least twenty (20) days prior to filing any registration statement under the Securities Act for purposes of effecting a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to any employee benefit plan or a corporate reorganization) and will afford each such Holder an opportunity to include in such registration statement all or any part of the Registrable Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by such Holder will, within fifteen (15) days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice will inform the Company of the number of Registrable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder will nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein.

(a) Underwriting . If a registration statement under which the Company gives notice under this Section 2 is for an underwritten offering, then the Company will so advise the Holders. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2 will be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting will enter into an underwriting agreement in customary form with the managing underwriter or underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Agreement, if the Company or managing underwriter determines that marketing or other factors require a limitation of the number of shares to be underwritten, then the Company may exclude shares (including all or any portion of the Registrable Securities) from the registration and the underwriting. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least twenty (20) days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting will be excluded and withdrawn from the registration.

 

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(b) Expenses . All expenses incurred in connection with a registration pursuant to this Section 2 (excluding underwriters’ and brokers’ discounts and commissions), including, without limitation all federal and “blue sky” registration and qualification fees, printers’ and accounting fees, fees and disbursements of counsel for the Company (but excluding counsel for the Holders), will be borne by the Company.

3. Obligations of the Company . Whenever required to effect the registration of any Registrable Securities under this Agreement, the Company will, as efficiently as reasonably possible:

(a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its reasonable, diligent efforts to cause such registration statement to become and remain effective until completion of the proposed offering.

(b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement.

(c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them that are included in such registration.

(d) Use reasonable, diligent efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as will be reasonably requested by the Holders, provided that the Company will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

(e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting will also enter into and perform its obligations under such an agreement.

(f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing.

(g) Furnish, at the request of any Holder requesting registration of Registrable Securities, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company

 

3


for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a “comfort” letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any.

(h) Cause the securities covered by such registration statement to be listed on the securities exchange or quoted on the quotation system on which the Common Stock is then listed or quoted.

4. Obligations of the Holders .

(a) Furnish Information . It will be a condition precedent to the obligations of the Company to take any action pursuant to Section 2 hereof that the selling Holders will furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as will be required to timely effect the registration of their Registrable Securities.

(b) Underwriting Agreement . In the event of any underwritten public offering, each Holder will enter into, and perform its obligations under, an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering.

5. Delay of Registration . No Holder will have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement.

6. Indemnification . In the event any Registrable Securities are included in a registration statement under Section 2 hereof:

(a) By the Company . To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, members, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “ Violation ”):

(i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto;

(ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or

(iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any federal or state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any federal or state securities law in connection with the offering covered by such registration statement;

 

4


and the Company will reimburse each such Holder, partner, member, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided however , that the indemnity agreement contained in this Section 6 will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent will not be unreasonably withheld), nor will the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, member, officer, director, underwriter or controlling person of such Holder.

(b) By Selling Holders . To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder’s partners, directors or officers or any person who controls such Holder within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, partner or director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action; provided , however , that the indemnity agreement contained in this Section 6 will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent will not be unreasonably withheld; and provided further , that the total amounts payable in indemnity by a Holder under this Section 6 in respect of any Violation will not exceed the net proceeds received by such Holder in the registered offering out of which such Violation arises.

(c) Notice . Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided , however , that an indemnified party will have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of

 

5


interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party under this Section 6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 6.

(d) Defect Eliminated in Final Prospectus . The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the “ Final Prospectus ), such indemnity agreement will not inure to the benefit of any indemnified party if a copy of the Final Prospectus was furnished to such indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act, where such indemnified party had a legal obligation to deliver or cause to be delivered the Final Prospectus.

(e) Contribution . In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for indemnification pursuant to this Section 6 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 6 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under this Section 6; then, and in each such case, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by and sold under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and the Company and other selling Holders are responsible for the remaining portion; provided , however , that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.

(f) Survival . The obligations of the Company and Holders under this Section 6 will survive the completion of any offering of Registrable Securities in a registration statement, and otherwise.

7. Termination of the Company’s Obligations . The Company will have no obligations pursuant to Section 2 with respect to any Registrable Securities proposed to be sold by a Holder in a registration pursuant to Section 2 hereof if, in the opinion of counsel to the Company, all such Registrable Securities proposed to be sold by a Holder may be sold in a three-month period without registration under the Securities Act pursuant to Rule 144 under the Securities Act and such Holder holds less than one percent (1%) of the outstanding shares of the Company’s capital stock.

 

6


8. Assignment . Notwithstanding anything herein to the contrary, the rights of a Holder under this Agreement may be assigned only if the Company has given prior written consent thereto; provided , that any such assignee shall receive such assigned rights subject to all the terms and conditions of this Agreement, including without limitation the provisions of this Section 8.

9. Miscellaneous .

(a) Termination of this Agreement . This Agreement may be terminated voluntarily by written agreement of (1) the Company and (2) the Founders. Such termination will be binding upon all Holders of Registrable Securities.

(b) Notices . Unless otherwise provided, any notice required or permitted under this Agreement will be given in writing and will be deemed effectively given upon personal delivery to the party to be notified, or three (3) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid, or by deposit with a nationally recognized courier service such as FedEx, or by facsimile with confirmed receipt and addressed to the party to be notified at the address indicated for the Company and the Founders on the signature page hereof, or at such other address as any party may designate by giving at least ten (10) days advance written notice to all other parties, pursuant to this Section 9(b).

(c) Entire Agreement . This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings duties or obligations between the parties with respect to the subject matter hereof.

(d) Amendment and Waiver . Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of (1) the Company and (2) the Founders. Any amendment or waiver effected in accordance with this Section 9(d) will be binding upon each Holder, each permitted successor or assignee of any Holder, and the Company.

(e) Governing Law . This Agreement will be governed by and construed under the internal laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware, without reference to principles of conflict of laws or choice of laws.

(f) Severability . If any provision of this Agreement is held to be unenforceable under applicable law, such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms.

(g) Third Parties . Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Agreement.

 

7


(h) Successors And Assigns . The terms and conditions of this Agreement will inure to the benefit of and be binding upon the respective successors and assigns of the parties.

(i) Headings . The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs, exhibits and schedules will, unless otherwise provided, refer to sections and paragraphs hereof and exhibits and schedules attached hereto, all of which exhibits and schedules are incorporated herein by this reference.

(j) Counterparts . This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

(k) Costs And Attorneys’ Fees . In the event that any action, suit or other proceeding is instituted concerning or arising out of this Agreement or any transaction contemplated hereunder, the prevailing party will recover all of such party’s costs and reasonable attorneys’ fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom.

(l) Further Assurances . From and after the date of this Agreement, upon the request of the Founders or the Company, the Company and the Founders will execute and deliver such instruments, documents or other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement.

[R EMAINDER OF P AGE I NTENTIONALLY L EFT B LANK ]

 

8


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.

COMPANY

 

ONCOTHYREON INC.
By:   /s/ Dr. Robert L. Kirkman
Name:   Dr. Robert L. Kirkman
Title:   President and CEO

FOUNDERS

 

/s/ Jay Venkatesan
Jay Venkatesan

 

/s/ Mitchell H. Gold
Mitchell H. Gold

[S IGNATURE P AGE TO O NCOTHYREON I NC . P IGGYBACK R EGISTRATION  R IGHTS  A GREEMENT ]

EXHIBIT 10.1

* Confidential Treatment has been

requested for the marked portions of

this exhibit pursuant to Rule 24B-2

of the Securities Exchange Act of

1934, as amended.

PATENT LICENSE AGREEMENT

Between

STC.UNM and ALPINE BIOSCIENCES, INC.

THIS PATENT LICENSE AGREEMENT (the “Agreement”) entered into effective June 30, 2014 (the “Effective Date”) between STC.UNM, a New Mexico 501(c)(3) nonprofit corporation, with its principal office at 801 University Blvd. SE, Suite 101, Albuquerque, New Mexico 87106 (hereinafter referred to as “STC”) and ALPINE BIOSCIENCES, INC., a Delaware corporation with a place of business at 600 Stewart St. Suite 150, Seattle, Washington 98101 (“LICENSEE”).

Effective as of the date set out above, in consideration of the mutual covenants and premises contained herein, the receipt and sufficiency of which are hereby acknowledged, STC and LICENSEE agree:

BACKGROUND

By assignment from The Regents of the University of New Mexico (“University”), STC holds title to and has certain rights and interests in the Licensed Patents. STC desires to have products and services utilizing the Licensed Patents developed and marketed at the earliest possible time in order that such products and services may be available for public use and benefit. LICENSEE desires to obtain rights to use the Licensed Patents for commercial purposes and STC desires to grant certain rights and licenses in and to the Licensed Patents to Licensee, all in accordance with the terms and conditions of this Agreement.

With the exception of the STC Solely-Owned Licensed Patent (as defined below) the Licensed Patents are owned jointly by STC.UNM and Sandia Corporation, a Delaware corporation, manager and operator of Sandia National Laboratories for the United States Department of Energy under contract DE-AC04-94AL85000 (“Sandia”). In accordance with the Sandia—STC—UNM Memorandum of Understanding on Intellectual Property, entered into among Sandia, STC, and University effective August 31, 2006, and fully executed on September 5, 2006, as amended by First Amendment to Sandia—STC—UNM Memorandum of Understanding on Intellectual Property, Sandia, STC, and University have entered into a Commercialization Agreement (as defined below) with respect to each Commercialization Agreement Licensed Patent (as defined below). STC anticipates that Sandia, STC, and University will enter into Commercialization Agreements with respect to one or more of the other Licensed Patents.

 

[*]

*Confidential Treatment Requested.


ARTICLE I.

DEFINITIONS

When used in this Agreement, the capitalized terms listed below shall have the following meaning:

“Affiliate” means a person or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control, with the person or entity specified. For purposes of this definition, “control” and cognates thereof mean, with respect to an entity, the direct or indirect ownership of (a) at least fifty percent (50%) of the capital stock or share capital entitled to vote for the election of directors of the entity; or (b) at least fifty percent (50%) of equity or voting interests of the entity, or (c) the ability to otherwise direct the management and operations of the entity.

“Agreement” or “License Agreement” means this Agreement, including all Exhibits attached to this Agreement.

