HUMANIGEN, INC - Quarter Report: 2015 September (Form 10-Q)

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KALOBIOS PHARMACEUTICALS, INC.

FORM 10-Q

 

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

See accompanying notes.

 

 

KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(Unaudited)

 

See accompanying notes.

 

 

KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

See accompanying notes.

 

KaloBios Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

		As of September 30,
		2015		2014
Options to purchase common stock		527,120		336,102
Unvested restricted stock units to purchase common stock		3,750		—
ESPP contributions to purchase common stock		375		430
Warrants to purchase common stock		11,067		11,067
		542,312		347,599

						Gross				Gross
		Amortized				Unrealized				Unrealized
(in thousands)		Cost				Gains				Losses				Fair Value
Money market funds		$	7,396			$	—			$	—			$	7,396
Total investments		$	7,396			$	—			$				$	7,396
Reported as:
Cash and cash equivalents														$	7,154
Restricted cash, long-term															242
Total investments														$	7,396

						Gross				Gross
		Amortized				Unrealized				Unrealized
(in thousands)		Cost				Gains				Losses				Fair Value
Money market funds		$	9,663			$	—			$	—			$	9,663
Federal agency securities			13,774				—				(4	)			13,770
Commercial paper			1,499				1				—				1,500
Corporate debt securities			14,525				—				(5	)			14,520
Total investments		$	39,461			$	1			$	(9	)		$	39,453
Reported as:
Cash and cash equivalents														$	9,470
Marketable securities															29,790
Restricted cash															193
Total investments														$	39,453

		Fair Value Measurements as of
		September 30, 2015
(in thousands)		Level 1				Level 2				Level 3				Total
Investments:
Money market funds		$	7,396			$	—			$	—			$	7,396
Total assets measured at fair value		$	7,396			$				$	—			$	7,396
Financing derivative		$	—			$	—			$	341			$	341
Total liabilities measured at fair value		$	—			$	—			$	341			$	341

		Fair Value Measurements as of
		December 31, 2014
(in thousands)		Level 1				Level 2				Level 3				Total
Investments:
Money market funds		$	9,663			$	—			$	—			$	9,663
Federal agency securities			—				13,770				—				13,770
Commercial paper			—				1,500				—				1,500
Corporate debt securities			—				14,520				—				14,520
Total assets measured at fair value		$	9,663			$	29,790			$	—			$	39,453
Financing derivative		$	—			$	—			$	89			$	89
Total liabilities measured at fair value		$	—			$	—			$	89			$	89

		Fair Value Measurements of Level 3 Liabilities
		(in thousands)
Balance as of December 31, 2014		$	89
Loss on re-measurement of the financing derivative liability			3
Balance as of March 31, 2015			92
Loss on re-measurement of the financing derivative liability			135
Balance as of June 30, 2015			227
Loss on re-measurement of the financing derivative liability			114
Balance as of September 30, 2015		$	341

					Weighted
					Average
					Exercise
		Options			Price
Outstanding at December 31, 2014			334,686			$	34.00
Granted			296,045				3.59
Exercised			—				—
Cancelled (forfeited)			(96,158	)			24.55
Cancelled (expired)			(7,453	)			18.22
Outstanding at September 30, 2015			527,120			$	18.84

		Three Months Ended				Nine Months Ended
Exercise price		$	3.23			$	3.59
Market value		$	3.23			$	3.59
Risk-free rate			1.62				1.61
Expected term			5.30				5.81
Expected volatility			69	%			70	%
Dividend yield			-				-

	Three Months								Nine Months
	Ended September 30,								Ended September 30,
(in thousands)		2015				2014				2015				2014
General and administrative		$	137			$	282			$	466			$	755
Research and development			134				184				447				729
		$	271			$	466			$	913			$	1,484

(in thousands)		Contract termination costs - R&D				Salaries and benefits - R&D				Salaries and benefits - G&A				Total
Balance as of December 31, 2014		$	1,185			$	—			$	—			$	1,185
Accrued			—				522				82				604
Paid			(479	)			(257	)			—				(736	)
Balance as of March 31, 2015		$	706			$	265			$	82			$	1,053
Accrued			—				57				122				179
Paid			(135	)			(142	)			—				(277	)
Balance as of June 30, 2015		$	571			$	180			$	204			$	955
Accrued			—				—				—				—
Adjustments			(78	)			—				—				(78	)
Paid			(493	)			(148	)			(136	)			(777	)
Balance as of September 30, 2015		$	-			$	32			$	68			$	100

 

On December 3, 2015, the Company entered into a Securities Purchase Agreement with certain investors (the “Purchasers”) relating to a private placement of up to an aggregate 511,596 shares of common stock at a purchase price of $29.32 per share, or up to $15 million (the “Private Placement”).  On December 15, 2015, the Securities Purchase Agreement was amended, resetting the share price for all Purchasers other than those Purchasers who were directors, officers, employees or consultants of the Company to $24.855.  Upon closing of the Private Placement, the Company issued to the Purchasers 326,698 shares of common stock for an aggregate purchase price of $8.2 million.

