You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and related notes and other financial information appearing elsewhere in this
Annual Report on Form 10-K. Some of the information contained in this discussion
and analysis or set forth elsewhere in this Annual Report on Form 10-K,
including information with respect to our plans and strategy for our business,
includes forward-looking statements that involve risks and uncertainties. As a
result of many factors, including those factors set forth in "Part I, Item 1A -
Risk Factors" section of this Annual Report on Form 10-K, our actual results
could differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical stage biopharmaceutical company, developing our portfolio of
proprietary Humaneered® anti-inflammatory immunology and immuno-oncology
monoclonal antibodies. Our proprietary, patented Humaneered technology platform
is a method for converting existing antibodies (typically murine) into
engineered, high-affinity human antibodies designed for therapeutic use,
particularly with acute and chronic conditions. We have developed or in-licensed
targets or research antibodies, typically from academic institutions, and then
applied our Humaneered technology to optimize them. Our lead product candidate,
lenzilumab, and our other product candidate, ifabotuzumab ("iFab"), are
Humaneered monoclonal antibodies. Our Humaneered antibodies are closer to human
antibodies than chimeric or conventionally humanized antibodies and have a high
affinity for their target. In addition, we believe our Humaneered antibodies
offer further important advantages, such as high potency, a slow off-rate and a
lower likelihood to induce an inappropriate immune response or infusion related
reaction.
Pursuant to our previously reported strategic realignment plan, we are
developing our lead product candidate, lenzilumab ("LENZ®"). Lenzilumab is a
monoclonal antibody that has been demonstrated to neutralize human GM-CSF, a
cytokine that we believe leads to the overproduction of monocytes which are
responsible for chronic myelomonocytic leukemia ("CMML"), a rare blood cancer
and is of critical importance in acute graft versus host disease ("aGvHD")
associated with bone marrow transplants. Our strategic realignment plans include
accelerating the development of LENZ in CMML, for which the PREACH-M study is
already underway, and continuing our plans for the RATinG study in aGvHD, as
these studies are majority funded by our partners. A leading network of centers,
The Mayo Clinics, is currently progressing with an investigator-initiated trial
("IIT") of lenzilumab in combination with CAR-T therapies. We are also
developing iFab, an EpAh-3 targeted monoclonal antibody, currently in Phase 1
development, as part of an antibody drug conjugate ("ADC"), for certain solid
tumors.
Our Pipeline
In addition to our lead product candidate, lenzilumab, our development portfolio
features our other two product candidates, ifabotuzumab and HGEN005, all of
which are Humaneered monoclonal antibodies. Please refer to "Item 1.
Business-Our Pipeline" for a detailed discussion of our development programs.
2022 Developments
In July 2022, topline results from the Accelerating COVID-19 Therapeutic
Interventions and Vaccines-5 ("ACTIV-5") and Big Effect Trial, in the "B" arm of
the trial ("BET-B"), referred to as the ACTIV-5/BET-B trial, were released. The
study was sponsored and funded by the National Institutes of Health ("NIH") and
evaluated lenzilumab in combination with remdesivir, compared to placebo and
remdesivir, in hospitalized COVID-19 patients. The topline results show the
trial did not achieve statistical significance on the primary endpoint, although
the topline results did indicate that lenzilumab demonstrated a positive trend
in mortality. A global group of leading institutions and research networks has
indicated interest in including lenzilumab in their large-scale, multinational
studies of COVID-19, pending an uptick in ICU admissions. Tocilizumab and
baricitinib demonstrated mortality benefit following inclusion in REMAP-CAP and
RECOVERY having failed to do so in smaller studies.
We are executing the strategic realignment plan to deemphasize the deployment of
certain resources for the development of lenzilumab for COVID-19 and currently
do not plan to pursue regulatory pathways unless further data from ACTIV-5/BET-B
or a future large-scale study merit such an approach. The Named Patient program
in select European Countries has been terminated. With the exception of one
lenzilumab batch in process, we have discontinued the manufacturing of
lenzilumab and are consolidating the remaining inventory of lenzilumab bulk drug
substance and drug product in a central location for potential future use.
Through partners in Australia, we initiated a study of lenzilumab in cancer
patients with COVID-19. The trial, known as C-SMART was a multi-center, four arm
trial, which aimed to evaluate several different immune modulating drugs for
prevention and treatment of COVID-19 in the cancer population. The
investigational product is in the process of being destroyed, due to COVID-19
being deprioritized by us and the Australian Government.
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In May 2022, our partners in South Korea dosed the final healthy volunteer of
the 20 required for their Phase 1 bridging study. This study was conducted to
explore the safety, tolerability, and pharmacokinetic ("PK") properties of
lenzilumab and compare it between Koreans and Caucasians. The clinical study
report has been completed and the degree of exposure was observed to be higher
in Koreans than in Caucasians. Lenzilumab was safe and well tolerated in both
Koreans and Caucasians.
PREACH-M Study
We are currently evaluating lenzilumab for the treatment of high-risk CMML in
patients with NRAS/ KRAS/CBL genetic mutations in an ongoing Phase 2 study,
known as "PREcision Approach to Chronic Myelomonocytic Leukemia" or "PREACH-M."
The PREACH-M study is being conducted in partnership with the South Australian
Health & Medical Research Institute ("SAHMRI") and the University of Adelaide.
The study is currently enrolling at sites in Australia with additional
enrollment anticipated at sites in New Zealand. As of March 16, 2023, 13
lenzilumab-treated patients have been enrolled in the study of a total of 15
patients and followed for multiple cycles, with what are believed to be
encouraging results. An abstract for the PREACH-M trial has been accepted to the
American Association for Cancer Research with a poster presentation scheduled
for April 17, 2023. We are providing lenzilumab for this study and the majority
of the study costs are being borne by the partner and funded by a grant from the
Medical Research Futures Fund, a research fund set up by the Australian
Government.
