Cascadian Therapeutics
Oncothyreon Inc. (Form: 10-Q, Received: 11/05/2015 18:18:58)
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, 2015

or

 

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

For the transition period from                     to                    

Commission file number: 001-33882

 

 

ONCOTHYREON INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-0868560

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2601 Fourth Ave., Suite 500

Seattle, Washington

 

98121

(Zip Code)

(Address of principal executive offices)  

(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 5, 2015, the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 94,928,170.

 

 

 


Table of Contents

ONCOTHYREON INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015

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      17   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      24   

Item 4.

   Controls and Procedures      24   

PART II—OTHER INFORMATION

     25   

Item 1.

   Legal Proceedings      25   

Item 1A.

   Risk Factors      25   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      37   

Item 3.

   Defaults Upon Senior Securities      37   

Item 4.

   Mine Safety Disclosure      37   

Item 5.

   Other Information      37   

Item 6.

   Exhibits      38   

Signatures

     39   

 

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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,
2015
    December 31,
2014
 
     (Unaudited)        
ASSETS     

Current:

    

Cash and cash equivalents

   $ 25,264      $ 10,454   

Short-term investments

     38,414        47,217   

Accounts and other receivables

     301        298   

Prepaid and other current assets

     463        888   
  

 

 

   

 

 

 

Total current assets

     64,442        58,857   

Long-term investments

     —          6,043   

Property and equipment, net

     1,869        1,576   

Indefinite-lived intangible assets

     19,738        19,738   

Goodwill

     16,659        16,659   

Other assets

     518        538   
  

 

 

   

 

 

 

Total assets

   $ 103,226      $ 103,411   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current:

    

Accounts payable

   $ 389      $ 689   

Accrued and other liabilities

     1,490        2,129   

Accrued compensation and related liabilities

     1,474        1,614   

Current portion of restricted share unit liability

     179        155   

Current portion of warrant liability

     —          128   
  

 

 

   

 

 

 

Total current liabilities

     3,532        4,715   

Deferred rent

     253        337   

Restricted share unit liability

     448        155   

Deferred tax liability

     6,908        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; 10,000,000 shares authorized as of September 30, 2015 and December 31, 2014; Series A Convertible Preferred Stock – 10,000 shares issued and outstanding as of September 30, 2015 and December 31, 2014; Series B Convertible Preferred Stock – 5,333 shares and zero shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively; Series C Convertible Preferred Stock – 7,500 shares and zero shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

     —         —    

Common stock, $0.0001 par value; 200,000,000 shares authorized as of September 30, 2015 and December 31, 2014; 94,928,170 shares and 91,601,352 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

     353,856        353,856   

Additional paid-in capital

     248,744        224,549   

Accumulated deficit

     (505,498     (482,048

Accumulated other comprehensive loss

     (5,047     (5,091
  

 

 

   

 

 

 

Total stockholders’ equity

     92,055        91,266   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 103,226      $ 103,411   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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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,
 
     2015     2014     2015     2014  
     (Unaudited)  

Operating expenses

        

Research and development

   $ 5,122      $ 5,663      $ 16,581      $ 15,876   

General and administrative

     2,100        2,357        7,057        7,101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,222        8,020        23,638        22,977   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,222     (8,020     (23,638     (22,977
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

        

Investment and other income (expenses), net

     25        11        60        52   

Change in fair value of warrant liability

     2,578        1,273        128        541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses), net

     2,603        1,284        188        593   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,619   $ (6,736   $ (23,450   $ (22,384
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

   $ (0.05   $ (0.09   $ (0.24   $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute basic and diluted net loss per share

     94,914,536        77,237,246        97,184,183        72,919,829   
  

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
     2015     2014     2015     2014  
     (Unaudited)  

Net loss

   $ (4,619   $ (6,736   $ (23,450   $ (22,384

Other comprehensive income (loss):

        

Available-for-sale securities:

        

Unrealized gain (loss) during the period, net

     20        (1     44        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     20        (1     44        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (4,599   $ (6,737   $ (23,406   $ (22,383
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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ONCOTHYREON INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

     Nine months ended
September 30,
 
     2015     2014  
     (Unaudited)  

Cash flows from operating activities

    

Net loss

   $ (23,450   $ (22,384

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

    

Depreciation and amortization

     454        373   

Amortization of premiums and accretion of discounts on securities

     276        443   

Share-based compensation expense

     2,100        1,751   

Change in fair value of warrant liability

     (128     (541

Cash settled on conversion of restricted share units

     (94     (96

Other

     (7     (1

Net change in assets and liabilities:

    

Accounts and other receivable

     (3     (112

Prepaid expenses and other current assets

     425        (167

Other long term assets

     20        2   

Accounts payable

     (300     (230

Accrued and other liabilities

     (639     162   

Accrued compensation and related liabilities

     (140     (89

Deferred rent

     (84     (76
  

 

 

   

 

 

 

Net cash used in operating activities

     (21,570     (20,965
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (48,407     (34,007

Redemption of investments

     63,021        39,847   

Purchases of property and equipment, net

     (739     (332

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

     —          104   
  

 

 

   

 

 

 

Net cash provided by investing activities

     13,875        5,612   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock, net of issuance cost

     20,609        21,622   

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

     1,863        18,693   

Proceeds from exercise of stock options

     33        1   
  

 

 

   

 

 

 

Net cash provided by financing activities

     22,505        40,316   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     14,810        24,963   

Cash and cash equivalents, beginning of period

     10,454        9,279   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 25,264      $ 34,242   
  

 

 

   

 

 

 

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, 2015 and September 30, 2014

(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, 2014 filed with the Securities Exchange Commission (the SEC) on March 10, 2015.

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, 2015 are not necessarily indicative of financial results for the full year. The condensed consolidated balance sheet as of December 31, 2014 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, 2014 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 10, 2015.

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.

 

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There were no reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2015. 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, 2015 and September 30, 2014:

 

     Three months ended September 30, 2015  
     Net unrealized
gains/(losses)  on
Available-for-sale
Securities
     Foreign
Currency
Translation
Adjustment
     Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at July 1, 2015

   $ (1    $ (5,066    $ (5,067

Current period other comprehensive income, net

     20         —           20   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2015

   $ 19       $ (5,066    $ (5,047
  

 

 

    

 

 

    

 

 

 
     Nine months ended September 30, 2015  
     Net unrealized
gains/(losses) on
Available-for-sale
Securities
     Foreign
Currency
Translation
Adjustment
     Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at December 31, 2014

   $ (25    $ (5,066    $ (5,091

Current period other comprehensive income, net

     44         —           44   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2015

   $ 19       $ (5,066    $ (5,047
  

 

 

    

 

 

    

 

 

 
     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, net

     (1      —           (1
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $ 16       $ (5,066    $ (5,050
  

 

 

    

 

 

    

 

 

 
     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, net

     1         —           1   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $ 16       $ (5,066    $ (5,050
  

 

 

    

 

 

    

 

 

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-14, Revenue from Contracts with Customers (Topic 606)—Deferral of the Effective Date, which defers by one year the effective date of ASU 2014-09, Revenue from Contracts with Customers. For public entities, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. The Company is currently evaluating any impact this standard may have on its consolidated financial position and results of operations.