On December 4, 2015, the Company issued a warrant to purchase up to an aggregate of 125,000 shares of common stock at $29.32 per share exercisable for a period of five years. The warrant was issued in relation to a proposed November 18, 2015 financing the Company elected not to pursue.

 

On December 3, 2015, the Company entered into a Services Agreement (the “Services Agreement”) with Turing Pharmaceuticals LLC (“Turing”), a life sciences company.  The Company’s then Chairman and Chief Executive Officer, Martin Shkreli, was also the chief executive officer and a member of the board of directors of Turing.  Pursuant to the Services Agreement, Turing was to provide certain employees to the Company, to utilize on a part-time basis, including Christopher Thorn, who was appointed as the Company’s interim chief financial officer on December 3, 2015. The Services Agreement provided that Turing would charge the Company for Mr. Thorn’s services at an hourly rate of $151.92 per hour, and Mr. Thorn would remain employed and compensated by Turing during the term of the Services Agreement.  No amounts have been, or will be, paid by the Company to Turing, and Mr. Thorn resigned on December 21, 2015.

 

Bankruptcy Filing and Delisting of Common Stock

On December 29, 2015, the Company filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). The filing was made in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) (Case No. 15-12628).  As described below, the Company emerged from bankruptcy on June 30, 2016 (the “Effective Date”).

As a result of delisting procedures implemented by The NASDAQ Stock Market in December 2015, on January 13, 2016, the Company’s common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market.  On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of the common stock, and the delisting was effective on February 5, 2016.

Bankruptcy Related Financing Arrangements

On April 1, 2016, the Company entered into a Debtor in Possession Credit and Security Agreement (the “Credit Agreement”) with Black Horse Capital Master Fund Ltd., as administrative agent and lender (“BHCMF” or “Agent”), Black Horse Capital LP, as a lender (“BHC”), Cheval Holdings, Ltd., as a lender (“Cheval”) and Nomis Bay LTD, as a lender (“Nomis” and, together with BHCMF, BHC and Cheval, the “Lenders”). The Credit Agreement provided for a debtor-in-possession credit facility in the original principal amount of $3,000,000 (the “Term Loan”). The Credit Agreement provided that the Term Loan will be made by the Lenders at an original discount equal to $191,000 (the “Upfront Fee”) and required the payment by the Company to the Lenders of a commitment fee equal to $150,000 (the “Commitment Fee”). In accordance with the terms of the Credit Agreement, the Company used the proceeds of the Term Loan for working capital, bankruptcy-related costs, costs related to the Company’s plan of reorganization, the payment of certain fees and expenses owed to the Agent and the Lenders in connection with the Credit Agreement and other costs incurred in the ordinary course of business.

 

Pursuant to the terms of the Credit Agreement, the Term Loan bore interest at a rate per annum equal to 12.00%.

 

In accordance with the bidding procedures order entered by the Bankruptcy Court, the Term Loan and the SPA (defined below) were together subject to competing, higher and better offers.

The Company’s obligations under the Credit Agreement were secured pursuant to an Intellectual Property Security Agreement.

 

Emergence from Bankruptcy

On May 9, 2016, the Company filed with the Bankruptcy Court a Second Amended Plan of Reorganization (the “Plan”) and related amended disclosure statement pursuant to Chapter 11 of the Bankruptcy Code. On June 16, 2016, the Bankruptcy Court entered an order confirming the Plan (the “Confirmation Order”). On May 9, 2016, the Bankruptcy Court entered an order (the “Order”) approving the Settlement Stipulation entered into between (i) Gregory Rea, RTAT LLC, Nancy Retzlaff, Armistice Capital Master Fund, Ltd. Andrew Pizzo and Sabine Gritti and (ii) the Company (the “Settlement Stipulation”). The Settlement Stipulation provides for the resolution among the parties of a lawsuit filed on January 7, 2016 (the “PIPE Litigation”) in connection with the purchase and sale of the Company’s common stock in the Private Placement, certain objections related to the Company’s bankruptcy proceedings and all related matters.  Pursuant to the terms of the Settlement Stipulation, the plaintiffs in the PIPE Litigation received 327,608 shares of the common stock of the Company as reorganized pursuant to the Plan, in addition to certain other consideration.