RATinG Study
We are currently evaluating lenzilumab for the early treatment of aGvHD in
patients undergoing bone marrow transplants in a Phase 2/3 potentially
registrational trial, known as the "RATinG" study. The study is being conducted
by the IMPACT Partnership, a collection of 22 stem cell transplant centers
located in the United Kingdom. We anticipate the first patient dosing in this
study to occur in the second quarter of 2023 . We are providing lenzilumab for
the study including the cost of import, labeling and distribution of the study
drug, and support certain laboratory tests related to the study, but the
majority of the study costs will be borne by the IMPACT Partnership. The goal of
the study is to determine the efficacy and safety of lenzilumab in reducing
non-relapse mortality at six months.
Market Opportunity in CMML and Related Hematological Cancers
Clonal cytogenic abnormalities are commonly seen in CMML patients. RAS
mutations, which make leukemic cells hyperresponsive to GM-CSF, are seen in
approximately 50% of CMML patients and are the anticipated target patient
population for lenzilumab. The incidence of new CMML patients in the US, UK, and
Australia is about 1,700 patients annually. RAS mutations, which may drive
GM-CSF hyperresponsiveness, are also seen in additional myeloid hematological
malignancies including juvenile myelomonocytic leukemia ("JMML"),
myelodysplastic syndromes ("MDS") and acute myeloid leukemia ("AML"), totaling
approximately 4,000 new cases annually in the US. We believe success with CMML
may provide proof of principle for targeting RAS pathway mutations in myeloid
leukemias with lenzilumab and allow us to develop, and if successful,
commercialize lenzilumab ourselves or through a partner, in these additional
patient populations. About 15 to 20% of CMML cases progress to AML. According to
the American Cancer Society, approximately 1,100 individuals in the US are newly
diagnosed annually with CMML, with the majority of these new patients being age
60 or older. These patients are typically unsuitable for stem cell transplants.
For FDA approval, a confirmatory study in the US may be required and we plan to
seek regulatory guidance from the agency with interim results from PREACH-M. As
a treatment for a rare disease, lenzilumab may qualify for certain regulatory
and commercial benefits that may accelerate development and approval. Pricing
and reimbursement for rare diseases are traditionally higher than treatments for
more common diseases.
We are assessing regulatory pathways that may enable early results to support a
regulatory submission and potential approval by the Therapeutic Goods
Administration in Australia, which could be expanded through Project Orbis, an
international regulatory agency collaboration, to the United States and the
United Kingdom.
There have been no new therapeutic agents for patients with high-risk CMML in 30
years and independent publications have demonstrated the key role of GM-CSF and
RAS pathway mutations in this and other cancers, including JMML, MDS,
myeloproliferative neoplasms, and AML.
A clinical protocol has been developed for a study in JMML, an ultra-orphan and
devastating condition affecting young children.
Review of Strategic Options and Alternatives
As previously reported, during 2022 we engaged SC&H Capital, an affiliate of
SC&H Group, ("SC&H") to advise us on exploration of strategic options. SC&H is
an investment banking and advisory firm providing merger and acquisition (M&A),
financial restructuring and related business advisory solutions. SC&H has acted
as our advisor as we explore strategic options to maximize value around
lenzilumab and ifabotuzumab. We also have considered and pursued a full range of
options to raise additional capital and to address, satisfy, defer or
restructure our accounts payable and accrued liabilities to manufacturing and
other parties.
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We have executed a non-binding letter of intent and are engaged in exclusive
negotiations relating to a proposed business combination with a privately held
biopharmaceutical company (the "Partner Company"). The proposed terms for the
business combination contemplate a tax-free stock-for-stock merger, as a result
of which we would issue shares of our capital stock to stockholders of the
Partner Company which are expected to represent roughly two times the number of
our currently outstanding shares of common stock.
We cannot assure you that we and the Partner Company will enter into a
definitive agreement for the proposed transaction, and the final form and terms
of any such transaction may be materially different from the terms described
above. Our ability to enter into a definitive agreement is subject to
conditions, including that we have received binding commitments for investment
of additional capital that will be necessary to fund the operations of the
combined company going forward and enable the combined company to maintain a
listing of its common stock on the Nasdaq Capital Market or another national
securities exchange, as well as customary matters such as approval of the terms
of the definitive agreement by the Partner Company's board of directors and
stockholders. Certain of these conditions will be out of our control.
Accordingly, we cannot provide any assurance that we will effect the proposed
business combination or related financing transactions. If we are unable to
complete the proposed transactions or identify and complete another strategic or
financing transaction in the first half of 2023, we may elect or be required to
pursue a reorganization or seek other protection under the federal bankruptcy
code. See Part I, Item 1A, "Risk Factors."
Nasdaq Listing Deficiencies
As previously reported, we have received two notices from The Nasdaq Stock
Market, LLC ("Nasdaq") regarding our failures to satisfy the $1 minimum bid
price and $35 million total market value of listed securities standards for
continued listing. As disclosed, we had 180 days from the date of the applicable
notice to cure each deficiency. On February 21, 2023, we received a letter from
the Listing Qualifications Department (the "Staff") of Nasdaq notifying us that
we had not regained compliance with the minimum bid price requirement as of
February 20, 2023 and that we were not eligible for a second 180-day extension
period. The letter specifically noted that we do not comply with the
stockholders' equity initial listing requirement for The Nasdaq Capital Market.