“Change-In-Control” means each and all of the following occurrences after the date hereof: (i) the consummation of a merger or consolidation of LICENSEE with any other corporation, other than a merger or consolidation which would result in the voting securities of LICENSEE outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent company) more than fifty percent (50%) of the total voting power represented by the voting securities of LICENSEE or such surviving entity, or its parent company, outstanding immediately after such merger or consolidation, or (ii) the consummation of a sale or disposition by LICENSEE of all or substantially all LICENSEE’s assets, or (iii) the acquisition by any person directly or indirectly, of securities of the LICENSEE representing fifty percent (50%) or more of the total voting power represented by LICENSEE’ s then outstanding voting securities.

“Combination Product” means a Licensed Product or Licensed Service that incorporates at least one other proprietary molecule, compound or other active ingredient, or a proprietary service or method, in each case that is not itself a Licensed Product or Licensed Service in addition to the Licensed Product or Licensed Service (each such other active ingredient, service or method, an “Other Component”). For clarity, all references to “Licensed Products or Licensed Services” in this Agreement shall be deemed to include Combination Products.

“Commercialization Agreement” means a written agreement entered into among Sandia, STC, and University in accordance with the Sandia—STC—UNM Memorandum of Understanding on Intellectual Property, entered into among Sandia, STC, and University effective August 31, 2006, and fully executed on September 5, 2006, as amended by First Amendment to Sandia—STC—UNM Memorandum of Understanding on Intellectual Property.

“Commercialization Agreement Licensed Patent” means a Licensed Patent that, as specified on attached Exhibit A, is subject to and covered by a Commercialization Agreement as of the Effective Date.

 

[*]

*Confidential Treatment Requested.


“Commercial Sublicense” means any sublicensing agreement or arrangement between LICENSEE or a Licensed Affiliate and a third party by which the third party is licensing the Licensed Patents primarily for its own commercial development of Licensed Products or to provide Licensed Services. The holder of a Commercial Sublicense is a “Commercial Sublicensee.”

“Common Stock” means the LICENSEE’s common stock.

“Compassionate Use Program” means the use of a Licensed Product or a Licensed Service as an investigational drug in accordance with applicable law outside of a clinical trial to treat a patient with a serious or immediately life-threatening disease or condition who has no comparable or satisfactory alternative treatment options.

“Effective Date” means the date set out on the opening paragraph of this Agreement.

“Exclusive License” means a license as to which STC agrees that on and after the Effective Date, STC will not grant any additional rights or licenses to third parties with respect to a Licensed Patent or itself practice the inventions claimed therein for commercial purposes.

“Field of Use” means all fields of use, subject, however, to certain exceptions applicable to the Commercialization Agreement Licensed Patents as set forth in Section 2.3, below.

“First Commercial Sale” means the first transaction following launch of the applicable Licensed Product that results in either (i) Net Sales to the LICENSEE or a Licensed Affiliate or (ii) results in Sublicense Income based upon (A) the sale or other disposition of Licensed Products by the Commercial Sublicensee or a sublicensee of a Commercial Sublicensee, or (B) the performance of Licensed Services by a Commercial Sublicensee or a sublicensee of a Commercial Sublicensee (with the definitions of “sale or other disposition” and “otherwise disposed of” having the meanings set out in the definition of “Net Sales” below, but as applied to activities of the Commercial Sublicensee).

“Net Sales” means the gross payments and other consideration accrued or received by LICENSEE or a Licensed Affiliate (but not Commercial Sublicensees) for: (i) the sale or other disposition of Licensed Products; or (ii) the performance of Licensed Services. The expression “other disposition” or “otherwise disposed of” with respect to Licensed Products means Licensed Products not sold but delivered by LICENSEE to others regardless of the basis for compensation. Where Licensed Products are not sold, but are otherwise disposed of, Net Sales from such products for the purpose of computing royalties will be the selling price at which Licensed Products are currently being offered for sale by LICENSEE, or its Licensed Affiliates or Commercial Sublicensees. Where Licensed Products are not currently being offered for sale by LICENSEE, its Licensed Affiliates, or Commercial Sublicensees, Net Sales from such products for the purposes of determining royalties shall be the fair market value of such products.

 

[*]

*Confidential Treatment Requested.


In the event that Licensed Products or Licensed Services are Combination Products, the Net Sales of such Combination Product, for the purposes of computing royalties, shall be determined by multiplying the Net Sales of the Combination Product during the applicable royalty reporting period, by the fraction, A/A+B, where A is the average sale price of the Licensed Products or Licensed Services included as components or constituent of such Combination Product and B is the average sale price of the Other Components when sold separately. If the Other Components are not sold separately, Net Sales for the purposes of computing royalties shall be calculated by multiplying the Net Sales of the Combination Product by the fraction of C/C+D, where C is the fair market value of the Licensed Products or Licensed Services included as components or constituent of such Combination Product, and D is the fair market value of all Other Components included in the Combination Product.

Notwithstanding the foregoing, Net Sales shall not include gross payments or other consideration received by LICENSEE or a Licensed Affiliate from the sale of other disposition of Licensed Products or the performance of Licensed Services: (a) sold or used for development purposes; provided that such sales or uses are in accordance with a written agreement that sets out the compensation for the development activities and such compensation is reasonable in light of the circumstances; or (b) sold or used in connection with a Compassionate Use Program or patient assistance program or in reasonable and customary quantities as commercial samples; or (c) provided to a Licensed Affiliate or a Commercial Sublicensee if either: (i) the Licensed Affiliate or Commercial Sublicensee uses such Licensed Products or Licensed Services in a manner described in (a) or (b), above; or (ii) Net Sales with respect to such Licensed Products or Licensed Services are deducted by the Licensed Affiliate pursuant to (A) or (B) below; or (iii) the amounts received by LICENSEE or a Licensed Affiliate under a Commercial Sublicense for such Licensed Products or Licensed Services are not included as Sublicense Income pursuant to subsections (a) through (d) of the definition of “Sublicense Income” below; or (iv) a royalty will be payable to STC under Section 4.3 or under Section 4.2 upon the sale or other disposition of the Licensed Product or the performance of Licensed Services by the Licensed Affiliate or Commercial Sublicensee.

In determining Net Sales with respect to a Licensed Product or a Licensed Service the LICENSEE and its Licensed Affiliate may exclude the following items: (1) trade, quantity and cash discounts; (2) packing, freight, transportation and insurance charges, in each case as separately charged and enumerated on an invoice to customers; and (3) import, export, sales, use and value added taxes, and customs or excise duties or other duties relating to sales, in each case as separately charged and enumerated on an invoice to customers.

In addition, LICENSEE and its Licensed Affiliates may deduct from Net Sales in any reporting period under Section 5.1 amounts LICENSEE or the Licensed Affiliate pays or credits or otherwise allows during that reporting period for: (A) write offs for bad debts with respect to Licensed Products or Licensed Services for which a royalty was paid to STC in a prior reporting period; (B) with respect to the current reporting period and with respect to Licensed Products or Licensed Services sold or otherwise disposed for which a royalty was paid to STC for any prior reporting period, price adjustments, billing errors, damaged or defective goods, recalls, returns, rebates, and chargeback rebates or similar payments to wholesalers or other distributors. Any royalty income or other consideration for a Commercial Sublicense that is subject to Section 4.2 hereof shall not be deemed to be “Net Sales” hereunder.

 

[*]

*Confidential Treatment Requested.


“Indemnitees” means STC, STC’s employees, officers, and directors, University, University’s employees, Sandia, Sandia’s employees, officers and directors, and the Inventors, and their respective heirs, executors, administrators, and legal representatives.

“Inventors” means [*]

“Licensed Affiliate” means an Affiliate of the LICENSEE designated by the LICENSEE as a Licensed Affiliate in a notice provided to STC in accordance with Article XV of this Agreement. An entity designated as a Licensed Affiliate shall remain a Licensed Affiliate until the earlier of the date: (a) such entity is no longer an Affiliate of the Licensee; and (b) LICENSEE gives notice to STC that such entity is no longer designated as a Licensed Affiliate.

“Licensed Patents” means all rights in inventions or discoveries covered by or embodied in the patents and patent applications listed on attached Exhibit A, and all divisions, substitutions, continuations, continuations-in-part (but only to extent the claims thereof are enabled by disclosure of and name the same Inventors and assignees as the parent application), reissues, renewals, reexaminations or extensions thereof, any patents that issue thereon, and existing and future foreign patent applications and patents that correspond thereto. To the extent any continuation-in-part is enabled by disclosure of the parent application but names at least one new Inventor, the parties agree to discuss in good faith adding such continuation-in-part as a Licensed Patent under this Agreement.

“Licensed Products” means products, the development, manufacture, use, or sale of which would, but for the license granted to LICENSEE under this Agreement, infringe a Valid Claim.

“Licensed Services” means services that make use of the Licensed Patents in a manner which would, but for the license granted to LICENSEE under this Agreement, infringe a Valid Claim.

“Licensed Territory” means worldwide.

“Other STC/Sandia Jointly Owned Licensed Patents” means a Licensed Patent as specified on attached Exhibit A that, as of the Effective Date, is not the subject to or covered by a Commercialization Agreement.

“Regulatory Approval” means approval, clearance, certification, or permission of the U.S. Food and Drug Administration (the “FDA”) for the marketing, sale, or use of a Licensed Product (including 510(k) premarket notification, premarket approval, and qualification for the humanitarian device exemption) or the comparable approval, clearance, certification, or permission under the laws of any foreign country or jurisdiction, including but not limited to any classification of CE Mark or certification in Europe. The term Regulatory Approval does not include approval, clearance, certification, or permission of the FDA or a comparable foreign agency to use Licensed Products in research or development (including in a clinical trial), or in a Compassionate Use Program or other charitable program.

 

[*]

*Confidential Treatment Requested.


“Related IND Application” means the filing of an investigational new drug application with the United States Food and Drug Administration with respect to a Licensed Product or a Licensed Service.

“Sublicense Income” means all amounts accrued or received by LICENSEE or a Licensed Affiliate under a Commercial Sublicense, in consideration of the granting of the sublicense of the Licensed Patents, net of any sales taxes (paid or payable, including value added tax) imposed upon LICENSEE or the Licensed Affiliate and not reimbursed or paid by a third party with respect to such amounts, as consideration under the Commercial Sublicense, including, without limitation, license fees or maintenance fees. Sublicense Income shall not include amounts received by LICENSEE or a Licensed Affiliate for: (a) research and development activities conducted after the date of the Commercial Sublicense related to the Licensed Patents, Licensed Products or Licensed Services, including without limitation pre-clinical and clinical studies, provided that the research and development activities are performed in accordance with a written agreement that sets out the compensation for the development activities and such compensation is reasonable in light of the circumstances; (b) equity interests in the LICENSEE; (c) Licensed Products purchased from LICENSEE or a Licensed Affiliate which generate Net Sales to the LICENSEE or the Licensed Affiliate; provided that the consideration for such Licensed Products is separately stated in the Commercial Sublicense; and (d) reimbursement for patent costs or regulatory filing fees; provided that such reimbursement is separately stated in the Commercial Sublicense. For the avoidance of doubt, royalties received by LICENSEE or a Licensed Affiliate for sales or other disposition of Licensed Products or the provision of Licensed Services by Commercial Sublicensees shall be included in and treated as Sublicense Income.