 

On the Effective Date, the Plan became effective and the Company emerged from its Chapter 11 bankruptcy proceedings.

 

On the Effective Date, in accordance with the terms of the Plan, in addition to shares issued to the Lenders and the Purchasers under the Credit Agreement and SPA, respectively, and shares issued in connection with the Settlement Stipulation, the Company reserved for issuance 300,000 shares to the plaintiffs in a class action lawsuit related to the events surrounding the Company’s former Chairman and Chief Executive Officer, and the Company became obligated to issue 3,750 shares to Marek Biestek, a former director, in satisfaction of claims by Mr. Biestek against the Company.  In addition, on the Effective Date, the Company reserved for issuance shares of common stock in connection with certain other claims and interests as set forth in the Plan in an amount as yet to be determined.

 

In accordance with the Plan, on the Effective Date, the Company became obligated to issue promissory notes (the “Notes”) in the estimated aggregate principal amount of approximately $1.3 million to certain holders of allowed general unsecured claims in the Company’s bankruptcy proceedings. The Notes are unsecured, bear interest at a rate of 10% per annum and mature on June 30, 2019.

                               

Savant Arrangements

On February 29, 2016, the Company entered into a binding letter of intent (the “LOI”) with Savant Neglected Diseases, LLC (“Savant”).  The LOI provided that the Company would acquire certain worldwide rights relating to benznidazole (the “Compound”) from Savant.   Under the LOI, the Company made a non-refundable deposit to Savant of $500,000, which was credited towards the Initial Payment (as defined below), and agreed to make monthly payments to Savant equal to $87,500 for development services performed by Savant relating to the Compound.

  

The LOI provided that in consideration for the assets to be acquired, the Company would provide consideration to Savant, including:

 

 

On the Effective Date, as authorized by the Plan and the Confirmation Order, the Company and Savant entered into an Agreement for the Manufacture, Development and Commercialization of Benznidazole for Human Use (the “MDC Agreement”), pursuant to which the Company acquired certain worldwide rights relating to benznidazole (the “Compound”). The MDC Agreement consummates the transactions contemplated by the LOI.

 

Under the terms of the MDC Agreement, the Company acquired certain regulatory and non-intellectual property assets relating to the Compound and any product containing the Compound and an exclusive license of certain intellectual property assets related to the Compound. Savant will retain the right to use the licensed intellectual property for veterinary uses. The MDC Agreement provides that the Company and Savant will jointly conduct research and development activities with respect to the Compound, while the Company will be solely responsible for commercializing the Compound. The Company will fund the development program for the Compound and will reimburse Savant for its development program costs. 

 

As required by the MDC Agreement, on the Effective Date, the Company made payments to Savant totaling $2,687,500, consisting of the remaining portion of the Initial Payment less the deposit in the amount of $2,500,000, an initial monthly Joint Development Program Cost payment of $87,500, and reimbursement of Savant’s legal fees capped at $100,000. The MDC Agreement provides for regulatory and other milestone payments of up to $21 million and certain other contingent payments.  Additionally, the Company will pay Savant royalties on any net sales of the Compound, which royalty would increase if a PRV is granted subsequent to regulatory approval of the Compound.  The MDC Agreement also provides that Savant is entitled to a portion of the amount the Company receives upon the sale, if any, of a PRV regarding the Compound.

  

In addition, on the Effective Date the Company and Savant also entered into a Security Agreement (the “Security Agreement”), pursuant to which the Company granted Savant a continuing senior security interest in the assets and rights acquired by the Company pursuant to the MDC Agreement and certain future assets developed from those acquired assets.

 

On the Effective Date, the Company issued to Savant a five year warrant (the “Warrant”) to purchase 200,000 shares of the Company’s Common Stock, at an exercise price of $2.25 per share, subject to adjustment. The Warrant is exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain milestones related to regulatory approval of the Compound. In addition, pursuant to the MDC Agreement, the Company has granted Savant certain “piggyback” registration rights for the shares issuable under the Warrant.