In April 2015, FASB issued ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to clarify the accounting treatment for cloud computing arrangements. The new standard provides guidance on how customers should evaluate whether a cloud computing arrangement contains a software license that should be accounted for separately. Customers will need to apply the same criteria as vendors to determine whether an arrangement contains a software license or is solely a service contract. This standard is effective for public entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. An entity can elect to adopt the standard either prospectively for all arrangements entered into or materially modified after the effective date, or retrospectively. Early adoption is permitted for all entities. The Company is currently evaluating any impact this standard may have on its consolidated financial position and results of operations.

 

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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, 2015 and December 31, 2014:

 

     September 30, 2015      December 31, 2014  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets:

                       

Money market funds

   $ 7,328       $ —        $ —        $ 7,328       $ 4,103       $ —        $ —        $ 4,103   

Debt securities of U.S. government agencies

     —          38,216         —          38,216         —           43,844         —          43,844   

Corporate bonds

     —          10,935         —          10,935         —          9,416         —          9,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,328       $ 49,151       $ —        $ 56,479       $ 4,103       $ 53,260       $ —        $ 57,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

                       

Restricted share units

   $ 627       $      $ —        $ 627       $ 310       $ —        $ —        $ 310   

Warrants

   $ —        $      $ —         $ —         $ —        $ —        $ 128       $ 128   

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, 2015. 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 8.

 

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.

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, 2015 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

 

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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, 2015

           

Cash

   $ 7,199       $ —        $ —        $ 7,199   

Money market funds

     7,328         —           —           7,328   

Debt securities of U.S. government agencies

     38,213         4         (1      38,216   

Corporate bonds

     10,918         18         (1      10,935   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 63,658       $ 22       $ (2    $ 63,678   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2014

           

Cash

   $ 6,351       $ —        $ —        $ 6,351   

Money market funds

     4,103         —          —          4,103   

Debt securities of U.S. government agencies

     43,862         1         (19      43,844   

Corporate bonds

     9,423         2         (9      9,416   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 63,739       $ 3       $ (28    $ 63,714   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     As of September 30, 2015      As of December 31, 2014  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  
     (In thousands)  

Less than one year

   $ 56,459       $ 56,479       $ 51,338       $ 51,320   

Greater than one year but less than five years

     —           —           6,050         6,043   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 56,459       $ 56,479       $ 57,388       $ 57,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

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, B and C 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.

 

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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, 2015 and September 30, 2014:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  
     (in thousands, except share and per share amounts)  

Numerator

           

Net loss used to compute net loss per share:

           

Basic

   $ (4,619    $ (6,736    $ (23,450    $ (22,384

Adjustments for change in fair value of warrant liability

     —          —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ (4,619    $ (6,736    $ (23,450    $ (22,384
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

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

           

Basic

     94,914,536         77,237,246         97,184,183         72,919,829   

Dilutive effect of warrants

     —          —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     94,914,536         77,237,246         97,184,183         72,919,829   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per share—basic and diluted

   $ (0.05    $ (0.09    $ (0.24    $ (0.31
  

 

 

    

 

 

    

 

 

    

 

 

 

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,  
     2015      2014      2015      2014  

Director and employee stock options

     7,325,000         4,050,033         7,325,000         4,050,033   

Warrants

     8,230,848         8,230,848         8,230,848         8,230,848   

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

     10,000,000         10,000,000         10,000,000         10,000,000   

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

     5,333,000         —           5,333,000         —     

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

     7,500,000         —           7,500,000         —     

Non-employee director restricted share units

     228,943         163,204         228,943         163,204   

Employee stock purchase plan

     15,761         23,780         15,761         23,780   

 

7. EQUITY

Series C Convertible Preferred Stock

On May 14, 2015, the Company designated 7,500 shares of its authorized and unissued preferred stock as Series C Convertible Preferred Stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock with the Delaware Secretary of State. The Company entered into an exchange agreement with certain affiliates of Biotechnology Value Fund (BVF) to exchange 7,500,000 shares of common stock previously purchased by BVF for 7,500 shares of Series C Convertible Preferred Stock.

Each share of Series C 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 C 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 9.99% 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 C Convertible Preferred Stock will receive a payment equal to $0.0001 per share of Series C Convertible

 

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Preferred Stock before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of the Company’s Class UA Preferred Stock and on parity with any distributions to the holders of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock. Shares of Series C 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 C Convertible Preferred Stock will be required to amend the terms of the Series C Convertible Preferred Stock. Shares of Series C 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 C Convertible Preferred Stock;

 

    on parity with the Company’s Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and any class or series of capital stock hereafter created specifically ranking by its terms on parity with the Series C 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 C Convertible Preferred Stock;

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

Equity Financings

February 2015 Financing

Common Stock

On February 11, 2015, the Company closed on an underwritten offering of 13,500,000 shares of its common stock at a price to the public of $1.50 per share, for gross proceeds of approximately $20.3 million. As part of the common stock offering, the Company also granted the underwriters a 30-day option to purchase 2,025,000 additional shares of the Company’s common stock. On February 18, 2015, the Company closed a partial exercise of the underwriter’s option to purchase 1,199,660 additional shares of the Company’s common stock, at a price to the public of $1.50 per share, less underwriting discounts and commissions, which resulted in net proceeds to the Company of approximately $1.7 million.

Series B Convertible Preferred Stock

In addition, on February 11, 2015, the Company closed on a concurrent but separate underwritten offering of 1,333 shares of its Series B convertible preferred stock at a price to the public of $1,500 per share, for gross proceeds of approximately $2.0 million. The Company designated 5,333 shares of its authorized and unissued preferred stock as Series B convertible preferred stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock with the Delaware Secretary of State. Concurrent but separate from this offering, the Company entered into an exchange agreement with certain affiliates of BVF to exchange 4,000,000 shares of common stock previously purchased by BVF for 4,000 shares of Series B convertible preferred stock.