“STC Solely-Owned Licensed Patent” means [*]

“Valid Claim” means a claim of an issued and unexpired patent, or a claim of a patent application being prosecuted in good faith, in each case included within the Licensed Patents, which claim shall not have been disclaimed, irrevocably abandoned or withdrawn, or held invalid, unpatentable, or unenforceable in an unappealable decision of a court or other authority of competent jurisdiction, and which shall not have been admitted to be invalid or unenforceable through reissue, re-examination, disclaimer, or otherwise.

 

[*]

*Confidential Treatment Requested.


ARTICLE II.

GRANT OF LICENSES

2.1 Subject to the terms and conditions of this Agreement, including the reservations set out in Sections 2.2, 2.3, 2.6, 2.7, and 2.9, below, STC hereby grants to LICENSEE, to the extent of the Field of Use (subject to the provisions of Section 2.3, below) and Licensed Territory, an Exclusive License under the Licensed Patents to: (i) make, use, sell, offer for sale, and import Licensed Products and to provide Licensed Services; and (ii) to grant Commercial Sublicenses allowing a Commercial Sublicensee to make, use, sell, offer for sale, and import Licensed Products and to provide Licensed Services in accordance with the provisions of Section 2.6 below.

2.2 The LICENSEE acknowledges that, except for the STC Solely-Owned Patent, this Agreement grants rights with respect to Licensed Patents that are owned jointly by STC and Sandia, and that as of the Effective Date, STC and Sandia have entered into Commercialization Agreements only with respect to the Commercialization Agreement Licensed Patents. Unless and until STC and Sandia enter into a Commercialization Agreement with respect to the Other STC/Sandia Jointly Owned Licensed Patents, Sandia retains all rights of a joint patent owner with respect to the Other STC/Sandia Jointly Owned Licensed Patents, including the power to grant licenses with respect to the Other STC/Sandia Jointly Owned Licensed Patents. Following the Effective Date, STC agrees to use commercially reasonable efforts to negotiate and execute a Commercialization Agreement with Sandia with respect to each of the Other STC/Sandia Jointly Owned Licensed Patents. Upon the execution of a Commercialization Agreement by STC and Sandia with respect to an Other STC/Sandia Jointly Owned Licensed Patent, such Other STC/Sandia Jointly Owned Licensed Patent shall be a Commercialization Agreement Licensed Patent under this Agreement. STC shall notify LICENSEE of the execution of each such Commercialization Agreement, and any limitations imposed by Sandia under the Commercialization Agreement, including any fields of use for which Sandia has retained the right to grant licenses. Upon the execution of a Commercialization Agreement by STC and Sandia with respect to an Other STC/Sandia Jointly Owned Licensed Patent, STC shall provide LICENSEE with a revised Exhibit A, reflecting the change of the applicable Other STC/Sandia Jointly Owned Licensed Patent to a Commercialization Agreement Licensed Patent under this Agreement.

2.3 The LICENSEE acknowledges that under the Commercialization Agreements, Sandia has, with respect to certain Commercialization Agreement Licensed Patents, retained the right to grant licenses to third parties except within certain fields of use as specified on attached Exhibit A. Under the Commercialization Agreements, and subject to the provisions of Section 2.7 and 2.9 below, Sandia agreed not to grant licenses to third parties within such fields of use. Consequently, notwithstanding the grant by STC under this Agreement of an Exclusive License with respect to all fields of use, Sandia has the rights to grant additional licenses to third parties with respect to any fields of use other than those specified on attached Exhibit A. For clarity, STC agrees that it shall not grant licenses to third parties under the Licensed Patents for any field of use despite the foregoing rights retained by Sandia.

 

[*]

*Confidential Treatment Requested.


2.4 Except as expressly granted by STC to LICENSEE herein, all rights and entitlements in and to the Licensed Patents, whether now existing or that may hereafter come into existence, are reserved to STC.

2.5 This Agreement shall not be construed to confer any rights upon LICENSEE by implication or estoppel.

2.6 LICENSEE acknowledges and consents that, notwithstanding any provision of this Agreement, including the grant of the license granted under Section 2.1 to the Licensed Patents, the rights and licenses granted to LICENSEE under this Agreement to the Licensed Patents are subject to the reservation by University of a permanent, irrevocable, royalty-free, non-exclusive right and license to use and practice the Licensed Patents at University for research, development, and educational purposes, including the right to use and practice the Licensed Patents for research and testing, including research and testing funded by third parties. The foregoing shall not be construed to reserve any right to use and practice a Licensed Patent for commercial applications or to produce Licensed Products or provide Licensed Services in quantities greater than reasonably required for research, development or educational purposes by the University.

2.7 LICENSEE acknowledges and consents that, notwithstanding any provision of this Agreement, including the grant of the license granted under Section 2.1 to the Licensed Patents, the rights and licenses granted to LICENSEE under this Agreement to the Licensed Patents are subject to the reservation by Sandia of a permanent, irrevocable, royalty-free, non-exclusive right and license to use and practice the Licensed Patents: (a) for research, development, and educational purposes; and (b) to non-exclusively license the Licensed Patents as background intellectual property to CRADA Participants and WFO Sponsors solely for use in the conduct of the CRADA or WFO and not for the purposes of making, using, selling, or importing Licensed Products or providing Licensed Services.

2.8 STC also grants to LICENSEE and each Licensed Affiliate the right to sublicense the rights granted to LICENSEE and the Licensed Affiliate under this Agreement to Commercial Sublicensees, and to allow the Commercial Sublicensees to further sublicense such rights. LICENSEE and each Licensed Affiliate shall ensure that all uses of Licensed Patents and all development and distribution of Licensed Products or the provision of Licensed Services by each Commercial Sublicensee and each sublicensee of a Commercial Sublicensee 1) are consistent with the terms and conditions of this Agreement, and 2) return value to LICENSEE or the Licensed Affiliate commensurate, in the reasonable discretion of the LICENSEE or the Licensed Affiliate, with the benefits conferred on the Commercial Sublicensee by the Commercial Sublicense. LICENSEE and each Licensed Affiliate shall provide STC with a copy of each Commercial Sublicense, and any amendments thereto and a copy of each sublicense granted by any Commercial Sublicensee, and amendments thereto, promptly following the execution thereof. STC shall treat Commercial Sublicenses and each sublicense granted by any Commercial Sublicensee as Confidential Information of LICENSEE. LICENSEE and each Licensed Affiliate shall use commercially reasonable efforts to enforce its Commercial Sublicenses in accordance with the terms thereof.

 

[*]

*Confidential Treatment Requested.


2.9 The Licensed Patents, or portions thereof, may have been developed with financial or other assistance through grants or contracts funded by the United States government. LICENSEE acknowledges that in accordance with Public Law 96-517 and other statutes, regulations, and Executive Orders as now exist or may be amended or enacted, the United States government may have certain rights in the Licensed Patents. LICENSEE shall take all action necessary to enable STC to satisfy its obligations under any federal law relating to the Licensed Patents, including any right of the United States government to a noncommercial use license. Without limiting the foregoing:

(a) It is understood that the United States Government (through any of its agencies or otherwise) has funded research, Contract No. DE-AC04-94AL85000 United States DOE’s National Nuclear Security Administration, during the course of or under which the inventions described under the Licensed Patents were conceived or made. The United States Government is entitled, as a right, under 48 CFR 952.227-13, to a non-exclusive, non- transferable, irrevocable, paid-up license to practice or have practiced the inventions for governmental purposes. The parties also agree and understand that the United States Government retains “march-in” rights, in accordance with the procedures set forth in 37 CFR 401.6 and any supplemental regulations promulgated by the DOE. Any rights or licenses granted to LICENSEE pursuant to this Agreement shall be subject to such rights.

(b) It is further understood that one or more of the Licensed Patents are subject inventions as defined under 35 U.S.C. §201(e), and that the United States Government has a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world (and in some cases the right to assign or have assigned foreign patent rights). The parties also agree and understand that the United States Government retains “march-in” rights, in accordance with 35 U.S.C. §203. The parties agree and understand that licensing of the Licensed Patents is subject to other restrictions, including that preferences be given to small business firms (35 U.S.C. §202(c)(7)(D) and for U.S. manufacturing (35 U.S.C. §204).

2.10 The parties agree that, notwithstanding anything to the contrary in Section 7(c)(ii) of the Sponsored Research Agreement by and between the University and LICENSEE, dated as of July 14, 2014 (the “Sponsored Research Agreement”), all patent applications on any inventions or discoveries covering or related to protocells that are owned by STC, and (a) name the same Inventors as any of the Licensed Patents and (b) are developed pursuant to the Sponsored Research Agreement, shall be added to this Agreement as a Licensed Patent and shall be subject to the terms and conditions of this Agreement, including the royalty obligations set out herein, at LICENSEE’s election without the need for any further action by the parties upon the payment by LICENSEE to STC of $[*] for each such Licensed Patent LICENSEE elects to add to this Agreement in accordance with this Section 2.10. Such payment shall be due within thirty (30) days after LICENSEE’s election to add the applicable patent or patent application to this Agreement. STC will promptly notify LICENSEE of any such patent applications. In addition, the parties agree that to the extent that STC owns any rights under patents and patent applications claiming any inventions or discoveries covering or related to protocells but that are not covered by subsections (a) and (b) above, the parties agree to discuss in good faith adding such patents or patent applications as Licensed Patents under this Agreement.

 

[*]

*Confidential Treatment Requested.


ARTICLE III.

DILIGENCE AND COMMERCIALIZATION

3.1 Diligence and Commercialization. Throughout the term of this Agreement, LICENSEE shall use commercially reasonable efforts to bring Licensed Products and Licensed Services, in the Field of Use to market, including the obtaining of any required Regulatory Approvals. The Parties acknowledge that this Agreement relates to new technology, and that there are many risks, some unknown and unpredictable, involved in such new technology, and that this Article only obligates the LICENSEE to make efforts that LICENSEE believes in good faith are commercially reasonable at the time given the information known to LICENSEE.