The total market value of our listed securities also remains below the $35
million requirement for continued listing on The Nasdaq Capital Market. On March
2, 2023, the Nasdaq Hearings Panel (the "Panel") granted our request for a
hearing to appeal the determination from the Staff. The hearing before the Panel
has been scheduled for April 6, 2023. In addition, our common stock may be
subject to immediate delisting from the Nasdaq Capital Market if our common
stock has a closing bid price of $0.10 or less for any ten consecutive trading
days. See Part I, Item 1A, "Risk Factors."
Critical Accounting Policies and Critical Accounting Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the US,
or GAAP. The preparation of our financial statements in conformity with GAAP
requires our management to make estimates and assumptions that affect the
amounts and disclosures reported in the Consolidated Financial Statements and
accompanying notes. Actual results could differ materially from those estimates.
Our management believes judgment is involved in determining revenue recognition,
the fair value-based measurement of stock-based compensation and accruals. Our
management evaluates estimates and assumptions as facts and circumstances
dictate. As future events and their effects cannot be determined with precision,
actual results could differ from these estimates and assumptions, and those
differences could be material to the Consolidated Financial Statements. If our
assumptions change, we may need to revise our estimates, or take other
corrective actions, either of which may also have a material adverse effect on
our statements of operations, liquidity and financial condition.
While our significant accounting policies are described in more detail in Note 2
to our Consolidated Financial Statements included in Part II, Item 8, "Financial
Statements and Supplementary Data" of this Annual Report on Form 10-K, we
believe the following accounting policies to be critical to the judgments and
estimates used in the preparation of our financial statements.
Accrued Research and Development Expenses
As part of the process of preparing our Consolidated Financial Statements, we
are required to estimate our accrued research and development expenses. This
process involves reviewing contracts and purchase orders, reviewing the terms of
our license agreements, communicating with our applicable personnel to identify
services that have been performed on our behalf, and estimating the level of
service performed and the associated cost incurred for the service when we have
not yet been invoiced or otherwise notified of actual cost. Some of our service
providers invoice us monthly in arrears for services performed. We make
estimates of our accrued expenses as of each balance sheet date based on facts
and circumstances known to us at that time. Examples of estimated accrued
research and development expenses include fees to:
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· contract research organizations and other service providers in connection with
clinical studies;
· contract manufacturers in connection with the production of lenzilumab,
including cancellation and termination charges and charges for product that
does not meet specifications; and
· vendors in connection with preclinical development activities.
We base our expenses related to clinical studies on our estimates of the
services received and efforts expended pursuant to contracts with multiple
research institutions and contract research organizations that conduct and
manage clinical studies on our behalf. The financial terms of these agreements
are subject to negotiation, vary from contract to contract, and may result in
uneven payment flows and expense recognition. Payments under some of these
contracts depend on factors such as the successful enrollment of patients and
the completion of clinical trial milestones. In accruing these costs, we
estimate the time period over which services will be performed for which we have
not been invoiced and the level of effort to be expended in each period. If the
actual timing of the performance of services or the level of effort varies from
our estimate, we adjust the accrual accordingly. Our understanding of the status
and timing of services performed relative to the actual status and timing of
services performed may vary and may result in our reporting changes in estimates
in any particular period.
Stock-Based Compensation
Our stock-based compensation expense for stock options is estimated at the grant
date based on the award's fair value as calculated by the Black-Scholes option
pricing model and is recognized as expense over the requisite service period.
The Black-Scholes option pricing model requires various highly judgmental
assumptions including expected volatility and expected term. The expected
volatility is based on the combined historical stock volatilities of our own
common stock and that of several of our publicly listed peers over a period
equal to the expected terms of the options as we do not have a sufficient
trading history to rely solely on the volatility of our own common stock. To
estimate the expected term, we have opted to use the simplified method, which is
the use of the midpoint of the vesting term and the contractual term. If any of
the assumptions used in the Black-Scholes option pricing model changes
significantly, stock-based compensation expense may differ materially in the
future from that recorded in the current period. In addition, we are required to
estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest. We estimate the forfeiture rate based on historical
experience and our expectations regarding future pre-vesting termination
behavior of employees. To the extent our actual forfeiture rate is different
from our estimate, stock-based compensation expense is adjusted accordingly.
Revenue Recognition
Our revenue to date has been generated primarily through license agreements and
research and development collaboration agreements. We have recorded revenue from
licensing of $2.5 million and $3.6 million for the years ending December 31,
2022 and 2021, respectively. We recognize revenue in accordance with Accounting
Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic
606)" ("ASC 606"). The core principle of ASC 606 is that an entity should
recognize revenue to depict the transfer of promised goods and/or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods and/or services. To determine
the appropriate amount of revenue to be recognized for arrangements that we
determine are within the scope of ASC 606, we perform the following steps: (i)
identify the contract(s) with the customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction price, (iv)
allocate the transaction price to the performance obligations in the contract
and (v) recognize revenue when (or as) each performance obligation is satisfied.
Revenue under technology licenses and collaborative agreements typically
consists of nonrefundable and/or guaranteed license fees, collaborative research
funding, and various milestone and future product royalty or profit-sharing
payments.
The fair value of deliverables under the arrangement may be derived using a best
estimate of selling price if vendor specific objective evidence and third-party
evidence is not available. Deliverables under the arrangement will be separate
units of accounting if a delivered item has value to the customer on a
standalone basis and if the arrangement includes a general right of return for
the delivered item, delivery or performance of the undelivered item is
considered probable and substantially in our control.