Each share of Series B 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 B 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, which percentage may be increased at the holders’ election up to 19.99% upon 61 days’ notice to the Company. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series B convertible preferred stock will receive a payment equal to $0.0001 per share of Series B convertible preferred stock before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of the Company’s Class UA preferred stock and on parity with any distributions to the holders of the Company’s Series A convertible preferred stock and Series C convertible preferred stock. Shares of Series B 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 B convertible preferred stock will be required to amend the terms of the Series B convertible preferred stock. Shares of Series B 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 created specifically ranking by its terms junior to the Series B convertible preferred stock;

 

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    on parity with the Company’s Series A convertible preferred stock, Series C convertible preferred stock and any class or series of capital stock created specifically ranking by its terms on parity with the Series B convertible preferred stock; and

 

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

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

Aggregate gross proceeds from the February 2015 offerings were approximately $24.0 million. Aggregate net proceeds from the February 2015 offerings, after underwriting discounts, commissions and estimated expenses of $1.6 million, were approximately $22.4 million.

September 2014 Financing

Common Stock

On September 23, 2014, the Company closed on an underwritten offering of 10,000,000 shares of its common stock at a price to the public of $2.00 per share, for gross proceeds of $20.0 million. 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 at a price to the public of $2.00 per share, less underwriting discounts and commissions, which resulted in net proceeds to the Company of approximately $3.0 million.

Series A Convertible Preferred Stock

In addition, on September 23, 2014, the Company closed on a concurrent but separate underwritten offering of 10,000 shares of its Series A convertible preferred stock at a price to the public of $2,000 per share, for gross proceeds of $20.0 million, and 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, after any proceeds are distributed to the holder of the Company’s Class UA preferred stock, and on parity with any distributions to the holders of the Company’s Series B convertible preferred stock and Series C convertible 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 created specifically ranking by its terms junior to the Series A convertible preferred stock;

 

    on parity with the Company’s Series B convertible preferred stock, Series C convertible preferred stock and any class or series of capital stock 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 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.

Aggregate gross proceeds from the September 2014 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 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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8. WARRANTS

Warrants consist of liability-classified warrants and equity-classified warrants. As of September 30, 2015, warrants to purchase a total of 8,230,848 shares of the Company’s common stock were outstanding. No warrants were exercised or expired during the three and nine months ended September 30, 2015. 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, 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, 2015, 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, 2015, warrants from the September 2010 financing to purchase 3,182,147 shares of the Company’s common stock were outstanding and classified as a liability. All of these warrants subsequently expired on October 12, 2015 and are no longer outstanding.

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:

 

     September 2010 Warrants  
     As of September 30, 2015     As of December 31, 2014  

Exercise price

   $ 4.24      $ 4.24   

Market value of stock at end of period

   $ 2.74      $ 1.90   

Expected dividend rate

     0.0     0.0

Expected volatility

     0.0     60.3

Risk-free interest rate

     0.3     0.2

Expected life (in years)

     0.03        0.78   

The fair value of the warrant liability was zero as of September 30, 2015, a decrease of $0.1 million over the fair value as of December 31, 2014, which was $0.1 million. The primary factors affecting the decrease in value of the warrants were the fair market value of the stock price as of September 30, 2015 in relation to the strike price of the warrants, expected life and a decrease in the expected volatility.

The fair value of the warrant liability and the changes in its fair value during the three and nine months ended September 30, 2015 and September 30, 2014 were as follows:

 

     Three months ended September 30,  
     2015      2014  
     (In thousands)  

Balance at beginning of period

   $ 2,578       $ 1,656   

Change in fair value of warrant liability included in:

     

Other expense (income)

     (2,578      (1,273
  

 

 

    

 

 

 

Balance at the end of period

   $ —         $ 383   
  

 

 

    

 

 

 

 

     Nine months ended September 30,  
     2015      2014  
     (In thousands)  

Balance at beginning of period

   $ 128       $ 924   

Change in fair value of warrant liability included in:

     

Other expense (income)

     (128      (541
  

 

 

    

 

 

 

Balance at the end of period

   $ —         $ 383   
  

 

 

    

 

 

 

 

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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. There would be no impact on the value of the warrant liability if volatility were to increase or decrease by 10%.

 

9. 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, 2015, the number of shares of common stock available for issuance under the Share Option Plan was 9,492,817. As of September 30, 2015, 1,791,777 shares of common stock remained available for future grant under the Share Option Plan.

During the three months ended September 30, 2015 and September 30, 2014, the Company granted 2,520,500 and 104,000 stock options, respectively. Stock compensation expense was $0.5 million and $0.4 million for the three months ended September 30, 2015 and September 30, 2014, respectively. During the nine months ended September 30, 2015 and September 30, 2014, the Company granted 2,541,500 and 185,500 stock options, respectively. Stock compensation expense was $1.3 million in each of the nine months ended September 30, 2015 and September 30, 2014. 5,437 and zero stock options were exercised during the three months ended September 30, 2015 and September 30, 2014, respectively. 19,437 and 1,000 stock options were exercised during the nine months ended September 30, 2015 and September 30, 2014, respectively.

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,
 
     2015     2014     2015     2014  

Expected dividend rate

     0.00     0.00     0.00     0.00

Expected volatility

     72.10     82.02     72.14     75.10

Risk-free interest rate

     1.63     1.91     1.63     1.42

Expected life of options (in years)

     6.00        6.00        6.00        4.59   

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 were 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

 

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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, 2015, expense related to this plan was $39,574 and $64,750, respectively. For the three and nine months ended September 30, 2014, expense related to this plan was $19,103 and $83,633, respectively. Under the ESPP, the Company did not issue any shares to employees during each of the three month periods ended September 30, 2015 and September 30, 2014. The Company issued 34,338 shares to employees during the nine months ended September 30, 2015 and 36,434 shares during the nine months ended September 30, 2014. There are 566,195 shares reserved for future issuances under the ESPP as of September 30, 2015.

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. Approximately 75% of each RSU represents a contingent right to receive approximately 0.75 of a share of the Company’s common stock upon vesting and approximately 25% represents a contingent right to receive cash upon vesting 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, 2015, 391,788 shares of common stock remain available for future grant under the RSU Plan. The Company granted 71,225 restricted share units (RSUs) with a fair value of approximately $250,000 and zero RSUs during the three months ended September 30, 2015 and September 30, 2014, respectively. The Company granted 163,587 restricted share units (RSUs) with a fair value of approximately $550,000 and granted 81,695 RSUs with a fair value of $250,000 during the nine months ended September 30, 2015 and September 30, 2014, respectively. 17,341 and 97,848 shares were issued upon conversion of RSUs during the three and nine months ended September 30, 2015. Zero and 110,104 shares were issued upon conversion of RSUs for the three and nine months ended September 30, 2014, 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 these 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.