3.2 Lack of Diligence. If STC believes that LICENSEE is not in compliance with Section 3.1, then, STC will so notify LICENSEE in writing. Upon written request by LICENSEE, the parties shall meet to discuss in good faith the basis for such belief and agree upon a corrective action plan regarding LICENSEE’s commercialization efforts within one hundred twenty (120) days of such notice.

3.3 Financial Capability. At all times during the term of this license, LICENSEE shall use commercially reasonable efforts to maintain the financial capability to comply with Section 3.1. In the event that STC reasonably believes that LICENSEE does not possess said capability, LICENSEE shall provide STC with reasonable information regarding LICENSEE’s financial capabilities.

ARTICLE IV.

CONSIDERATION FOR LICENSE AND ROYALTIES

4.1 License Fee. In addition to all other amounts due to STC under this Article IV, LICENSEE shall pay STC the following license fees:

(a) Upfront fee of [*] Dollars ($[*]) due upon execution of this Agreement, of which the sum of [*] dollars ($[*]) shall be credited as paid pursuant to the provisions of that certain Exclusive Option Agreement between the parties dated March 29, 2013, as amended June 24, 2013, August 6, 2013, and January 30, 2014.

 

[*]

*Confidential Treatment Requested.


(b) Within thirty (30) days of the Effective Date, LICENSEE shall issue to STC that number of shares of the Common Stock of LICENSEE such that STC will own [*] percent ([*]%) of the aggregate equity ownership of LICENSEE on a non-dilutable basis. Thereafter, at any time the equity ownership of STC in LICENSEE shall fall below [*] percent ([*]%) on a non-dilutable basis, LICENSEE shall issue to STC additional shares of Common Stock of LICENSEE so that at STC owns [*] percent ([*]%) of the aggregate equity ownership of LICENSEE on a non-dilutable basis. STC’s right to maintain ownership of LICENSEE at [*] percent ([*]%) of the aggregate equity ownership of LICENSEE on a non-dilutable basis shall continue until the earlier of: (i) the issuance of equity by LICENSEE for capital received by LICENSEE of an aggregate amount of [*] Dollars ($[*]) in consideration of equity securities of the LICENSEE; or (ii) the consummation of a Change in Control, and upon the earlier of (i) and (ii), STC’s right to maintain ownership of LICENSEE at [*] percent ([*]%) on a non-dilutable basis shall terminate. For clarity, a Change in Control, regardless of the form of such transaction, shall not be treated as an issuance of equity by LICENSEE for capital triggering STC’s right to maintain ownership of LICENSEE at [*] percent ([*]%) requiring the issuance of additional shares of Common Stock to STC as a result of the Change in Control. The term “non-dilutable basis” will be calculated to include conversion of all issued and outstanding securities convertible into ownership interests, and the exercise of all then outstanding options, warrants and other rights to acquire ownership interests, whether or not then exercisable. All Common Shares issued to STC under this Section will be considered fully paid and non-assessable. For purposes of clarity, if LICENSEE issues debt securities convertible into equity securities of the LICENSEE such principal amount of debt securities shall be included in the aggregate amount of capital received in consideration of equity securities of the LICENSEE upon conversion. If requested by LICENSEE, STC shall enter into a mutually agreeable stock issuance agreement with respect to the Common Stock issued to STC.

(c) Milestone payments payable as follows:

(i) LICENSEE shall pay to STC the amount of $[*] on the one-year anniversary date of the first Regulatory Approval of a Licensed Product;

(ii) LICENSEE shall pay to STC the amount of $[*] on the one-year anniversary date of the First Commercial Sale of each Distinct Licensed Product. For purposes of this Section 4(c)(ii), a given Licensed Product shall be distinct from another Licensed Product if the first Licensed Product contains a different active ingredient than does the second Licensed Product; in such case each such Licensed Product would be a Distinct Licensed Product; and

 

[*]

*Confidential Treatment Requested.


(iii) In the event of a Change-in Control of the LICENSEE, LICENSEE shall pay to STC the amount of $[*], payable as follows:

a. If the Change in Control occurs prior to December 31, 2016, LICENSEE shall pay to STC: (x) the amount of $[*] upon the earlier of: (1) the filing of the first Related IND Application; and (2) December 31, 2016; and (y) the amount of $[*] upon the earlier of: (1) the filing of the second Related IND Application; and (2) December 31, 2017; or

b. If the Change in Control occurs on or after December 31, 2016 but prior to December 31, 2017, LICENSEE shall pay to STC: (x) the amount of $[*] upon the date of the Change in Control; and (y) the amount of $[*] upon the earlier of: (1) the filing of the second Related IND Application; and (2) December 31, 2017; or,

c. If the Change in Control occurs on or after December 31, 2017, LICENSEE shall pay to STC the amount of $[*] on the date of the Change in Control.

d. If the proceeds received by the LICENSEE or its stockholders in a Change in Control consist (in whole or in part) of shares of a class of capital stock that are publicly traded on a national exchange, the milestone payments pursuant to this Section 4.1(c)(iii) shall, at the LICENSEE’s sole discretion, consist (in whole or in part but in the same ratio as paid or payable to the LICENSEE or the stockholder of LICENSEE) of shares of such class of capital stock issuable to the LICENSEE or its stockholders in such Change in Control. The value of such shares of capital stock shall be deemed to be the average of the closing prices of the securities on such exchange or system over the five (5) trading-day period preceding the execution of the definitive agreement for such Change in Control transaction.

e. For purposes of clarity, the milestone payments due pursuant to this Section 4.1(c)(iii) shall be payable only with regard to the first Change in Control transaction of LICENSEE and no further milestone payments pursuant to this Section 4.1(c)(iii) shall be due and payable for a subsequent Change in Control transaction(s).

(d) License maintenance fees payable as follows:

(i) Five annual payments of $[*] each with the first payment due on the first anniversary of the Effective Date and the fifth payment due on the fifth anniversary of the Effective Date; and

 

[*]

*Confidential Treatment Requested.


(ii) $[*] due on the sixth anniversary of the Effective Date and each anniversary of the Effective Date thereafter until the earlier of: (x) the date of the First Commercial Sale of a Licensed Product; or (y) the tenth anniversary of the Effective Date.

4.2 Royalty on Commercial Sublicensing Income. LICENSEE shall pay to STC a royalty on Sublicense Income as follows:

(a) [*]% of Sublicense Income for aggregate Sublicense Income of less than or equal to $[*];

(b) [*]% of Sublicense Income for aggregate Sublicense Income greater than $[*] and less than or equal to $[*];

(c) [*]% of Sublicense Income for aggregate Sublicense Income greater than $[*].

4.3 Royalty on Net Sales. As further consideration for the grant of rights hereunder, LICENSEE shall pay STC an earned annual royalty of [*] percent ([*]%) of Net Sales during each calendar year during the term of this Agreement.

4.4 Minimum Annual Royalties . LICENSEE shall pay STC royalties as stated in Section 4.3, but in no event will royalties for any calendar year during the term of this Agreement under Section 4.3 be less than the following minimum royalties during the calendar years indicated:

(a) $[*] (except as provided in (a)(ii), below) for each calendar year beginning as of the earlier of: (i) the calendar year after the calendar year in which the First Commercial Sale occurs; or (ii) the calendar year beginning January 1, 2024; provided, however, that for the calendar year beginning January 1, 2024, the minimum royalty shall be $[*].

(b) If the First Commercial Sale has not occurred prior to December 31, 2023, with respect to the minimum royalty paid for the 2024 calendar year and for each calendar year thereafter until (and not including) the calendar year that includes the date of the First Commercial Sale, [*] percent ([*]%) of that year’s minimum royalty payment shall be credited against and offset LICENSEE’s obligation to pay royalties under Section 4.3 for the calendar year in which the First Commercial Sale occurs and in subsequent calendar years in excess of the $[*] minimum royalty payment (or the lesser amount as provided in (a)(ii), above) for such year.

 

[*]

*Confidential Treatment Requested.


(c) In the event that this Agreement is terminated for any reason prior to the end of a calendar year, the minimum royalty payable to STC for the year of termination shall be determined in accordance with the following formula:

 

TYMR = MR x (DAYS/365)

where:

TYMR is the minimum royalty payable for the year of termination;

MR is the minimum royalty that would have been payable to STC for the year but for the termination: and, DAYS is the number of days of the year of termination prior to the date of termination.

4.5 Reimbursement for Legal and Patent Expenses. Subject to LICENSEE’s right to notify STC that it no longer wishes to reimburse STC for such amounts for one or more patent applications included in the Licensed Patents pursuant to Section 7.1, LICENSEE shall reimburse STC for all reasonable, documented out-of-pocket legal and other fees, costs, and expenses heretofore and hereafter incurred by STC during the term of this Agreement paid in the filing, prosecution, and maintenance of the Licensed Patents in the Licensed Territory as follows:

(a) With respect to such amounts incurred by STC on or after the Effective Date, LICENSEE shall reimburse and pay to STC all such reasonable, documented fees, costs, and expenses within thirty (30) days after STC invoices LICENSEE from time-to-time for the amount of such fees, costs, and expenses;

(b) With respect to such unreimbursed patent costs and expenses incurred by STC prior to the Effective Date, estimated to be [*] Dollars ($[*]), LICENSEE shall reimburse and pay to STC such amount (plus any such additional costs and expenses incurred through the Effective Date) according to the following payment structure:

(i) $[*] due upon execution of this Agreement; and

(ii) the remaining balance due and to be paid in full on the earlier of: (x) the closing by LICENSEE of a Series A financing; (y) 180 days following a Change in Control; or, (z) the first anniversary of the Effective Date.

4.6 Royalty Stacking. If at any time LICENSEE is required to take one or more royalty- bearing licenses under intellectual property rights owned by a third party in order to make, use, manufacture, sell, have sold, offer for sale, export or import Licensed Products in the Licensed Territory, [*]% of amounts paid during any reporting period under Section 5.1 to such third parties shall be applied to and reduce the amount of royalties payable to STC pursuant to Section 4.3 for such reporting period; provided that in no event shall the amount paid to STC during any calendar year be reduced by reason of this Section 4.6 below a royalty rate of [*]% of Net Sales. This provision will apply only to prospective running royalties paid to third parties on the same basis as required by Section 4.3 of this Agreement, and no credit will be allowed for lump-sum license fees, for milestone payments, for minimum annual royalties in excess of accrued royalties, for any amounts paid for past infringement of any third party’s rights or for any amount paid for rights not required to permit LICENSEE to make, have made, use, manufacture, sell, have sold, offer for sale, export and import Licensed Products as provided in this Agreement.