We recognize upfront license payments as revenue upon delivery of the license
only if the license has standalone value from any undelivered performance
obligations and that value can be determined. The undelivered performance
obligations typically include manufacturing or development services or research
and/or steering committee services. If the fair value of the undelivered
performance obligations can be determined, then these obligations would be
accounted for separately. If the license is not considered to have standalone
value, then the license and other undelivered performance obligations would be
accounted for as a single unit of accounting. In this case, the license payments
and payments for performance obligations are recognized as revenue over the
estimated period of when the performance obligations are performed or deferred
indefinitely until the undelivered performance obligation is determined.
Whenever we determine that an arrangement should be accounted for as a single
unit of accounting, we determine the period over which the performance
obligations will be performed, and revenue will be recognized. Revenue is
recognized using a proportional performance or straight-line method. The
proportional performance method is used when the level of effort required to
complete performance obligations under an arrangement can be reasonably
estimated. The amount of revenue recognized under the proportional performance
method is determined by multiplying the total payments under the contract,
excluding royalties and payments contingent upon achievement of milestones, by
the ratio of the level of effort performed to date to the estimated total level
of effort required to complete performance obligations under the arrangement. If
we cannot reasonably estimate the level of effort to complete performance
obligations under an arrangement, we recognize revenue under the arrangement on
a straight-line basis over the period we are expected to complete our
performance obligations. Significant management judgment is required in
determining the level of effort required under an arrangement and the period
over which we are expected to complete our performance obligations under an
arrangement.
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Our collaboration agreements typically entitle us to additional payments upon
the achievement of development, regulatory and sales performance-based
milestones. If the achievement of a milestone is considered probable at the
inception of the collaboration, the related milestone payment is included with
other collaboration consideration, such as upfront fees and research funding, in
our revenue calculation. Typically, these milestones are not considered probable
at the inception of the collaboration. As such, milestones will typically be
recognized in one of two ways depending on the timing of when the milestone is
achieved. If the milestone is achieved during the performance period, then we
will only recognize revenue to the extent of the proportional performance
achieved at that date, or the proportion of the straight-line basis achieved at
that date, and the remainder will be recorded as deferred revenue to be
amortized over the remaining performance period. If the milestone is achieved
after the performance period has completed and all performance obligations have
been delivered, then we will recognize the milestone payment as revenue in its
entirety in the period the milestone was achieved.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially
impact our financial position and results of operations is set forth in Note 2
to our Consolidated Financial Statements included in this Annual Report on Form
10-K. We do not believe that the impact of recently issued standards that are
not yet effective will have a material impact on our financial position or
results of operations upon adoption.
Results of Operations
At December 31, 2022, we had an accumulated deficit of $681.8 million. Since
inception, we have recognized a nominal amount of revenue from payments for
license or collaboration fees. Our product candidates may never be successfully
developed or commercialized and we may therefore never realize revenue from any
product sales. Accordingly, we expect to continue to incur substantial losses
from operations for the foreseeable future, and there can be no assurance that
we will ever generate significant revenue or profits. Our ability to continue as
a going concern depends on our ability to attain a significant amount of
additional financing, as more fully described under "-Liquidity and Capital
Resources" below and in "Risk Factors" in Item 1A of Part I above.
Comparison of Years Ended December 31, 2022 and 2021
The following table summarizes the results of our operations for the periods
indicated (amounts in thousands, except percentages):
Year Ended December 31, Increase/ (Decrease)
2022 2021 Amount %
Revenue:
License revenue $ 2,514 $ 3,595 $ (1,081 ) (30 )
Total revenue 2,514 3,595 (1,081 ) (30 )
Operating expenses:
Research and development 55,210 213,115 (157,905 ) (74 )
General and administrative 15,608 23,252 (7,644 ) (33 )
Total operating expenses 70,818 236,367 (165,549 ) (70 )
Loss from operations (68,304 ) (232,772 ) (164,468 ) (71)
Other income (expense):
Interest expense (2,918 ) (2,264 ) 654 29
Other income (expense), net 492 (1,613 ) 2,105 131
Net loss $ (70,730 ) $ (236,649 ) $ (165,919 ) (70 )
Revenue
Revenue in the fiscal years ended December 31, 2022 and 2021 represents license
revenue under the license agreement (the "South Korea Agreement") with KPM and
its affiliate, Telcon, (together with KPM, the "Licensee"), described in more
detail in Note 3 to the Consolidated Financial Statements included in this
Annual Report on Form 10-K. License revenue decreased $1.1 million in 2022 from
$3.6 million for the year ended December 31, 2021 to $2.5 million for the year
ended December 31, 2022. Through June 30, 2022, revenue was being amortized
through March 31, 2023, the expected end of the performance period. During the
quarter ended September 30, 2022, the performance period was reevaluated, and
the estimated end date of the performance period was adjusted to December 31,
2025. The change in estimate resulted in a decrease of $0.8 million in quarterly
license revenue as compared to amounts that would have been recorded under the
previous timeline. Prospective periods will reflect the impact of this change in
estimate.
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Research and Development Expenses
Conducting research and development is central to our business model. We expense
both internal and external research and development costs as incurred. We track
external research and development costs incurred by project for each of our
clinical programs. Our external research and development costs consist primarily
of:
? expenses incurred under agreements with contract research organizations,
investigative sites, and consultants that conduct our clinical trials and our
pre-clinical activities;
? the cost of acquiring and manufacturing clinical trial, pre-commercial and
other materials, the cost to transfer the manufacturing process for bulk drug
substance and fill/finish production, development of and periodic performance
of a variety of tests and assays for stability, release, comparability and
product characterization, costs associated with quality management, the
preparation of documents and information necessary to file with regulatory
authorities; and
? other costs associated with development activities, including additional
studies.
Other research and development costs consist primarily of internal research and
development costs such as salaries and related fringe benefit costs for our
employees, stock-based compensation charges, and travel costs not allocated to
one of our clinical programs. Internal research and development costs generally
benefit multiple projects and are not separately tracked per project.