The remeasurement of the outstanding RSUs together with the grant and conversion of the RSUs resulted in an additional $29,000 and $0.7 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, 2015, respectively. 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.

 

10. CONTINGENCIES, COMMITMENTS, AND GUARANTEES

Pursuant to various license agreements, the Company is obligated to make payments based both on the achievement of certain event or time-based milestones and a percentage of revenues derived from the licensed technology and royalties on net sales. As of September 30, 2015, none of the milestones, as defined in the agreements, were achieved and, as such, the Company is not currently contractually committed to any significant quantifiable payments for licensing fees, royalties or other contingent payments.

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, the Company’s breach of contract or negligence, 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.

 

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11. COLLABORATIVE AND LICENSE AGREEMENTS

Array BioPharma Inc.

On December 11, 2014, the Company entered into a License Agreement (the License Agreement) with Array BioPharma Inc. (Array). Pursuant to the License Agreement, Array granted the Company an exclusive license to develop, manufacture and commercialize ONT-380, an orally active, reversible and selective small-molecule HER2 inhibitor.

Under the terms of the License Agreement, the Company paid Array an upfront fee of $20 million, which was recorded as part of research and development expense upon initiation of the exclusive license agreement. In addition, if the Company sublicenses rights to ONT-380 to a third party, the Company will pay Array a percentage of any sublicense payments it receives, with the percentage varying according to the stage of development of ONT-380 at the time of the sublicense. If the Company is acquired within three years of the effective date of the License Agreement, and ONT-380 has not been sublicensed to another entity prior to such acquisition, then the acquirer will be required to make certain milestone payments of up to $280 million to Array, which are primarily based on potential ONT-380 sales. Array is also entitled to receive up to a double-digit royalty based on net sales of ONT-380.

The License Agreement will expire on a country-by-country basis ten years following the first commercial sale of the product in each respective country, but may be terminated earlier by either party upon material breach of the License Agreement by the other party or the other party’s insolvency, or by the Company on 180 days’ notice to Array. The Company and Array have also agreed to indemnify the other party for certain of their respective warranties and obligations under the License Agreement.

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. There are no payments due under this agreement.

STC.UNM

Effective June 30, 2014, Alpine Biosciences, Inc. (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, a mesoporous silica nanoparticle delivery platform. Oncothyreon acquired Alpine in August 2014. 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 and time-based milestones up to $5 million, including milestone payments of $1.3 million at each year ended December 31, 2016 and December 31, 2017. Royalty obligations under the license agreement include a double-digit royalty on commercial sublicensing income and a low single-digit royalty based on net sales.

Sentinel Oncology Ltd.

In April 2014, the Company entered into an exclusive license and research collaboration agreement with Sentinel Oncology Limited (Sentinel) for the development of novel small molecule Chk1 kinase inhibitors. Under the agreement, the Company makes payments to Sentinel to support their chemistry research. The Company is responsible for pre-clinical and clinical development, manufacture and commercialization of any resulting compounds. Sentinel is eligible to receive success-based development and commercial milestone payments up to approximately $90 million based on development and commercialization events, including the initiation of cGMP toxicology studies, the initiation of certain clinical trials, regulatory approval and first commercial sale. Sentinel is also entitled to a single-digit royalty based on net sales.

Merck KGaA

In May 2001, the Company and Merck KGaA entered into a collaborative arrangement to pursue joint global product research, clinical development and commercialization for two product candidates, including tecemotide (formerly known as L-BLP25 or Stimuvax), a MUC1-based liposomal cancer vaccine. This collaboration agreement was subsequently revised and ultimately replaced in 2008 with a license agreement. Under the 2008 license agreement, (1) the Company licensed to Merck KGaA the exclusive right to develop, commercialize and manufacture tecemotide and the right to sublicense to other persons all rights licensed to Merck KGaA by the Company, (2) the Company transferred certain manufacturing know-how, (3) the Company agreed not to develop any product, other than ONT-10, that is competitive with tecemotide and (4) if the Company intends to license the development or commercialization rights to ONT-10, Merck KGaA will have a right of first negotiation with respect to such rights. In 2014, Merck KGaA announced that it does not intend to continue the clinical development of tecemotide. Merck KGaA is continuing to support certain investigator-sponsored studies of tecemotide.

 

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12. INCOME TAX

Due to projected and actual losses for the years ended December 31, 2015 and 2014, 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, 2015 and September 30, 2014. 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, 2015 and December 31, 2014.

 

13. RELATED PARTY TRANSACTIONS

Certain of the Company’s affiliates participated in the Company’s public underwritten offering in early 2015. In February 2015, the Company closed concurrent but separate underwritten offerings of 13,500,000 shares of its common stock at a price of $1.50 per share, for gross proceeds of $20.3 million, and 1,333 shares of its Series B convertible preferred stock at a price of $1,500 per share for gross proceeds of $2.0 million. In this offering, affiliates of BVF, a holder of more than 5% of the Company’s outstanding common stock, purchased 1,333 shares of the Company’s Series B preferred stock for an aggregate purchase price of $2.0 million. Separate but concurrent with these offerings, affiliates of BVF also exchanged 4,000,000 shares of common stock for 4,000 shares of Series B preferred stock. In addition, in May 2015, the Company entered into an exchange agreement with certain affiliates of BVF to exchange 7,500,000 shares of common stock previously purchased by BVF for 7,500 shares of Series C Convertible Preferred Stock.

 

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 discovery research, 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 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 development, 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.

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 the Mucin 1 peptide antigen (MUC1). We are developing preclinical product candidates in oncology and immuno-oncology using our recently acquired protocell technology. We also collaborate with partners to discover and develop additional product candidates.

We are developing ONT-380 for the treatment of HER2-positive metastatic breast cancer. ONT-380 is a small molecule inhibitor of HER2, also known as ErbB2, a receptor tyrosine kinase that is over-expressed in breast cancer and other cancers, such as gastric and ovarian cancer. Over-expression of HER2 in breast cancer is associated with increased mortality in early stage disease, decreased time to relapse, and increased incidence of metastases. We have an exclusive license agreement with Array BioPharma Inc. (Array) to develop, manufacture and commercialize ONT-380.