 

[*]

*Confidential Treatment Requested.


ARTICLE V.

REPORTS AND PAYMENTS

5.1 Not later than the last day of each March, May, August, and November during the term of this Agreement, LICENSEE shall deliver to STC a written report stating for the quarterly period ended the last days of the preceding December, March, June, and September, respectively (each, a “reporting period”):

(a) for Licensed Products, the number of units sold and the Net Sales of LICENSEE and all Licensed Affiliates;

(b) the amount, if any, taken by LICENSEE during the reporting period as a deduction for(A) write offs for bad debts with respect to Licensed Products or Licensed Services for which a royalty was paid to STC in a prior reporting period; (B) with respect to the current reporting period and with respect to Licensed Products or Licensed Services sold or otherwise disposed for which a royalty was paid to STC for any prior reporting period, price adjustments, billing errors, damaged or defective goods, recalls, returns, rebates, and chargeback rebates;

(c) for Licensed Services, a description of the services provided and the Net Sales of the LICENSEE and all Licensed Affiliates from Licensed Services;

(d) the number of units sold or otherwise disposed of by LICENSEE and Licensed Affiliates for Compassionate Use Programs;

(e) for each Commercial Sublicense, the name and address of the Commercial Sublicensee, any reports received by LICENSEE from the Commercial Sublicensee during the reporting period, the consideration received by LICENSEE from the Commercial Sublicensee under the Commercial Sublicense, and the amount of Sublicense Income received from the Commercial Sublicensee under the Commercial Sublicense;

(f) the total amount due to STC from LICENSEE, with supporting calculations.

 

[*]

*Confidential Treatment Requested.


5.2 With the delivery of each report required under Section 5.1, LICENSEE shall pay to STC all amounts due with respect to the preceding reporting period. In the event that the amounts due as described in Section 4.3 at the end of any calendar year do not equal or exceed the minimum royalty amount specified in Section 4.4 for such calendar year, LICENSEE shall pay to STC, on or before the last day of the following March, the amount required to satisfy the minimum royalty obligation for the preceding calendar year. If no amount is accrued during any reporting period, a written statement to that effect shall be delivered to STC.

5.3 All amounts to be paid by LICENSEE hereunder shall be paid in U.S. Dollars. To the extent that Net Sales received by LICENSEE in any reporting period are received in currencies other than U.S. Dollars, for purposes of calculating the royalties due hereunder, such Net Sales shall be converted to U.S. Dollars at the exchange rate existing between the U.S. Dollar and the relevant currency on the last day of such reporting period, as such rate is determined by the Chase Manhattan Bank of New York. All payments due must be made without deduction for taxes, assessments, or other charges of any kind that may be imposed on STC by any government other than that of the United States, or any political subdivision of such other government, with respect to any amounts payable to STC pursuant to this Agreement, and such taxes, assessments, or other charges must be assumed and paid by LICENSEE.

5.4 Payments required under this Agreement, when overdue, shall bear interest at a rate per annum rate of (1.5% in excess of the prime rate as published by “The Wall Street Journal” at the time such payment is due and until payment is received by STC. The accrual of such interest shall not foreclose STC from exercising any other rights it may have resulting from the failure of LICENSEE to make the payment when due.

5.5 If this Agreement is terminated for any reason before all of the payments provided for have been made (including the minimum royalties for the year in which the Agreement is terminated and any legal and patent expenses incurred by STC prior to the termination date), LICENSEE must submit a terminal report and pay to STC any remaining unpaid balance within thirty (30) days after the date of termination even though the due date as above provided has not been reached.

 

[*]

*Confidential Treatment Requested.


ARTICLE VI.

RECORDS

6.1 Records of Operations and Audit. LICENSEE, each Licensed Affiliate and each of their Commercial Sublicensees shall keep full and accurate records containing particulars that may be necessary for the purpose of calculating the amounts payable to STC hereunder in sufficient detail to verify the royalty income payable to STC and to further allow such investigation of its operations as may be necessary to determine compliance by the LICENSEE, Licensed Affiliate, and Commercial Sublicensee with the financial obligations under this Agreement in all material respects, as well as the accuracy of the reports and statements furnished hereunder. LICENSEE, each Licensed Affiliate, and each Commercial Sublicensee shall keep these records carefully preserved and available for inspection by a nationally recognized independent accountant (a) selected by STC and reasonably acceptable to the LICENSEE or Licensed Affiliate, with respect to inspections of LICENSEE or Licensed Affiliate’s records or (b) selected by Commercial Sublicensee and reasonably acceptable to STC, with respect to inspections of the Commercial Sublicensee’s records, in each case for a period of at least five (5) years following the end of the calendar year to which they pertain. STC through such independent accountant, shall have the right at its own expense to inspect the records upon reasonable (at least five (5) calendar days) written notice and during regular business hours. If the audit discloses an underpayment of more than (i) five percent (5%) from the amount of the original report or payment calculation, or (ii) $5,000, whichever is greater, LICENSEE shall, in addition to paying to STC any deficiency plus interest thereon in accordance with Section 5.4, reimburse STC for the full cost of the performance of the audit.

 

[*]

*Confidential Treatment Requested.


ARTICLE VII.

PATENT PROSECUTION AND

MAINTENANCE/LICENSEE PATENT DISPUTES

7.1 Prosecution and Maintenance of Licensed Patents. The prosecution and maintenance of the United States and foreign patent applications and patents included in the Licensed Patents shall be the primary responsibility of and controlled by STC, with consultation and input by LICENSEE by patent counsel selected by STC that is reasonably acceptable to LICENSEE. STC shall diligently prosecute and maintain the United States and foreign patent applications and patents included in the Licensed Patents. STC, or its patent counsel, shall promptly provide LICENSEE with copies of all relevant documentation to keep LICENSEE informed with respect to the prosecution and maintenance of the patent applications and patents included in the Licensed Patents. LICENSEE shall be afforded reasonable opportunities to comment on such documentation and advise STC and cooperate with STC in such prosecution and maintenance and STC will reasonably consider all such comments and advice made by LICENSEE pursuant to this Section 7.1. If LICENSEE should fail to reimburse STC for patent expenses incurred under this Section in accordance with Section 4.5 of this Agreement, STC shall have no further obligation to prosecute or maintain the patent applications and patents included in the Licensed Patents. LICENSEE may, upon ninety (90) days’ advance written notice to STC, advise STC that it no longer wishes to reimburse STC for expenses for filing, prosecuting or maintaining one or more patent applications or patents included in the Licensed Patents. The giving of such notice, however, shall not relieve LICENSEE of its obligation to reimburse STC for such expenses incurred prior to the expiration of the ninety (90)-day period. STC may, at its option, elect to pay such expenses or permit such patent applications and patents included in the Licensed Patents to become abandoned or lapsed. If STC elects to pay such expenses, such patents shall not be subject to any license granted to LICENSEE hereunder. Without limiting the foregoing, STC agrees to file any patent application included in the Licensed Patents or prosecute or maintain any Licensed Patent, in each case as requested by LICENSEE, provided that LICENSEE reimburses STC for patent expenses as set forth above. In the event that such costs are anticipated to be significant in any particular case, STC may require that LICENSEE advance funds to STC.

 

[*]

*Confidential Treatment Requested.


7.2 Extension of Licensed Patents. LICENSEE may request that STC have the normal term of any patent application or patent included in the Licensed Patents extended or restored under a country’s procedure of extending life for time lost in government regulatory approval processes, and the expense of same shall be borne in accordance with the terms of Section 4.5. LICENSEE shall assist STC to take whatever action is necessary to obtain such extension. In the case of such extension, royalties payable pursuant to Article IV hereof shall be payable until the end of the extended life of the applicable patent. In the event that LICENSEE does not elect to extend patent application or patent included in the Licensed Patents, STC may, at its own expense, effect the extension of such patent application or patent included in the Licensed Patents with LICENSEE’s prior written consent, not to be unreasonably conditioned, delayed or withheld.

7.3 Licensee Patent Dispute. With respect to any assertion or claim by LICENSEE of the patentability, invalidity, unenforceability, or non-infringement of a Licensed Patent (a “Licensee Patent Dispute”):

(a) Notwithstanding any other provision of this Agreement and specifically notwithstanding Section 12.3 of this Agreement, STC may by written notice to LICENSEE terminate this Agreement in the event that LICENSEE initiates any action, arbitration, or other proceeding arising out of a Licensee Patent Dispute.

(b) Notwithstanding any other provision of this Agreement, in the event that LICENSEE initiates any action, arbitration, or other proceeding arising out of a Licensee Patent Dispute, then effective as of the date such proceeding is initiated:

(i) The royalty rate on Sublicense Income under Section 4.2 shall be increased to [*] times the amount provided for under Section 4.2;

(ii) The royalty rate on Net Sales under Section 4.3 shall be increased to [*] times the amount provided for under Section 4.3 during the pendency of the action, arbitration, or other proceeding, and [*] times the amount provided for under Section 4.3 in the event that any judgment or award in such action, arbitration, or proceeding upholds the validity or enforceability of the Licensed Patent, or any claim thereof, or determines that LICENSEE has infringed or is infringing the Licensed Patent.

(iii) The minimum annual royalty under Section 4.4 shall be increased to [*] times the amount provided for under Section 4.4 during the pendency of the action, arbitration, or other proceeding, and [*] times the amount provided for under Section 4.4 in the event that any judgment or award in such action, arbitration, or proceeding upholds the validity or enforceability of the Licensed Patent, or any claim thereof, or determines that LICENSEE has infringed or is infringing the Licensed Patent.

 

[*]

*Confidential Treatment Requested.


(c) Reports and payments to STC under Section 5.1 shall be made on a monthly basis, with reports and payments for each month due and payable on or before the tenth (10 th ) day of the following month.

(d) LICENSEE shall reimburse and pay STC its costs, expenses, attorney’s and expert fees, and all other amounts incurred by STC in any action, arbitration or proceeding arising out of a Licensee Patent Dispute in the event that any arbitration award or judgment in such action, arbitration or proceeding upholds the validity or enforceability of the Licensed Patents, or any claim thereof, or determines that LICENSEE has infringed or is infringing the Licensed Patents.