The following table shows a summary of our research and development expenses for
the years ended December 31, 2022 and 2021 (in thousands):
Year Ended December 31,
(in thousands) 2022 2021
External Costs
Lenzilumab $ 53,092 $ 210,129
Ifabotuzumab 542 112
Internal costs 1,576 2,874
Total research and development $ 55,210 $ 213,115
Research and development expenses decreased by $157.9 million from $213.1
million for the year ended December 31, 2021 to $55.2 million for the year ended
December 31, 2022. The decrease is primarily due to a $142.7 million decrease in
lenzilumab manufacturing costs, a $8.3 million decrease in clinical trial
expenses, primarily due to the completion of the LIVE-AIR study and the
termination of the CAR-T trial in the third quarter of 2022, as part of our plan
to reduce costs, and a $3.6 million decrease in consulting expenses.
We expect our development costs will decrease in 2023 as compared to 2022. In
connection with our realignment to deemphasize the deployment of certain
resources for the development of lenzilumab for COVID-19, with the exception of
one lenzilumab batch in process, we have discontinued the manufacturing of
lenzilumab and are consolidating the remaining inventory of lenzilumab bulk drug
substance and drug product in a central location for potential future use. We
believe we have sufficient drug product for our currently planned clinical
trials.
General and Administrative Expenses
General and administrative expenses consist principally of personnel-related
costs (including stock-based compensation), professional fees for legal and
patent expenses, insurance, consulting, audit, investor relations costs, and
other general operating expenses not otherwise included in research and
development.
General and administrative expenses decreased by $7.7 million from $23.3 million
for the year ended December 31, 2021, to $15.6 million for the year ended
December 31, 2022. The decrease for the year ended December 31, 2022, is
primarily due to decreases of $7.3 million in consulting expenses and $1.3
million in investor and public relations expenses partially offset by a $1.1
million increase in non-cash stock-based compensation expense. We expect that
our overall general and administrative expenses may decrease in the near-term
due to our realignment plan designed to significantly reduce our go-forward,
cash-based general and administrative expenses; however, our ongoing litigation
costs may more than offset any such expense reductions.
Interest Expense
Interest expense for the years ended December 31, 2022 and 2021 is primarily
related to the Loan and Security Agreement with Hercules Capital as agent for
its affiliates serving as lenders thereunder (the "Term Loan"). Interest expense
increased $0.6 million from $2.3 million for the year ended December 31, 2021 to
$2.9 million for the year ended December 31, 2022. Interest expense in the year
ended December 31, 2022 included $1.2 million in unamortized loan fees
recognized in connection with the loan payoff in July 2022. We drew the initial
$25.0 million under the Term Loan on March 29, 2021. After giving effect to
payment of fees and expenses associated with the draw, we received net proceeds
of approximately $24.4 million.
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Other Income (Expense), net
Other income (expense), net increased by $2.1 million for the year ended
December 31, 2022, primarily due to litigation settlement costs incurred in the
year ended December 31, 2021.
Income Taxes
As of December 31, 2022, we had net operating loss carryforwards of
approximately $166.2 million to offset future federal income taxes which expire
in the years 2024 through 2037, and approximately $542.9 million that may offset
future state income taxes which expire in the years 2028 through 2042. We also
have federal net operating loss carryforwards generated in the years 2018
through 2022 of $375.3 million that have no expiration date. Current federal and
state tax laws include substantial restrictions on the utilization of net
operating losses and tax credits in the event of an ownership change. Even if
the carryforwards are available, they may be subject to annual limitations, lack
of future taxable income, or future ownership changes that could result in the
expiration of the carryforwards before they are utilized. At December 31, 2022,
we recorded a 100% valuation allowance against our deferred tax assets of
approximately $171.4 million, as at that time our management believed it was
uncertain that they would be fully realized. If we determine in the future that
we will be able to realize all or a portion of our deferred tax assets, an
adjustment to our valuation allowance would increase net income in the period in
which we make such a determination.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through proceeds
from the public offerings of our common stock, private placements of our common
and preferred stock, debt financings, interest income earned on cash, and cash
equivalents, and marketable securities, and borrowings against lines of credit,
and with the proceeds under the South Korea Agreement. At December 31, 2022, we
had cash and cash equivalents of $10.2 million. In the year ended December 31,
2022, we sold an aggregate of 55,052,506 shares of our common stock under the
Controlled Equity OfferingSM Sales Agreement (the "Sales Agreement") with Cantor
Fitzgerald & Co. ("Cantor"), raising net proceeds of approximately $41.8 million
after deducting underwriting discounts and offering costs. In the year ended
December 31, 2021, we sold an aggregate of 6,408,087 shares of our common stock
under the Sales Agreement, raising net proceeds of approximately $65.7 million.
No shares have been sold under the Sales Agreement subsequent to December 31,
2022.
Primary Sources of and Uses of Cash
The following table sets forth the primary sources and uses of cash and cash
equivalents for each of the periods presented below ($000's):
Twelve Months Ended December 31,
(In thousands) 2022 2021
Net cash (used in) provided by:
Operating activities $ (76,698 ) $ (184,045 )
Financing activities 16,837 186,324
Net (decrease) increase in cash and cash equivalents $ (59,861 ) $ 2,279
Net cash used in operating activities was $76.7 million and $184.0 million for
the years ended December 31, 2022 and 2021, respectively. Cash used in operating
activities of $76.7 million for the year ended December 31, 2022, primarily
related to our net loss of $70.7 million, adjusted for non-cash items, such as
$5.8 million in stock-based compensation, and a net change in operating assets
and liabilities of $11.8 million, including a $4.2 million decrease in accounts
payable, a $5.1 million decrease in accrued expenses and a $2.5 million decrease
in deferred revenue. Cash used in operating activities of $184.0 million for the
year ended December 31, 2021, primarily related to our net loss of $236.6
million, adjusted for non-cash items, such as $5.4 million in stock-based
compensation, a net increase in operating assets and liabilities of $46.6
million and other non-cash items of $0.6 million.