Governance Arrangements

 

 

·

purchasing any stock or assets of the Company;

·

participating in any proposal for any merger, tender offer or other business combination, or similar extraordinary transaction involving the Company or any of its subsidiaries;

·

seeking to control or influence the management, the Company’s Board or the policies of the Company; or

·

submitting any proposal to be considered by the stockholders of the Company.

 

 

Board Changes

On the Effective Date, in accordance with the Plan, Cameron Durrant, current Chief Executive Officer of the Company, as joint designee of BHCMF, BHC and Cheval (the "Black Horse Entities") and Nomis, continued as a director, Ronald Barliant, current member of the Board, continued as a director as the designee of the Black Horse Entities, Dale Chappell became a director as a designee of Nomis, and Timothy Morris and Ezra Friedberg became directors as joint designees of the Black Horse Entities and Nomis.

 

Item 2.

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

You should read the following discussion and analysis in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2015 and June 30, 2015. This discussion contains forward-looking statements that involve involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements, including statements related to the scope, progress, expansion, and costs of developing and commercializing our product candidates, our anticipated financial results and condition, and our anticipated expenses related to development activities, our clinical trials and the development and potential commercialization of our product candidates. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K, and throughout this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q.

Overview

We are a biopharmaceutical company focused on developing medicines for patients with neglected and rare diseases, with an ancillary focus on pediatric conditions, and on executing our Responsible Pricing Model in the commercialization of  our products that may be approved. Our lead product candidate is benznidazole for the treatment of Chagas disease, a parasitic illness that can lead to long-term heart, intestinal and neurological problems. We are developing one of our proprietary monoclonal antibodies, lenzilumab (formerly known as KB003), for the treatment of chronic myelomonocytic leukemia, or CMML, and potentially for the treatment of juvenile myelomonocytic leukemia, or JMML, both of which are rare hematologic cancers with high unmet medical need. We are exploring development of another of our proprietary monoclonal antibodies, ifabotuzumab (formerly known as KB004), for the treatment of certain rare solid and hematologic cancers. With a focus on neglected, rare, and orphan diseases, we believe we have the opportunity to benefit from various regulatory incentives, such as orphan drug exclusivity, breakthrough therapy designation, fast track designation, accelerated approval, priority review and priority review vouchers, or PRVs, where available, that provide for certain periods of exclusivity, expedited review and/or other benefits.

Upon approval of any of our products, we intend to apply our Responsible Pricing Model, which focuses on affordability for patients and payers, transparency for all stakeholders, and delivery of a reasonable return in recognition of the risks we are taking in our development efforts.

Benznidazole is an oral small molecule antiprotozoal for the treatment of Chagas disease, which is also known as American trypanosomiasis.  Benznidazole has undergone numerous clinical trials and studies that show efficacy against Chagas disease and we believe is the current preferred treatment for Chagas disease in the countries where it is approved. No treatments for Chagas disease are approved by the United States Food and Drug Administration, or FDA, for use in the United States. We recently acquired certain worldwide rights relating to benznidazole for human use from Savant Neglected Diseases, LLC, or Savant, and we are focused on the development necessary to seek and obtain FDA approval of benznidazole.  We believe benznidazole as a treatment for Chagas disease could qualify for priority review and potentially other FDA regulatory incentives, and to receive a PRV if FDA approves the drug for marketing.

Lenzilumab is a recombinant monoclonal antibody, or mAb, that neutralizes soluble granulocyte-macrophage colony-stimulating factor, or GM-CSF, a critical cytokine for the growth of certain hematologic malignancies and solid tumors. Consistent with our strategic focus on neglected and rare diseases, in July 2016, we initiated dosing in a Phase 1 clinical trial in patients with CMML to identify the maximum tolerated dose, or MTD, or recommended Phase 2 dose of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity.

 

Ifabotuzumab is an anti-EphA3 mAb that has the potential to offer a novel approach to treating both solid tumors and hematologic malignancies. EphA3 is aberrantly expressed on the tumor cell surface of certain cancers. We have completed the Phase 1 dose escalation portion of a Phase 1/2 clinical trial in ifabotuzumab in multiple hematologic malignancies and are evaluating whether to conduct further studies of ifabotuzumab in rare solid tumors such as glioblastoma, other brain cancers in children and rare hematologic cancer indications. We also have an additional drug candidate, KB001-A, a recombinant, PEGylated, anti‑Pseudomonas PcrV high‑affinity Fab antibody that we are no longer developing, but which is being considered for partnering or out-licensing.