ARTICLE VIII.

ABATEMENT OF INFRINGEMENT

8.1 LICENSEE acknowledges that the Licensed Patents are of great value to STC, and therefore, LICENSEE promises to take all reasonable measures to protect STC’s interests therein. LICENSEE shall not permit any entity, individual or firm to have rights to practice the Licensed Patents, except as authorized in this Agreement.

8.2 Each party shall promptly give written notice to the other party in the event such party learns of: (i) any suspected infringement of a Licensed Patent; or, (ii) the threat of or filing of any declaratory judgment action by a third party alleging the invalidity, unenforceability, or non-infringement of the Licensed Patent.

8.3 LICENSEE shall have the exclusive first right (but not the obligation) to notify an infringer and initiate legal proceedings to abate the infringement of a Licensed Patent within LICENSEE’S Field of Use. STC agrees to join as a party plaintiff in any such lawsuit initiated by LICENSEE, if requested to do so by LICENSEE, with all reasonable, documented costs, attorneys’ fees, and expenses of STC to be paid by LICENSEE. Should LICENSEE elect not to institute such an action to enforce the Licensed Patent against infringement within LICENSEE’s Field of Use within ninety (90) days after receipt of written notice from STC of STC’s intention to bring suit for such infringement, STC shall have the right (but not the obligation) at its own expense to take those steps on behalf of itself and LICENSEE, provided that LICENSEE shall have the right to participate at its own expense in any action brought by STC.

 

[*]

*Confidential Treatment Requested.


8.4 If LICENSEE leads proceedings to abate and remedy infringement, any monetary recovery from the infringement of Licensed Patents received by LICENSEE shall first be applied to reimburse LICENSEE’s reasonable, documented unreimbursed expenses of such proceedings and then STC’s reasonable, documented unreimbursed expenses of such proceedings, including, in each case, without limitation, reasonable attorneys’ fees and court costs. Any remainder shall, to the extent the same pertain to an infringement of the Licensed Patents within LICENSEE’s Field of Use, be treated as Net Sales and subject to LICENSEE’s royalty obligations pursuant to Section 4.3 above. If STC leads proceedings to abate and remedy infringement, any monetary recovery from the infringement of Licensed Patents shall be first applied to reimburse STC’s unreimbursed expenses of such proceedings, and then LICENSEE’s unreimbursed expenses of such proceedings, including without limitation, reasonable attorneys’ fees and court costs. Any remainder shall, to the extent the same pertains to an infringement of the Licensed Patents within LICENSEE’s Field of Use, be treated as Net Sales and subject to LICENSEE’s royalty obligations pursuant to Section 4.3 above.

8.5 In the event that a declaratory judgment action is brought by a third party against STC or LICENSEE alleging invalidity, unenforceability, or non-infringement of the Licensed Patents, STC, at its option, shall have the right within twenty (20) days after commencement of such action to take over the sole defense of the action at its own expense. If STC does not exercise this right, LICENSEE may take over the defense of the action at LICENSEE’s expense, either solely or in conjunction with other licensees of STC holding licenses with respect to fields of use of the Licensed Patents other than the Field of Use. STC agrees to participate in such defense as a party, if requested by LICENSEE, with all reasonable, documented costs, attorneys’ fees, and expenses of STC to be paid by LICENSEE. In either case, the non-controlling party as between STC and LICENSEE shall have the right to participate in, comment on, and make recommendations regarding the course of the controlling party’s defense of such declaratory judgment action, which recommendations the controlling party agrees to reasonably consider except to the extent the recommendations would result, in STC’s reasonable determination, in an unwarranted narrowing of the Licensed Patents. The controlling party shall provide to the non-controlling party each document or a draft thereof pertaining to the declaratory judgment action, including but not limited to each communication to opposing counsel, pleading, discovery request, or other court filing as follows: (a) documents received from the court or opposing counsel shall be provided to the non-controlling party promptly after receipt; and (b) for a document to be served upon opposing counsel or filed in court, a draft of such document shall be provided to the non- controlling party sufficiently prior to its filing, to allow for review and comment by the non-controlling party.

ARTICLE IX.

CONFIDENTIALITY

9.1 Except as provided herein, STC shall maintain in confidence, and shall not use for any purpose or disclose to any third party, information disclosed by or on behalf of LICENSEE or a Licensed Affiliate in writing and marked “Confidential” or that is disclosed by or on behalf of LICENSEE or an Affiliate orally and confirmed in writing as confidential within forty-five (45) days following such disclosure, or which by its nature would reasonably be deemed to be confidential or proprietary (collectively, “Confidential Information”) and shall not use such Confidential Information for any purpose other than those expressly permitted by this Agreement, or reasonably necessary for the performance or the enforcement of this Agreement. Confidential Information shall not include any information that: (i) is already known to the receiving party at the time of disclosure hereunder other than under an obligation of confidentiality, (ii) now or hereafter becomes publicly known other than through acts or omissions of the receiving party, (iii) is disclosed to the receiving party by a third party under no obligation of confidentiality to the disclosing party or (iv) is independently developed by the receiving party without reliance on the Confidential Information of the disclosing party.

9.2 Neither party shall, without the express written consent of the other, for any reason or at any time either during or subsequent to the term of this Agreement disclose to third parties the financial terms set forth in this Agreement, except upon a subpoena or other court order made with appropriate provision for protection of confidential information or as required by securities or other applicable laws or to advisors (including financial advisors, attorneys and accountants), potential and existing investors, and others on a need to know basis, in each case under circumstances that protect the confidentiality thereof on terms no less strict than those contained in this Agreement. Notwithstanding the foregoing, STC may disclose the financial terms of this Agreement to University, Sandia, and to the Inventors under a duty of confidentiality no less strict than that contained in this Agreement.

 

[*]

*Confidential Treatment Requested.


ARTICLE X.

LIMITED WARRANTY,

MERCHANTABILITY AND EXCLUSION OF WARRANTIES

(i) Each Party warrants to the other that it has the right and power to enter into this Agreement. STC represents, in good faith and to the best of its knowledge, that: (i) there are not, as of the date of the Effective Date, any claims, demands, suits, or judgments against it that in any manner would or might impair or interfere with STC’s performance of the license granted by STC to LICENSEE under this Agreement; (ii) it has all requisite power and authority to grant the licenses granted to LICENSEE pursuant to Article II; it has not previously granted to any third party any rights that conflict with the licenses granted to LICENSEE pursuant to this Agreement; (iv) it has not received any notification, and does not possess any information reasonably indicating that the Licensed Patents may be invalid or that the exercise of the rights granted hereunder will infringe on any patent or other proprietary right of any third party. Notwithstanding the foregoing, STC does not warrant the validity of any Licensed Patents. STC does not warrant the content contained in the Licensed Patents or that they will be error free or that any defects will be corrected. STC makes no representation whatsoever with regard to the scope or commercial potential or profitability or income of or from the Licensed Patents or that such Licensed Patents may be exploited by LICENSEE without infringing any rights of any other party. STC makes no covenant either to defend any infringement charge by a third party or to institute action against infringers of Licensed Patents. STC does not warrant that the Licensed Patents will meet LICENSEE’s or any of LICENSEE’s customer’s specific requirements. LICENSEE warrants that it possesses the necessary expertise and skill to make, and has made, its own evaluation of the capabilities, safety, utility, and commercial application of the Licensed Patents.

 

[*]

*Confidential Treatment Requested.


10.1 EXCEPT AS OTHERWISE PROVIDED IN SECTION 10.1, THE LICENSED PATENTS ARE PROVIDED “AS IS.” STC MAKES NO OTHER REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO THE LICENSED PATENTS AND EXPRESSLY DISCLAIMS ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND ANY OTHER IMPLIED WARRANTIES WITH RESPECT TO THE CAPABILITIES, SAFETY, UTILITY, OR COMMERCIAL APPLICATION OF LICENSED PATENTS.

ARTICLE XI.

DAMAGES, INDEMNIFICATION, AND INSURANCE

11.1 LICENSEE shall defend, indemnify and hold the Indemnitees harmless from any and all third party claims, demands, actions and causes of action against the Indemnitees, and each of them, whether groundless or not, in connection with any and all injuries, losses, damages or liability of any kind whatsoever arising, directly or indirectly, out of use, exploitation, distribution, or sale of Licensed Patents or Licensed Products by or through the LICENSEE or its Affiliates or Commercial Sublicensees, whether or not the claims, demands, actions or causes of action are alleged to have resulted, in whole or in part, from the negligent acts or omissions of an Indemnitee, or from acts or omissions of such persons for which an Indemnitee would otherwise be strictly liable. This indemnification obligation shall include, without limiting the generality of the foregoing, reasonable attorney fees and other reasonable costs or expenses incurred in connection with the defense of any and all such claims, demands, actions, or causes of action.

11.2 Without limiting LICENSEE’s indemnity obligations, within ninety (90) days of the commercial distribution of any Licensed Product or provision of Licensed Services, or, if applicable, on the date of initiation of any human trials, whichever occurs sooner, LICENSEE shall acquire a liability insurance policy and shall further maintain said policy throughout the term of this Agreement and for three (3) years thereafter, said policy to cover each Indemnitee as a named insured (with right to prior notice of cancellation) for all liabilities, claims, damages, and actions arising from or relating to LICENSEE’s exercise of its license under this Agreement, including but not limited to product liability and other matters within the scope of LICENSEE’s indemnity obligations under this Agreement, said coverage to be in an amount no less than Two Million Dollars ($2,000,000) per occurrence for bodily injury and Five Million Dollars ($5,000,000) per occurrence for property damage, subject to a reasonable aggregate amount.

STC shall promptly notify LICENSEE in writing of each claim, demand, action and cause of action for which STC or any Indemnitee intends to claim indemnification under Section 11.1 , cooperate reasonably in any such claim, demand, action or cause of action, and provide, to the extent that such an evaluation is reasonably possible by STC, LICENSEE with STC’s good-faith evaluation of the claim, demand, action or cause of action. STC will not make any admissions or take any actions in such claim, demand, action or cause of action that may prejudice or impair LICENSEE’s ability to defend such claim or suit without LICENSEE’s prior written consent.

 

[*]

*Confidential Treatment Requested.