Net cash provided by financing activities was $16.8 million for the year ended
December 31, 2022 and consists of net proceeds of $41.8 million from the
issuance of common stock in connection with the Sales Agreement with Cantor,
offset by the Hercules loan repayment of $25.0 million.
Net cash provided by financing activities was $186.3 million for the year ended
December 31, 2021 and consisted primarily of net proceeds of approximately $94.2
million related to the sale of 5,427,017 shares of our common stock in
connection with an underwritten public offering, $65.7 million received from the
issuance of common stock in connection with the Sales Agreement, $24.4 million
in net proceeds received from the Term Loan, and $2.0 million received from the
exercise of stock options.
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Recent Financings
Controlled Equity Offering
On December 31, 2020, we entered into the Sales Agreement with Cantor, under
which we could issue and sell shares of our common stock, having an aggregate
gross sales price of up to $100 million through Cantor, as sales agent. On April
14, 2022, we filed a prospectus in respect of the Sales Agreement which provides
us with the ability to offer and sell shares of common stock having an aggregate
offering price of up to an additional $75.0 million. As mentioned above, for the
year ended December 31, 2022, we issued and sold 55,052,506 shares of our common
stock under the Sales Agreement, raising net proceeds of $41.8 million, and for
the year ended December 31, 2021, we issued and sold 6,408,087 shares of our
common stock under the Sales Agreement, raising net proceeds of $65.7 million.
Our ability to continue to utilize the Sales Agreement at terms acceptable to us
and in sufficient quantities will be subject to the Baby Shelf Rule (as defined
and described in "Risk Factors" in Item 1A of Part I above), and also relies on
future market conditions that are uncertain and cannot be relied upon. See "Risk
Factors" in Item 1A of Part I above.
2021 Underwritten Public Offering
On March 30, 2021, we entered into an underwriting agreement with Jefferies LLC,
Credit Suisse Securities (USA) LLC and Cantor, as representatives of the several
underwriters, in connection with the public offering of 5,000,000 shares of our
common stock. In addition, we granted the underwriters a 30-day option to
purchase an additional 750,000 shares of our common stock. The initial offering
closed on April 5, 2021. On May 3, 2021, we closed on the sale of an additional
427,017 shares of our common stock related to the exercise of the underwriters'
30-day option. The aggregate gross proceeds from the sale of the 5,427,017
shares in the offering, inclusive of the additional shares purchased by the
underwriters, were approximately $100.4 million. The net proceeds from this
offering, after deducting underwriting discounts and offering costs, were
approximately $94.2 million.
Term Loan with Hercules
On March 10, 2021, we entered into the Term Loan with Hercules which provided us
with the ability to draw an initial amount of $25.0 million, which we drew on
March 29, 2021. In July 2022, we paid $26.7 million in full settlement of the
Term Loan with Hercules. See Note 5 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K for additional information on the
Term Loan.
Liquidity and Manufacturing Commitments
As of December 31, 2022, we had cash and cash equivalents of $10.2 million;
combined accounts payable and accrued expenses of $55.3 million, certain of
which were in dispute; and manufacturing commitments of $2.6 million for the
remainder of 2023 with no significant commitments thereafter, as further
described below (see "- Contracts"). We intend to seek to defer these disputed
payment obligations, negotiate lower amounts or seek other courses of action,
which may include legal recourse for the amounts in question.
Subsequent to December 31, 2022, as previously reported we paid $3.0 million to
conditionally resolve previously reported disputes between the Company and Avid
arising pursuant to the commercial agreements between the two parties. See Note
11 to the Consolidated Financial Statements for additional information. Our cash
and cash equivalents were approximately $3 million as of March 30, 2023, after
giving effect to this payment and other uses of funds in conducting our business
and pursuing strategic alternatives. Our capital resources are not sufficient to
fund our operations for the remainder of 2023.
Our ability to enter into a definitive agreement with the Partner Company for
the strategic transaction described above is subject to numerous conditions,
including (among others) that we have received binding commitments for
investment of additional capital that will be necessary to enable us to fund the
operations of the combined company going forward and enable the combined company
to maintain a listing of its common stock on the Nasdaq Capital Market or
another national securities exchange. We cannot provide any assurance that we
will be able to raise sufficient funds to permit us to effect the proposed
business combination. If we are unable to complete the proposed transactions or
identify and complete another strategic or financing transaction in the first
half of 2023, we may elect or be required to pursue a reorganization or seek
other protection under the federal bankruptcy code. If the proposed business
combination with the Partner Company and related financing is completed, we
would expect to issue a significant number of shares of common stock and/or
convertible equity securities to the stockholders of the Partner Company as
discussed above and to new investors in the financing, each of which would have
a significant dilutive effect on our existing stockholders.
See Part I, Item 1A, "Risk Factors" in this Form 10-K for further discussion of
the risks surrounding the proposed transaction and our company.
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Contracts
Eversana Agreement
On January 10, 2021, we announced that we had entered into a master services
agreement (the "Eversana Agreement") with Eversana Life Science Services, LLC
("Eversana") pursuant to which Eversana will provide us with services in
connection with the potential launch of lenzilumab.