 

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We are currently conducting 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). In December 2014, we announced that interim data from these Phase 1b trials indicated preliminary clinical activity and tolerability in heavily pretreated patient populations. In May 2015, we announced updated results from the combination trial with Xeloda and Herceptin, which demonstrated an overall response rate of 52% in 27 evaluable patients. ONT-380 has been well tolerated in both Phase 1b trials. The most common adverse events included diarrhea, nausea, constipation, fatigue, dyspepsia, headache and vomiting. Most adverse events were grade 1 or 2 in severity. Laboratory abnormalities included asymptomatic elevated liver function tests, which were more common in patients also receiving Kadcyla. No grade 3 diarrhea was seen in either trial at the recommended dose of ONT-380; anti-diarrheal prophylaxis was not a study requirement. Based on these results, we announced plans to conduct a blinded, randomized placebo-controlled Phase 2 trial of ONT-380 in combination with Herceptin and Xeloda for the treatment of HER2-positive metastatic breast cancer in patients who have failed both Perjeta ® (pertuzumab) and Kadcyla, which we currently expect to initiate in late 2015.

Also in May 2015 we presented data on the role of ONT-380 in the treatment of HER2-positive breast cancer metastatic to the central nervous system (CNS). Patients were included in this presentation from both of our ongoing Phase 1b trials if their CNS metastases were evaluable using RECIST 1.1 criteria and they had either untreated, asymptomatic lesions having never received radiotherapy or surgery to the CNS (n=8) or new or progressive lesions following prior CNS therapy (n=14). Best CNS response was a complete response in one patient, a partial response in four patients and stable disease in nine patients. No patient had progressive disease as a CNS best response. One patient was not evaluable for response having undergone surgery for a symptomatic CNS lesion; pathologic examination of the resected specimen found no evidence of viable tumor. Two patients were not evaluated because of progressive disease outside of the CNS, while five patients in the series were too early to evaluate. We are continuing to evaluate the treatment of CNS metastases in our ongoing Phase 1b trials and considering options for the potential future development of ONT-380 in this indication. CNS metastases, which occur in up to 50% of women with metastatic HER2-positive breast cancer, are a significant unmet medical need with currently available therapies.

We recently completed evaluation of two dosing cohorts in our Phase 1b trial of ONT-10 in combination with the T-cell agonist antibody varlilumab in collaboration with Celldex. Preliminary data from these two cohorts did not demonstrate sufficient activity to move forward with the program and we do not plan to enroll additional patients in the Phase 1b trial. In addition, we do not currently plan to conduct additional trials with ONT-10.

We are increasingly focused on expanding our pipeline of product candidates through both internal research and collaborative efforts. To support our internal efforts, in August 2014 we 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, either on our own or with partners. We are also collaborating with Sentinel Oncology Ltd., of Cambridge, United Kingdom for the development of novel small molecule Chk1 kinase inhibitors. In addition, we are collaborating with Adimab LLC of Lebanon, New Hampshire for the discovery of novel antibodies against undisclosed immunotherapy targets in oncology.

We have not developed a therapeutic product to the commercial stage. As a result, our revenue has been limited to date and our ability to generate revenue in future periods, if at all, will depend substantially on the progress of ongoing and potential future clinical trials for ONT-380 and other future product candidates, our success in obtaining regulatory approval for ONT-380 and other future product candidates and our ability to establish commercial markets for these drugs.

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 as we advance the development of our preclinical product candidates.

We have incurred substantial losses since our inception. As of September 30, 2015, our accumulated deficit totaled $505.5 million. We incurred a net loss of $23.5 million for the nine months ended September 30, 2015 compared to a net loss of $22.4 million for the same period in 2014. The increase in loss for the nine months ended September 30, 2015 was primarily due to higher research and development expenses primarily due to greater activity related to the development of our product candidates and lower non-cash income from the change in the fair value of our warrant liability, which was $0.1 million for the nine months ended September 30, 2015 compared to $0.5 million for the nine months ended September 30, 2014. 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 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.

 

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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 are 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 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 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 8—Warrants” of the unaudited financial statements included in this report.

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, 2014 filed with the SEC on March 10, 2015. There have been no material changes in our critical accounting policies and judgments since that date.

 

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Results of Operations for the Three and Nine Month Periods Ended September 30, 2015 and September 30, 2014

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,
 
     2015     2014     2015     2014  
     (In millions)     (In millions)  

Operating expenses

   $ (7.2   $ (8.0   $ (23.6   $ (23.0

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

   $ 2.6      $ 1.3      $ 0.1      $ 0.5   

Net loss

   $ (4.6   $ (6.7   $ (23.5   $ (22.4

Operating expenses were lower for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 due to decreases in research and development expenses primarily due to less activity related to the development of our product candidates and decreases in general and administrative expense primarily related to our August 2014 acquisition of Alpine. Operating expenses were higher for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to increases in research and development expenses primarily due to greater activity related to the development of our product candidates. Based on our development plans for our product candidates, we will continue to incur operating losses for the foreseeable future.

We incurred a net loss of $4.6 million for the three months ended September 30, 2015 compared to a net loss of $6.7 million for the three months ended September 30, 2014. The decrease in our net loss was primarily due to higher non-cash income from the change in the fair value of our warrant liability, which was $2.6 million for the three months ended September 30, 2015 compared to $1.3 million for the three months ended September 30, 2014, and decreases in operating expenses of $0.8 million.

We incurred a net loss of $23.5 million for the nine months ended September 30, 2015 compared to a net loss of $22.4 million for the nine months ended September 30, 2014. The increase in our net loss was primarily due to higher research and development expenses of $0.7 million and lower non-cash income from the change in the fair value of our warrant liability, which was $0.1 million for the nine months ended September 30, 2015 compared to $0.5 million for the nine months ended September 30, 2014.

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. For more information, see “Note 8 — Warrants” of the unaudited financial statements included elsewhere in this quarterly report on Form 10-Q.

Research and Development Expense

The following table summarizes the period over period changes in research and development expenses:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015      2014      Change     2015      2014      Change  
     (In millions, except percentages)     (In millions, except percentages)  

Research and development

   $ 5.1       $ 5.7         (10.5 %)    $ 16.6       $ 15.9         4.4

Research and development expenses are related primarily to the development of our discovery research and clinical stage programs. We do not currently utilize a formal time allocation system to capture expenses on a project-by-project basis because we are organized and record expense by functional area.

 

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The following table summarizes our research and development expenses by functional area for the three and nine months ended September 30, 2015 and September 30, 2014:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (In millions)      (In millions)  

External expenses 1

           

Preclinical research expenses

   $ 0.3       $ 0.7       $ 1.3       $ 1.6   

Clinical development expenses

     1.7         1.4         4.7         3.9   

Manufacturing expenses

     0.2         1.0         0.5         2.5   

License Fees / Milestones

     —           —           0.1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external expenses

     2.2         3.1         6.6         8.0   

All other expenses 2

     2.9         2.6         10.0         7.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development

   $ 5.1       $ 5.7       $ 16.6       $ 15.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 External expenses include costs paid to outside parties for activities associated with our preclinical, clinical and manufacturing efforts as well as costs associated with licensing agreements we have entered into with third parties.