11.3 Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY FOR ANY LOST PROFITS OR ANTICIPATED REVENUES OR PROFITS RELATING TO THE SAME, OR FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, EXEMPLARY OR INCIDENTAL DAMAGES ARISING FROM ANY CLAIM RELATING TO THIS AGREEMENT, WHETHER SUCH CLAIM IS BASED ON CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, EVEN IF AN AUTHORIZED REPRESENTATIVE OF SUCH PARTY IS ADVISED OF THE POSSIBILITY OR LIKELIHOOD OF SAME.

ARTICLE XII.

TERM AND TERMINATION

12.1 Term. Unless otherwise extended in writing by mutual agreement of the Parties, this Agreement will remain valid and in force until the expiration date of the last of the Valid Claims of the last to expire of the Licensed Patents. Any extension of the term of this Agreement may include additional provisions or modifications to other provisions of this Agreement as, negotiated and mutually agreed between the Parties.

12.2 Termination by LICENSEE. LICENSEE shall have the right to terminate this Agreement in whole or in part, including with respect to specified Licensed Patents in one or more specified jurisdictions, at any time, upon ninety (90) days prior written notice, without cause and for any reason. If LICENSEE terminates this Agreement under this provision, STC will not be under any obligation to return any portion of the consideration paid by LICENSEE to STC prior to or related to the period prior to the date of termination. If such termination is limited to certain Licensed Patents in specified jurisdictions, then LICENSEE’s rights and obligations with respect thereto shall terminate upon expiration of such notice period, but the Agreement shall otherwise continue in full force and effect.

12.3 Termination by STC. In the event of material breach of this Agreement by LICENSEE, STC may at any time provide written notice to LICENSEE of such material breach. If LICENSEE fails to cure the identified material breach within ninety (90) days after the date of the notice, STC may by written notice given to LICENSEE terminate this Agreement. A “material breach” of this Agreement for purposes of this Section 12.3 would include, but not be limited to, the failure to make the reports required under Article V of this Agreement on time or the failure to make the payments or deliveries required under Article IV of this Agreement on time.

 

[*]

*Confidential Treatment Requested.


12.4 LICENSEE’s Financial Condition. LICENSEE shall immediately notify STC in writing of its intent to take action to: (a) liquidate and/or cease to carry on its business, (b) become “insolvent” (as such term is defined in the United States Bankruptcy Code, as amended from time to time), or (c) voluntarily seek, consent to or acquiesce in the benefits of any bankruptcy or similar debtor-relief laws within thirty (30) days of such action. Upon receipt of such notice, STC may, at its sole option, terminate this Agreement without prejudice to any other remedy to which STC may be entitled at law or in equity or elsewhere under this Agreement, by giving written notice of termination to LICENSEE. Failure by LICENSEE to provide such notice of intent will be deemed a material, pre-petition, incurable breach of this Agreement and the Agreement will terminate automatically on the date of such voluntary or involuntary petition in bankruptcy.

12.5 Effect of Termination on Commercial Sublicenses. Upon termination of the Agreement, any Commercial Sublicenses granted hereunder shall survive, provided that: (a) at the time of such termination, the Commercial Sublicensee of the Commercial Sublicense is not in material default under the Commercial Sublicense; (b) under such Commercial Sublicense the duties and obligations of STC to the Commercial Sublicensee under the Commercial Sublicense are not greater than the duties and obligations of STC under this Agreement; and, (c) upon request by STC, such Commercial Sublicensee promptly agrees in writing to render to STC any performance, including the payment of money due from the Commercial Sublicensee under this Agreement, after the termination and to be bound by the applicable terms of this Agreement.

12.6 Effect of Termination on LICENSEE. Upon termination of this Agreement, LICENSEE shall cease manufacturing, processing, producing, using, or selling Licensed Products and cease providing Licensed Services; provided, however, that notwithstanding the foregoing LICENSEE may complete and continue to sell in the ordinary course of business for a period of one hundred twenty (120) days reasonable quantities of Licensed Products that are fully or partially manufactured at the date of termination and continue to render any previously commenced Licensed Services if (a) all monetary obligations of LICENSEE to STC have been satisfied, and (b) royalties on such sales are paid to STC in the amounts and in the manner provided in this Agreement. However, nothing herein shall be construed to release either party of any obligation that matured prior to the effective date of such termination.

 

[*]

*Confidential Treatment Requested.


12.7 Survival of Provisions on Termination. The word “termination” and cognate words such as “term” and “terminate” as used in this Article and elsewhere in this Agreement are to be read as omitting from their effect the following rights and obligations, all of which shall survive any termination to the degree reasonably necessary to permit their fulfillment or discharge:

(a) LICENSEE’s obligation to provide financial reports pursuant to Article V for the period through the date of termination, to pay any amounts due hereunder through the date of termination pursuant to Article IV, LICENSEE’s obligation to reimburse STC for legal and patent expenses incurred prior to the date of termination, and LICENSEE’S other obligations under Article V of this Agreement;

(b) Any cause of action or claim of either party accrued, or to accrue, because of any breach or default by the other party; and

(c) The provisions of Articles I, IX, X, XI, XII, XIV and XV of this Agreement.

ARTICLE XIII.

ASSIGNMENT

This Agreement shall be binding upon and shall inure to the benefit of the legal representatives and assigns of STC and LICENSEE, provided, however, that any assignment of this Agreement by LICENSEE to a third party may be made only upon prior written consent of STC, which consent may be withheld or conditioned by STC as necessary to prevent prejudice to the Licensed Patents and to preserve the value of the consideration promised by LICENSEE to STC under this Agreement. Notwithstanding the foregoing, LICENSEE may assign this Agreement in its entirety, and all the rights and obligations hereunder, without such prior consent, to an Affiliate or acquirer of all or substantially all of the assets of LICENSEE to which this Agreement pertains, whether by merger, acquisition, asset sale or otherwise, provided that LICENSEE informs STC of such assignment promptly thereafter and provided that the assignee agrees to be bound by all the terms of this Agreement.

ARTICLE XIV.

MISCELLANEOUS

14.1 Export Controls. LICENSEE acknowledges that STC is subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes, and other commodities and that STC’s obligations under this Agreement are contingent upon compliance with applicable United States export laws and regulations. The transfer of technical data and commodities may require a license from the cognizant agency of the United States government or written assurances by LICENSEE that LICENSEE shall not export data or commodities to certain foreign countries without the prior approval of certain United States agencies. STC neither represents that an export license shall not be required nor that, if required, such export license shall issue.

14.3 Legal Compliance. LICENSEE shall comply with all laws and regulations relating to its manufacture, processing, producing, use, selling, or distributing of Licensed Products.

14.4 Independent Contractor. LICENSEE’s relationship to STC shall be that of a licensee only. LICENSEE shall not be the agent of STC and shall have no authority to act for or on behalf of STC in any matter. Persons retained by LICENSEE as employees or agents shall not by reason thereof be deemed to be employees or agents of STC.

14.5 Patent Marking. To the extent reasonably practical, LICENSEE shall mark Licensed Products sold in the United States with United States patent numbers. Licensed Products manufactured or sold in other countries shall be marked in compliance with the intellectual property laws in force in such foreign countries.

 

[*]

*Confidential Treatment Requested.


14.6 Use of Names. LICENSEE shall obtain the prior written approval of STC, University, Sandia, or the Inventors prior to making use of their names for any commercial purpose, except as required by law. As an exception to the foregoing, LICENSEE, STC and Sandia shall have the right to publicize the existence of this Agreement; however, neither LICENSEE nor STC shall disclose the terms and conditions of this Agreement without the other party’s consent, except as required by law or rules of a securities exchange, or to such party’s actual or prospective investors, advisors, strategic partners and investment bankers under confidentiality.

14.7 Place of Execution. This Agreement and any subsequent modifications or amendments hereto shall be deemed to have been executed in the State of New Mexico, U.S.A.

14.8 Governing Law. This Agreement and all amendments, modifications, alterations, or supplements hereto, and the rights of the parties hereunder, shall be construed under and governed by the laws of the State of New Mexico without regard to its conflicts of laws principles.

14.9 Entire Agreement. This Agreement, including the attached Exhibits, constitutes the entire agreement between STC and LICENSEE with respect to the subject matter hereof and shall not be modified, amended or terminated except as herein provided or except by another agreement in writing executed by the parties hereto.

14.10 Severability. All rights and restrictions contained herein may be exercised and shall be applicable and binding only to the extent that they do not violate any applicable laws and are intended to be limited to the extent necessary so that they will not render this Agreement illegal, invalid or unenforceable. If any provision or portion of any provision of this Agreement shall be held to be illegal, invalid or unenforceable by a court of competent jurisdiction, it is the intention of the parties that the remaining provisions or portions thereof shall constitute their agreement with respect to the subject matter hereof, and all such remaining provisions or portions thereof shall remain in full force and effect. To the extent legally permissible, any illegal, invalid or unenforceable provision of this Agreement shall be replaced by a valid provision that will implement the commercial purpose of the illegal, invalid or unenforceable provision.

14.11 Force Majeure. Any delays in, or failure of, performance of any party to this Agreement shall not constitute default hereunder, or give rise to any claim for damages, if and to the extent caused by occurrences beyond the control of the party whose performance is so affected, including, but not limited to, acts of God, strikes or other work stoppages; civil disturbances, fires, floods, explosions, riots, war, rebellion, sabotage, acts of governmental authority or failure of governmental authority to issue licenses or approvals that may be required.

 

[*]

*Confidential Treatment Requested.


ARTICLE XV.

NOTICES

All notices and other communications shall be hand delivered, sent by private overnight mail service, or sent by registered or certified U.S. mail, postage prepaid, return receipt requested, and addressed to the party to receive such notice or other communication at the address given below, or such other address as may hereafter be designated by notice in writing:

 

If to STC:

  

President & CEO

STC.UNM

801 University Blvd. SE, Suite 101

Albuquerque, NM 87106

Email:

With a copy to:

  

Sandia National Laboratories

Attention: Licensing Agreements Administrator, Org. 7932

Ref: License #                    

P. O. Box 5800/Mailstop 0114

Albuquerque, NM 87185-0114

Telephone:

Facsimile:

If to LICENSEE:

  

President

ALPINE BIOSCIENCES, INC.

600 Stewart St., Suite 1503

Seattle, Washington 98102

Email:

Such notices or other communications shall be effective upon receipt by an employee, agent or representative of the receiving party authorized to receive notices or other communications sent or delivered in the manner set forth above.

 

[*]

*Confidential Treatment Requested.