On September 21, 2021, we notified Eversana that due to the EUA status in the
US, we were terminating the initial statement of work related to
commercialization support of lenzilumab for the treatment of COVID-19 in the
United States. Eversana is disputing the termination notice and has requested
payment of approximately $4.5 million it has asserted we owe for services
rendered from April 1, 2021 to September 30, 2021. We have disputed this
assertion and Eversana has filed for arbitration to resolve this dispute. See
Note 11 to the Consolidated Financial Statements in this Annual Report on Form
10-K for additional information.
Manufacturing Agreements
We entered into agreements with several CMOs to manufacture BDS and fill/finish
DP for our lenzilumab clinical trial activities . We also entered into
agreements for packaging of the drug. These agreements provided for upfront
amounts prior to commencement of manufacturing and progress payments through the
course of the manufacturing process and payments for technology transfer.
Certain of these CMOs were unsuccessful in their efforts to manufacture some
batches of lenzilumab to our specifications for various reasons. We have
amended, and in some cases canceled, certain of these agreements. In addition,
we have sought to mitigate our financial commitments by ceasing additional
manufacturing of lenzilumab in connection with our realignment plan and, more
recently, we have settled our disputes with two of our CMOs. See Note 11 to the
Consolidated Financial Statements in this Annual Report on Form 10-K for more
information on these settlement agreements.
We believe we have sufficient supply to conduct our contemplated clinical
development efforts. We have discontinued the manufacturing of lenzilumab, with
the exception of one batch in process at one of our CMOs, Catalent Pharma
Solutions, LLC ("Catalent"). If we are unable to obtain regulatory approval for
lenzilumab prior to the expiration of the shelf life at that time, the remaining
inventory will not be available for commercial use.
There is significant drug product that was in production at one of our other
CMOs, Thermo Fisher Scientific, Inc. ("Thermo"), for which material has not yet
been released by us because the batches produced are out of specification.
Nonetheless, Thermo has notified us that they have stopped production and have
recently filed a lawsuit against us in Delaware Superior Court for $25.9
million. We have filed a countersuit against Thermo for breach of contract
seeking more than $37.5 million. We deny Thermo's claims and assertions and will
vigorously defend against them. See Notes 7 and 11 to the Consolidated Financial
Statements in this Annual Report on Form 10-K for additional information.
License Agreements
We are obligated to make future payments to third parties under in-license
agreements, including sublicense fees, royalties, and payments that become due
and payable on the achievement of certain development and commercialization
milestones.
We record upfront and milestone payments made to third parties under licensing
arrangements as an expense. Upfront payments are recorded when incurred and
milestone payments are recorded when the specific milestone has been achieved.
License with the Mayo Foundation for Medical Education and Research
On June 19, 2019, we entered into the Mayo Agreement with the Mayo Foundation.
Under the Mayo Agreement, we have in-licensed certain technologies that we
believe may be used to create CAR-T cells lacking GM-CSF expression through
various gene-editing tools including CRISPR-Cas9. Pursuant to the Mayo
Agreement, we were required to pay $0.2 million to the Mayo Foundation within
six months of the effective date of the Mayo Agreement, or upon completion of a
qualified financing, whichever is earlier. We paid the initial payment following
completion of the Private Placement. The Mayo Agreement also requires the
payment of milestones and royalties upon the achievement of certain regulatory
and commercialization milestones.
License with the University of Zurich
On July 19, 2019, we entered into the Zurich Agreement with University of Zurich
("UZH"). Under the Zurich Agreement, we have in-licensed certain technologies
that we believe may be used to prevent GvHD through GM-CSF neutralization. The
Zurich Agreement required an initial one-time payment of $0.1 million, which we
paid to UZH on July 29, 2019. The Zurich Agreement also requires the payment of
annual license maintenance fees, as well as milestones and royalties upon the
achievement of certain regulatory and commercialization milestones.
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Out-licensing Agreements
The South Korea Agreement
On November 3, 2020, we entered into a License Agreement (the "South Korea
Agreement") with KPM and Telcon (together, the "Licensee"). Pursuant to the
South Korea Agreement, among other things, we granted the Licensee a license
under certain patents and other intellectual property to develop and
commercialize our lead product candidate, lenzilumab (the "Product"), for
treatment of COVID-19 pneumonia, in South Korea and the Philippines (the
"Territory"), subject to certain reservations and limitations. The Licensee will
be responsible for gaining regulatory approval for, and subsequent
commercialization of, lenzilumab in those territories.
As consideration for the license, the Licensee has agreed to pay us (i) an
up-front license fee of $6.0 million (or $4.5 million net of withholding taxes
and other fees and royalties), payable promptly following the execution of the
License Agreement, which was received in the fourth quarter of 2020, (ii) up to
an aggregate of $14.0 million in two payments based on our achievement of two
specified milestones in the US, of which the first milestone was met in the
first quarter of 2021 and $6.0 million (or $4.5 million net of withholding taxes
and other fees and royalties) was received in the second quarter of 2021,and
(iii) subsequent to the receipt by the Licensee of the requisite regulatory
approvals, double-digit royalties on the net sales of lenzilumab in South Korea
and the Philippines. The Licensee has agreed to certain development and
commercial performance obligations. It is expected that we will supply
lenzilumab to the Licensee for a minimum of 7.5 years at a cost-plus basis from
an existing or future manufacturer. The Licensee has agreed to certain minimum
purchases of lenzilumab on an annual basis.
Indemnification
In the normal course of business, we enter into contracts and agreements that
contain a variety of representations and warranties and provide for general
indemnifications. Our exposure under these agreements is unknown because it
involves claims that may be made against us in the future but have not yet been
made. To date, we have not paid any claims or been required to defend any action
related to our indemnification obligations. However, we may record charges in
the future as a result of these indemnification obligations.