 

2 All other expenses include personnel costs, stock compensation expenses, facility and equipment costs and other internal costs associated with our research and development activities.

In the three months ended September 30, 2015, research and development expenses decreased by $0.6 million compared to the three months ended September 30, 2014, due primarily to decreases in contract manufacturing expenses of $0.8 million related to clinical materials and preclinical research expenses of $0.4 million related to laboratory supplies and services. The decreases were partially offset by increases in clinical development expenses of $0.3 million related to contract clinical services associated with the ongoing clinical trials and other expenses of $0.3 million primarily due to increases in headcount.

In the nine months ended September 30, 2015, research and development expenses increased by $0.7 million compared to the nine months ended September 30, 2014, due primarily to a $2.1 million increase in other expenses related mostly to increases in headcount and clinical development expenses of $0.8 million related to contract clinical services associated with the ongoing clinical trials. Those expenses were partially offset by lower manufacturing expenses of $2.0 million related to contract manufacturing services for clinical materials and lower preclinical research expenses of $0.3 million related to laboratory supplies and services.

General and Administrative Expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (In millions)      (In millions)  

General and administrative

   $ 2.1       $ 2.4       $ 7.1       $ 7.1   

The $0.3 million, or 12.5%, decrease in general and administrative expense for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 was primarily due to a $0.4 million decrease in professional fees related to our August 2014 acquisition of Alpine and a $0.1 million decrease in salaries and benefits expenses. The decrease was partially offset by a $0.2 million increase in director compensation that was primarily related to grants and change in fair value of RSUs on conversion and remeasurement. The change in fair value of RSUs was attributable to the change in the price of our common stock.

There was no change in general and administrative expenses for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Change in Fair Value of Warrant Liability

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (In millions)      (In millions)  

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

   $ 2.6       $ 1.3       $ 0.1       $ 0.5   

 

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The $2.6 million and $0.1 million non-cash income for the three and nine months ended September 30, 2015 was due to the change in the estimated fair value of warrant liability during that period. The change in the fair value of the warrant liability was primarily attributable to a decrease in the remaining expected life of the outstanding liability-classified warrants, which expired on October 12, 2015. We determined the fair value of the warrants using the Black-Scholes model. For more information, see “Note 8—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, 2015, our principal sources of liquidity consisted of cash and cash equivalents of $25.3 million and short-term investments of $38.4 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 September 30, 2015. Our long-term investments, if any, 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 $25.3 million as of September 30, 2015 compared to $10.5 million as of December 31, 2014, an increase of $14.8 million, or 141.0%. The increase was the result of net proceeds of $22.4 million from our February 2015 financing and net investment redemption of $14.6 million, partly offset by cash used to fund our operations of $21.6 million and capital equipment purchases of $0.7 million.

As of September 30, 2015, our working capital (defined as current assets less current liabilities) was $60.9 million compared to $54.1 million as of December 31, 2014, an increase of $6.8 million, or 12.6%. The increase in working capital was primarily attributable to an increase in cash and cash equivalents of $14.8 million and a decrease in current liability of $1.2 million, partially offset by a decrease in short-term investments of $8.8 million and a decrease in prepaid and other current assets of $0.4 million.

On February 11, 2015, we closed concurrent but separate underwritten offerings of 13,500,000 shares of our common stock at a price to the public of $1.50 per share, for gross proceeds of approximately $20.3 million and 1,333 shares of our Series B convertible preferred stock at a price to the public of $1,500 per share, for gross proceeds of approximately $2.0 million. Each share of Series B convertible preferred stock is non-voting and convertible into 1,000 shares of the Company’s common stock, 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, we also granted the underwriters a 30-day option to purchase 2,025,000 additional shares of our common stock. On February 18, 2015, we closed a partial exercise of the underwriter’s option to purchase 1,199,660 additional shares of our common stock, at a price to the public of $1.50 per share, less underwriting discounts and commissions, which resulted in net proceeds to us of approximately $1.7 million. Aggregate gross proceeds from the offerings were approximately $24.0 million. Aggregate net proceeds from the offerings, after underwriting discounts and commissions and estimated expenses of $1.6 million, were approximately $22.4 million.

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, 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.

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 business development activities and the sale and issuance of equity or debt securities.

Cash Flows from Operating Activities

Cash used by operating activities totaled $21.6 million for the nine months ended September 30, 2015, compared to $21.0 million for the nine months ended September 30, 2014. The increase was attributable primarily to an increase in research and development expenses.

 

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Cash Flows from Investing Activities

Cash provided by investing activities was $13.9 million for the nine months ended September 30, 2015, compared to $5.6 million for the nine months ended September 30, 2014. This change was attributable primarily to higher redemption of investments, net of purchases, of $14.6 million for the nine months ended September 30, 2015 as compared to $5.8 million for the nine months ended September 30, 2014, partly offset by an increase in purchases of property and equipment of $0.4 million during the nine months ended September 30, 2015 compared to the same period in 2014.

Cash Flows from Financing Activities

Cash provided by financing activities was $22.5 million during the nine months ended September 30, 2015, which primarily consisted of net proceeds of approximately $22.4 million from our February 2015 concurrent but separate underwritten common stock and Series B convertible preferred stock offerings. Net proceeds from our common stock offering were $20.5 million and net proceeds from our Series B convertible preferred stock offering were $1.9 million.

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.

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, 2015:

 

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

Operating leases

   $ 2,095       $ 650       $ 1,312       $ 133       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 May 2018 for certain office equipment.

In addition to the obligations described above, under certain licensing arrangements for technologies incorporated into our product candidates, we are contractually committed to payments for licensing fees and royalties, as well as contingent payments if certain milestones (as defined in the agreements) have been achieved. The achievement of milestones is subject to numerous factors, and we cannot predict when or if such milestones will be achieved. For additional detail concerning the financial terms of our licensing arrangements, please refer to “Note 11 — Collaborative and License Agreements” of the unaudited financial statements included elsewhere in this quarterly report on Form 10-Q.

As of September 30, 2015, none of the milestones, as defined in the agreements, were achieved and, as such, we are not currently contractually committed to any significant quantifiable payments for licensing fees, royalties or other contingent payments.

We also enter into contracts in the ordinary course of our business such as clinical research organization service contracts and manufacturing service contracts. These contracts are fee for service contracts that are terminable at will by us, and do not provide for fixed payments to be made at specific intervals. Payments for these contracts are expensed in the period that the service is incurred.

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 the filing date of this report 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.