IN WITNESS WHEREOF, STC AND LICENSEE have caused this Agreement to be signed by their duly authorized representatives, under seal, as of the day and year indicated above.

 

STC.UNM   

ALPINE BIOSCIENCES, INC.

  
By:   

/s/ Elizabeth J. Kuuttila

      By:   

/s/ Jay Venkatesan

  
   Elizabeth J. Kuuttila          Jay Venkatesan   
   President & CEO          CEO   
Date:   

7/30/14

      Date:   

7/30/14

  

 

[*]

*Confidential Treatment Requested.


EXHIBIT A

LICENSED PATENTS

[*]

 

*Confidential Treatment Requested.

Exhibit 10.2

July 31, 2014

Dear Jay,

I am delighted to offer you the position of Executive Vice President & General Manager at Oncothyreon Inc. (“Oncothyreon” or the “Company”) This position is based in San Francisco, California and reports to Robert L. Kirkman, MD, President and Chief Executive Officer. Your official hire date will be coincident with and conditioned upon the closing of the acquisition of Alpine Biosciences, Inc., by Oncothyreon (the “Closing”). This offer includes the following:

 

  1. A base salary of $14,583.34 per semi-monthly pay period (equivalent to $350,000 on an annual basis). Your base salary will be paid twice a month, by direct deposit, on the 15 th and the last banking day of each month.

 

  2. You are eligible to participate in the Company’s non-qualified Stock Option Plan. The plan is governed by the Company’s “Amended and Restated Share Option Plan” (the “Option Plan”) and the terms of this document will govern.

Following your acceptance of this offer, we will recommend to the Compensation Committee of our Board of Directors after commencement of your employment that you receive a grant of options to purchase 100,000 shares of Oncothyreon’s Common Stock (the “Optioned Shares”), and your grant will be subject to the approval of the Compensation Committee or its delegate. Your grant will be priced in accordance with our equity incentive plan and our policies governing stock option grants. Subject to the terms and conditions set forth herein, twenty-five (25%) per cent of the Optioned Shares shall vest and become exercisable on the first (1 st ) anniversary of the Closing (the date of the Closing, the “Vesting Commencement Date”) and the balance of the Optioned Shares shall vest and become exercisable in equal monthly increments for thirty-six (36) months following the first anniversary of the Vesting Commencement Date, such that all of the Option Shares shall be vested and exercisable on the fourth (4 th ) anniversary of the Vesting Commencement Date.

 

  3. You will be eligible to participate in Oncothyreon’s incentive bonus program with a target incentive bonus of thirty-five percent (35%) of your annual base salary. Generally, goals for the program are established at the beginning of the year and payment is made following the close of the year. For 2014, you will receive an incentive bonus paid at your target level, pro-rated for your partial year of employment with Oncothyreon.


 

Jay Venkatesan, MD

July 31, 2014

Page Two

 

  4. You and your family are eligible to participate in Oncothyreon’s insured medical, dental, and vision benefits beginning on the first of the month following your hire date. As an employee, you will also be covered under Oncothyreon’s term life, term accidental death and dismemberment insurance, and short and long term disability plans. Oncothyreon observes eight (8) company holidays per year plus two personal days to use during the calendar year, in addition to twenty (20) days of accrued vacation.

 

  5. You will become eligible for Oncothyreon matching contributions into the Company’s 401(k) plan upon your commencement of employment. Oncothyreon will match your contributions into the plan, up to a maximum of 3% of your monthly gross salary (subject to maximums as deemed by law). Contributions to this plan are made through payroll deductions. Employees are immediately vested in the company match.

 

  6. Severance : In the event your employment is terminated for reasons other than “Cause” (as defined below) you will be entitled to the following:

i)    Lump sum payment of nine months’ base salary, less required withholding

ii)    Lump sum payment of nine months’ equivalent of incentive bonus at target, less required withholding

“Cause” for the purpose of this agreement shall include but not be limited to (i) willful engaging in illegal conduct or gross misconduct which is injurious to the Company or an affiliated company, (ii) being convicted of, or entering a plea of nolo contendere or guilty to, a felony or a crime of moral turpitude; (iii) engaging in fraud, misappropriation, embezzlement or any other act or acts of dishonesty resulting or intended to result directly or indirectly in a gain or personal enrichment to you at the expense of the Company or an affiliated company, (iv) material breach of any written policies of the Company or an affiliated company, or (v) willful and continual failure substantially to perform your duties with the Company, which failure has continued for a period of at least 30 days after written notice by the Company.

Section 409A

i)    Notwithstanding anything to the contrary in this letter agreement, no severance payable to you, if any, pursuant to this letter agreement that, when considered together with any other severance payments or separation benefits, are considered deferred compensation under Section 409A (together, the “Deferred Payments”) will be payable until you have a “separation from service” within the meaning of Section 409A of the Internal Revenue Code (“Section 409A”). Similarly, no severance payable to you, if any, pursuant to this letter agreement that otherwise would be exempt from Section 409A pursuant to Treasury Regulation Section 1.409A-1(b)(9) will be payable until you have a “separation from service” within the meaning of Section 409A.


 

Jay Venkatesan, MD

July 31, 2014

Page Three

 

ii)    Notwithstanding anything to the contrary in this letter agreement, if you are a “specified employee” within the meaning of Section 409A at the time of your separation from service, then, if required, the Deferred Payments, which are otherwise due to you on or within the six (6) month period following your separation from service will accrue, to the extent required, during such six (6) month period and will become payable in a lump sum payment on the date six (6) months and one (1) day following the date of your separation from service or the date of your death, if earlier. All subsequent Deferred Payments, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this letter agreement is intended to constitute a separate payment for purposes of Treasury Regulation Section 1.409A-2(b)(2).

iii)    Any amount paid under the letter agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations will not constitute Deferred Payments for purposes of clause (i) above.

iv)    Any amount paid under this letter agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that does not exceed the Section 409A Limit will not constitute Deferred Payments for purposes of clause (i) above. “Section 409A Limit” will mean the lesser of two (2) times: (i) your annualized compensation based upon the annual rate of pay paid to you during your taxable year preceding your taxable year of your termination of employment as determined under Treasury Regulation Section 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Internal Revenue Code for the year in which your employment is terminated.

v)    The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. You and the Company agree to work together in good faith to consider amendments to this letter agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to you under Section 409A.

 

  7. Change in Control : In the event there is a “Change in Control” as defined herein and you remain employed through the date of the Change in Control, you will be entitled to the following:

i)    Lump sum payment of one year’s base salary, less required withholding, and

ii)    Lump sum payment of one year’s equivalent of incentive bonus at target less required withholding.

Such payments will be made within sixty (60) days following the consummation of the Change in Control, provided that, within forty-five (45) days of the Change in Control, you have signed a separation agreement in a form reasonably satisfactory to the Company, which shall include a general release of all claims against the Company and its affiliated entities.


 

Jay Venkatesan, MD

July 31, 2014

Page Four

 

“Change in Control” for the purpose of this agreement shall be deemed to have occurred if, on or after the date hereof (i) the board of directors of the Company passes a resolution to the effect that, for purposes of the Company’s Option Plan, a Change in Control has occurred or (ii) any person or any group of two or more persons acting jointly or in concert becomes the beneficial owner, directly or indirectly, or acquires the right to control or direct, twenty-five (25%) percent or more of the outstanding voting securities of the Company or any successor to the Company in any manner, including without limitation as a result of a takeover bid or an amalgamation of the Company with any other corporation or any other business combination or reorganization, and for purposes hereof “voting security” means any security other than a debt security carrying a voting right either under all circumstances or under some circumstances that have occurred and are continuing.”

To protect the Company’s proprietary interests, all of Oncothyreon’s employees are required to sign a Confidentiality Agreement as a condition of employment. The Company also reserves the right to conduct reference checks, academic checks, background and credit checks on potential employees. Our job offer is contingent upon the signing of our Confidentiality Agreement and the positive results of such screening checks. As a condition of employment and to protect the Company’s interests, you hereby certify that you have not been debarred and are not subject to debarment under Section 306 of the United States Food, Drug and Cosmetic Act (21 USC 355a) or comparable provision of any other applicable law. You also must be able to prove your eligibility to work within the United States.

Oncothyreon has an at-will relationship with each of its employees. That means that either the Company or you can terminate the employment relationship at any time, for any reason not expressly prohibited by law. No manager or officer of Oncothyreon is authorized to alter the at-will relationship unless it is done in writing and signed by the President & Chief Executive Officer.

Please indicate your acceptance of this offer by signing below and returning this signed offer letter to me no later than August 8, 2014. You may return the letter via fax to 206-801-2125. You will be expected to sign the enclosed Confidentiality Agreement during your new hire orientation on your date of hire. A duplicate set of these documents is enclosed for your records.

Jay, we look forward to you joining our team at Oncothyreon and are confident that you will be able to significantly contribute to the success of our company. Please feel free to contact me if you have any questions.

Sincerely,

/s/ Robert L. Kirkman

Robert L. Kirkman, MD

President & Chief Executive Officer

I have read and accept the terms and conditions of employment as outlined above.

 

  /s/ Jay Venkatesan       August 8, 2014
  Jay Venkatesan, MD       Date

EXHIBIT 31.1

CERTIFICATION

I, Robert L. Kirkman, M.D., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Oncothyreon Inc., (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

November 6, 2014    

/s/ Robert L. Kirkman, M.D.

    Robert L. Kirkman, M.D.
    President and Chief Executive Officer
    (Principal Executive Officer)

EXHIBIT 31.2

CERTIFICATION

I, Julia M. Eastland, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Oncothyreon Inc., (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d—15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

November 6, 2014

   

/s/ Julia M. Eastland

    Julia M. Eastland,
   

Chief Financial Officer, Secretary and

Vice President of Corporate Development

    (Principal Financial and Accounting Officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Robert L. Kirkman, M.D., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Oncothyreon Inc. for the quarterly period ended September 30, 2014, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Oncothyreon Inc.

 

November 6, 2014

   

/s/ Robert L. Kirkman, M.D.

    Robert L. Kirkman, M.D.
    President and Chief Executive Officer
    (Principal Executive Officer)

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Julia M. Eastland, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Oncothyreon Inc. for the quarterly period ended September 30, 2014, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Oncothyreon Inc.

 

November 6, 2014

   

/s/ Julia M. Eastland

    Julia M. Eastland
    Chief Financial Officer, Secretary and Vice President of Corporate Development
    (Principal Financial and Accounting Officer)