Litigation
Eversana Arbitration
On May 19, 2022, Eversana filed a Demand for Arbitration claiming approximately
$4.5 million in damages against the Company with the American Arbitration
Association entitled Eversana Life Sciences, LLC v. Humanigen, Inc. (AAA Case
No. 01-22-0002-1591). The Demand contains two breach of contract claims related
to the Eversana Agreement between the parties and a related agreement between
the companies' European subsidiaries, and a claim for unjust enrichment.
Eversana asserts that the Company failed to pay it amounts due for work
preparing for the potential commercializing of lenzilumab performed between
April 1, 2021 and September 30, 2021. To date, requests for production and
objections thereto have been exchanged. The arbitration hearing is currently set
for August 2023. The Company denies Eversana's claims and assertions and will
continue to vigorously defend against them.
Avid Settlement
On February 21, 2023, the Company and Avid Bioservices, Inc. ("Avid") entered
into a Settlement Agreement (the "Settlement Agreement") providing for a
conditional resolution of certain previously reported disputes between the
Company and Avid arising pursuant to the commercial agreements between the two
parties (collectively, the "Lenzilumab Disputes").
Pursuant to the Settlement Agreement, the Company made a one-time payment of
$3.0 million to Avid (the "Settlement Payment"). In addition, the parties
mutually agreed that, effective upon the expiration of 120 days from the date of
the Settlement Agreement and only if Humanigen has not by such date filed for or
been placed into bankruptcy or commenced an assignment for the benefit of
creditors or other insolvency proceeding, the parties will dismiss the pending
Lenzilumab Disputes and release and discharge each other from all existing
claims, demands, causes of actions, charges and grievances of any kind arising
out of, or relating to, the Lenzilumab Disputes and the commercial agreements
between the parties, which were terminated in accordance with their respective
terms.
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Catalent Settlement
On December 16, 2022, the Company and Catalent entered into a Settlement
Agreement (the "Settlement Agreement") resolving certain previously reported
disputes between the Company and Catalent that had arisen under the Multiple
Facility Clinical Supply and Services Agreement (the "MSA") dated July 31, 2020,
by and between Catalent and the Company, pursuant to which Catalent had agreed
to perform certain services relating to the manufacturing of lenzilumab, the
Company's lead product candidate.
Pursuant to the Settlement Agreement, the Company agreed to make a one-time
payment of $12 million (the "Settlement Payment") to Catalent in full
satisfaction of all of the Company's payment obligations under the MSA for
products and prior services, as well as cancellation fees Catalent claimed to be
owed. In consideration of its receipt of the Settlement Payment, which the
Company made on December 22, 2022, Catalent waived and released Catalent's
rights to pursue all payments, claims, or invoices for such products and
services and cancellation fees, as well as for some limited additional work to
be performed by Catalent, quantified at approximately $23.5 million in the
aggregate.
The terms and conditions of the MSA generally will remain in full force and
effect with respect to any ongoing activities and additional work to be
performed by Catalent.
Savant Litigation
The Company was previously involved in litigation against Savant Neglected
Diseases, LLC ("Savant"). In March 2022, the Company and Savant reached a
confidential settlement. Accordingly, the litigation involving Savant was
dismissed on March 31, 2022.
Thermo Litigation
Thermo has notified the Company that they have stopped production and have
issued a demand for payment for unreleased batches of product. There is
significant drug product that was in production at Thermo for which material has
not yet been released by the Company because the batches produced are out of
specification. On October 24, 2022, Thermo filed a lawsuit against the Company
in Delaware Superior Court (Patheon Biologics, Inc. v. Humanigen, Inc., Case No.
N22C-10-185 MMJ) for $25.9 million. The Company has filed a countersuit against
Thermo for breach of contract seeking more than $37.5 million. The Company
denies Thermo's claims and assertions and will vigorously defend against them.
Securities Class Action Litigation
On August 26, 2022, a putative securities class action complaint captioned
Pieroni v. Humanigen Inc., et al., Case No. 22-cv-05258, was filed in the United
States District Court for the District of New Jersey against the Company, its
Chief Executive Officer, Dr. Cameron Durrant, and its former Chief Financial
Officer, Timothy Morris. On October 17, 2022, a second putative securities class
action complaint captioned Greenbaum v. Humanigen Inc., et al., Case No.
22-cv-06118, was filed in the United States District Court for the District of
New Jersey against the Company, Dr. Durrant, Mr. Morris, and the Company's Chief
Scientific Officer, Dale Chappell. The complaints assert claims and seek damages
for alleged violations of sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. The two actions have been
consolidated and a single lead plaintiff and co-lead law firms have been
appointed. The Company anticipates filing a Motion to Dismiss in late May 2023.
The Company believes that the allegations in the putative complaints are without
merit and will vigorously defend against them.
Shareholder Derivative Litigation
On January 19, 2023, a derivative lawsuit captioned Chul Yang derivatively on
behalf of Humanigen, Inc. v. Durrant, et al., Case No. 2:23-cv-00235, was filed
in the United States District Court for the District of New Jersey against the
company's Chief Executive Officer, Dr. Cameron Durrant, its former Chief
Financial Officer, Timothy Morris, and each of its Directors. The complaint
asserts claims and seeks damages against all of the defendants for alleged
violations of section 14(a) of the Securities Exchange Act of 1934 and Rule
14a-9 promulgated thereunder, breach of fiduciary duty, unjust enrichment, abuse
of control, gross mismanagement, and waste of corporate assets, and against Dr.
Durrant and Mr. Morris for alleged violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
Company anticipates this matter being stayed pending initial rulings in the
consolidated securities class action matter. The Company believes that the
allegations in the derivative action are without merit and will vigorously
defend against them.
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