 

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Recent Accounting Pronouncements

In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606)—Deferral of the Effective Date, which defers by one year the effective date of ASU 2014-09, Revenue from Contracts with Customers. For public entities, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. We are currently evaluating any impact this standard may have on our consolidated financial position and results of operations.

In April 2015, FASB issued ASU 2015-05, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to clarify the accounting treatment for cloud computing arrangements. The new standard provides guidance on how customers should evaluate whether a cloud computing arrangement contains a software license that should be accounted for separately. Customers will need to apply the same criteria as vendors to determine whether an arrangement contains a software license or is solely a service contract. This standard is effective for public entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. An entity can elect to adopt the standard either prospectively for all arrangements entered into or materially modified after the effective date, or retrospectively. Early adoption is permitted for all entities. We are currently evaluating any impact this standard may have on our consolidated financial position and 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 $63.7 million as of September 30, 2015 and December 31, 2014. 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, 2015 and sustained throughout the period ended September 30, 2015, would result in a decline in investment income of approximately $48,000 for that 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, 2015, 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, 2015 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, in September 2014 Merck KGaA announced that its biopharmaceutical division Merck Serono decided to discontinue the clinical development program of tecemotide as a monotherapy in Stage III NSCLC, including the Phase III START2 and INSPIRE studies and preliminary data from our Phase 1b trial of ONT-10 in combination with the T-cell agonist antibody varlilumab did not demonstrate sufficient activity to move forward with the program and we do not plan to enroll additional patients in the Phase 1b trial. In addition, we do not currently plan to conduct additional trials with ONT-10. The ongoing or future trials for ONT-380 may fail to demonstrate that this 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.

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 breast cancer or central nervous system disease or may indicate safety profile concerns not indicated by early clinical data. In December 2014, we announced that interim data from our ongoing Phase 1b trials indicated preliminary clinical activity and tolerability in a heavily pretreated patient population. Updates to some of these data were announced in May 2015 and provided further preliminary evidence of clinical activity and tolerability, including in the central nervous system. However, these trials are not yet complete, and even if final 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 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 and our business is highly dependent on the success of ONT-380.

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. Research programs to identify new product candidates require substantial technical, financial and human resources. 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 or ONT-380 fails, our pipeline of products in development could be reduced or eliminated. This would cause our stock price to decline and would 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 may not be successful in our efforts to use our protocell platform to develop a pipeline of product candidates or create partnership opportunities.

We intend to use our protocell platform to discover and develop our own product candidates. Our protocell platform is at an early stage of development and has not yet, and may never, lead to the development of product candidates. Even if we are successful in developing new product candidates, such product candidates may not be suitable for clinical development, including as a result of their harmful side-effects, limited efficacy or other characteristics that make it unlikely such product candidates will receive regulatory approval or achieve commercial success.

We also intend to enter into strategic partnerships with respect to our protocell platform, including business development transactions that license certain rights to our protocell platform to third parties and research collaborations. We may not be successful in entering into any capital-generating transactions with respect to this technology. Establishing strategic partnerships is difficult and time-consuming. Potential partners may reject partnerships based upon their assessment of our technology or product offerings or our financial, regulatory or intellectual property position. If we fail to establish a sufficient number of partners on acceptable terms, we may not be able to commercialize our products or generate sufficient revenue to fund further research and development efforts. Even if we establish new partnerships, these relationships may never result in the successful development or commercialization of any 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, 2015, our accumulated deficit was approximately $505.5 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 significant additional development efforts prior to commercial sale, including extensive clinical evaluation and approval by the U.S. Food and Drug Administration (FDA) and non-U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the risk that early stage data will not be replicable and 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.

 

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

We are currently conducting two Phase 1b trials, and plan to initiate a Phase 2 trial, for ONT-380. There can be no assurance that these and future 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.

Further, we 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 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 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 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.

We are responsible for the manufacture of ONT-380, which we outsource to third parties. Manufacturing drug product can be a complex process involving multiple steps and multiple manufacturers. If our third-party manufacturers cease or interrupt production, if our third-party manufacturers and other service providers fail to supply materials, products or services for any reason, or if materials or products are lost in transit between manufacturers, such interruption could substantially delay progress on our programs, with the potential for additional costs and a material adverse effect on our business, financial condition and results of operations.

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 will need to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for a particular product candidate could require us 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, and plan to initiate a Phase 2 clinical trial, for ONT-380. Each of our product candidates must undergo extensive pre-clinical studies and clinical trials as a condition to regulatory approval. Pre-clinical studies and clinical trials are expensive and take many years to complete. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:

 

    safety issues or side effects;

 

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

 

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    poor effectiveness of product candidates during clinical trials;

 

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

 

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

 

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

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

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.

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.

 

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

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

 

    warning letters;

 

    fines;

 

    product recalls;

 

    withdrawal of regulatory approval;

 

    operating restrictions;

 

    disgorgement of profits;

 

    injunctions; and

 

    criminal prosecution.

Regulatory agencies may require us 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. 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 December 2014, we entered into a license agreement with Array for exclusive rights to develop and commercialize 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 license agreement 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;

 

    potential adverse consequences if the acquired assets are worth less than we anticipated;

 

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

 

    potential disputes, including litigation, regarding contingent consideration for the acquired assets;

 

    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 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;

 

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

 

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    under our license agreement with Array, Array is 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 later be invalidated or 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, protocell platform 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.

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. Much of our technology, including ONT-380, our protocell technology, our Chk1 kinase inhibitors and the MUC1 antigen, originated from third-party sources.

These third-party sources include academic, government and other research laboratories, as well as the public domain. If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or product candidates conflict with patent rights of others, third parties could bring legal actions against us, in Europe, the United States and elsewhere, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending applications. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent. As a result, third parties may be able to obtain patents with claims relating to our product candidates or technology, 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.

 

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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.

Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare, including drugs. In the United States, there have been, and we expect that there will continue to be, federal and state proposals to implement similar governmental control. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. For example, 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 changed the way healthcare is financed by both governmental and private insurers and significantly affected 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.

 

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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, Novartis 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.

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.

 

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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. We may not be able to enter into such arrangements on commercially acceptable terms, if at all. Factors that may inhibit our efforts to commercialize our product candidates without entering into arrangements with third parties include:

 

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

 

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

 

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

 

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

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

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

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

Furthermore, we have not entered into non-competition agreements with all of our key employees. In addition, we do not maintain “key person” life insurance on any of our 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 complex environmental legislation that increases both our costs and the risk of noncompliance.

Our business involves the use of hazardous material, which requires 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 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 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.

 

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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. 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.

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 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 February 2015 public offering, we sold an aggregate of 14,699,660 shares of our common stock and 1,333 shares of our Series B convertible preferred stock.

Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. 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

 

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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.

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 and February 2015 public offerings, we issued 10,000 shares of Series A convertible preferred stock and 1,333 shares of Series B convertible preferred stock, respectively, each share of which is convertible into 1,000 shares of the Company’s common stock, subject to certain ownership restrictions. Concurrently but separate from the February 2015 offering, we entered into an exchange agreement with certain affiliates of Biotechnology Value Fund (BVF) to exchange 4,000,000 shares of common stock previously purchased by BVF for 4,000 shares of Series B Convertible Preferred Stock. In May 2015, we entered into an exchange agreement with certain affiliates of BVF to exchange 7,500,000 shares of common stock previously purchased by BVF for 7,500 shares of Series C Convertible Preferred Stock. Shares of our Series A, Series B and Series C preferred stock are convertible into common stock on a 1-for-1,000 basis. If the holders of such shares of preferred stock convert their shares into common stock, existing holders of our common stock will experience dilution.

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, 2015, 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 has broad discretion over the use of proceeds from the sale of shares of our common and preferred stock and may not use such proceeds in ways that increase the value of our stock price.

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. In our February 2015 public offering, we sold 14,699,660 shares of common stock and 1,333 shares of Series B convertible preferred stock for net proceeds of approximately $22.4 million. We 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

10.1*    Second Amendment to Patent License Agreement, effective September 15, 2015, between Oncothyreon Inc. and STC.UNM.
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

 

* 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.

 

# 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.

 

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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 5, 2015  

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

  Robert L. Kirkman, M.D.
 

President, CEO and Director

(Principal Executive Officer)

 

Date: November 5, 2015  

/s/ Julia M. Eastland

  Julia M. Eastland
 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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INDEX OF EXHIBITS

 

Exhibit
Number

  

Description

10.1*    Second Amendment to Patent License Agreement, effective September 15, 2015, between Oncothyreon Inc. and STC.UNM.
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

 

* 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.

 

# 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.

 

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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.

SECOND AMENDMENT TO PATENT LICENSE AGREEMENT

between

STC.UNM and ONCOTHYREON INC.

THIS SECOND AMENDMENT TO PATENT LICENSE AGREEMENT (“Second Amendment”) is made effective as of September 15, 2015 (the “Second Amendment Effective Date”) by and between STC.UNM (hereinafter referred to as “STC”), a New Mexico nonprofit corporation, with its principal office at 801 University Boulevard SE, Suite 101, Albuquerque, New Mexico 87106, and ONCOTHYREON INC. (hereinafter referred to as “Oncothyreon” or “LICENSEE”), a Delaware corporation with a principal office at 2601 Fourth Avenue, Suite 500, Seattle, WA 98121. As of the Second Amendment Effective Date, in consideration of the mutual covenants and promises herein contained, the parties agree as follows:

1. Background of Second Amendment . STC and Oncothyreon are parties to a Patent License Agreement (STC Ref. No. 2013-0170) effective June 30, 2014, as amended on February 2, 2015 (the “License Agreement”). Oncothyreon wishes to engage Dr. C. Jeffrey Brinker (“Principal Investigator”) under a separate consulting agreement to perform certain work related to protocell technology (“Research”). Principal Investigator is an employee of both the University of New Mexico (“UNM”) and Sandia corporation (“Sandia”). STC, UNM and Sandia are parties to a Memorandum of Understanding on Intellectual Property effective August 31, 2006, as amended by the First Amendment effective August 31, 2011 (collectively, “MOU”) and a Letter Agreement effective September 4, 2015 (“Letter Agreement”). In consideration for Oncothyreon funding the Research, the parties wish for Oncothyreon to have the option to obtain an exclusive license to certain patents and patent applications arising from the Research, as set forth in more detail below. Capitalized terms in this Second Amendment, unless defined herein, shall have the meanings ascribed to such terms in the License Agreement.

2. Amendment of Section 2.10 . Section 2.10 of the License Agreement is hereby amended to read entirely as follows:

The parties agree that all patents or patent applications on any inventions or discoveries covering or related to protocells that are: (a) owned by STC, and (1) name the same Inventors as any of the Licensed Patents and (2) are developed pursuant to the Sponsored Research Agreement by and between the University and LICENSEE, dated as of July 14, 2014 as amended (the “Sponsored Research Agreement”); or, (b) name the same Inventors as any of the Licensed Patents (including, for clarity, Principal Investigator, whether as the sole inventor or as a co-inventor with other Inventors of the Licensed Patents or with LICENSEE’S employees or contractors) and cover subject matter conceived and/or reduced to practice by Principal Investigator in performance of the Research (whether solely by Principal Investigator or jointly with other Inventors of the Licensed Patents or LICENSEE’s employees or contractors), to the extent STC is named as, or otherwise becomes, the commercialization manager pursuant to the MOU and/or the Letter Agreement for such patents or patent applications referenced in this subsection (b), 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,

 

STC & Oncothyreon Second Amendment to Patent License – STC Agreement Ref. No. 2013-0170

     Page  1  of  2   

[*]

*Confidential Treatment Requested.


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. The provisions of subsection (a) above shall apply notwithstanding anything to the contrary in Section 7(c)(ii) of the Sponsored Research Agreement. 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) or (b) above, the parties agree to discuss in good faith adding such patents or patent applications as Licensed Patents under this Agreement. For clarity, nothing in this Agreement shall be construed to limit LICENSEE’s joint ownership rights in and to any invention conceived or reduced to practice by Principal Investigator jointly with LICENSEE’s employees or contractors, or LICENSEE’s ability to claim or exploit, without any duty to account, any such joint ownership rights.

3. Ratification . Except as amended hereby, all other terms and conditions of the License Agreement are ratified and confirmed and remain in full force and effect.

IN WITNESS WHEREOF , each of the parties has caused this Second Amendment to be executed by its duly authorized representative on the respective dates entered below, effective as of the Second Amendment Effective Date.

 

LICENSOR:

STC.UNM

     

LICENSEE

ONCOTHYREON INC.

By:   /s/ Elizabeth J. Kuuttila                     By:   /s/ Scott Peterson                
  Elizabeth J. Kuuttila     Printed Name: Dr. Scott Peterson
  President & CEO     Title: Chief Scientific Officer
Date: 9/17/15     Date: 17 Sept. 2015

*Confidential Treatment Requested.

 

2

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 5, 2015  

/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 5, 2015  

/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, 2015, 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 5, 2015  

/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, 2015, 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 5, 2015   

/s/ Julia M. Eastland

   Julia M. Eastland
  

Chief Financial Officer, Secretary and Vice President of

Corporate Development

   (Principal Financial and Accounting Officer)