 

Lenzilumab, ifabotuzumab and KB001-A were each developed with our proprietary, patent-protected Humaneered® technology, which consists of methods for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use, typically for chronic conditions.

Our strategy also involves identifying, acquiring, developing and supporting the commercialization of additional treatments for neglected and rare diseases. We believe the treatment of neglected and rare diseases represents an opportunity to enter underserved patient populations and serve specialty markets. We also believe our focus on neglected and rare diseases provides us the opportunity to benefit from various regulatory incentives referenced above. The potential opportunities afforded by these regulatory programs provide an important incentive to support our efforts to develop medicines for patients with neglected and rare diseases and to apply our Responsible Pricing Model for any of our approved products.

 

We have incurred significant losses and had an accumulated deficit of $200.5 million as of September 30, 2015.  We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our development activities and seek regulatory approvals. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.

 

We will require substantial additional capital to support our business efforts, including obtaining regulatory approvals for benznidazole or other product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. We anticipate that in the future we will seek additional financing from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all.

 

If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months.  These conditions raise substantial doubt about our ability to continue as a going concern. The Condensed Consolidated Financial Statements for the quarter ended September 30, 2015 were prepared on the basis of a going concern, which contemplates that we will be able to realize our assets and discharge liabilities in the normal course of business.  Our ability to meet our liabilities and to continue as a going concern is dependent upon the availability of future funding.  The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

Our company has undergone a significant transformation subsequent to the quarter ended September 30, 2015. As a result of challenges facing us at the time, on December 29, 2015, we filed a voluntary petition for bankruptcy protection under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On June 30, 2016, our Second Amended Plan of Reorganization, dated May 9, 2016, as amended, or the Plan, became effective and we emerged from our Chapter 11 bankruptcy proceedings. For further information on our bankruptcy and emergence from bankruptcy, see Note 10 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

 

Critical Accounting Policies and Use of 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 United States, 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 financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, valuation of financing derivative, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. 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.

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There were no significant and material changes in our critical accounting policies and use of estimates during the three and nine months ended September 30, 2015, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our 2014 Annual Report on Form 10-K (File No. 001-35798), filed with the SEC on March 16, 2015.

Results of Operations

General

We have not generated net income from operations, except for the year ended December 31, 2007 during which we recognized a one-time license payment from Novartis. At September 30, 2015, we had an accumulated deficit of $200.5 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. 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.

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. We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. 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 a substantial portion of our preclinical activities;

·

the cost of acquiring and manufacturing clinical trial and other materials; 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 (such as workers compensation and health insurance premiums), stock‑based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external 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 lenzilumab expenses relating to the nine months ended September 30, 2015 below reflect a $312,000 benefit relating to an out-of-period adjustment. The following table shows our total research and development expenses for the three and nine months ended September 30, 2015 and 2014, and for the period from January 1, 2008 to September 30, 2015:

 

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development.

Comparison of Three Months Ended September 30, 2015 and 2014

Research and development expenses decreased $1.2 million, from $5.1 million for the three months ended September 30, 2014 to $3.9 million for the three months ended September 30, 2015. The decrease is primarily attributable to a $1.0 million decrease in clinical trial costs primarily resulting from a decrease in KB001-A costs due to the completion of our Phase 2 study of KB001-A in cystic fibrosis, or CF, patients with chronic Pa infections in the first quarter of 2015, partially offset by increased clinical costs for ifabotuzumab, including a $0.3 million increase in manufacturing costs primarily due to ifabotuzumab manufacturing activity underway during the third quarter of 2015.  The remainder of the decrease was primarily due to $0.8 million in reductions in employee related costs resulting from the restructuring activities undertaken in early 2015 and reduced contractor spend.

General and administrative expenses decreased $0.3 million, from $2.6 million for the three months ended September 30, 2014 to $2.3 million for the three months ended September 30, 2015 due to a $0.2 million decrease in personnel related costs and a $0.1 million decrease in consulting costs.

Interest expense of $0.3 million recognized for the three months ended September 30, 2014 and $0.2 million recognized for the three months ended September 30, 2015, was related to the Loan and Security Agreement with MidCap Financial SBIC LP, that was entered into by the Company in September 2012, or the Loan and Security Agreement.

Interest income and Other (expense) income, net, primarily consist of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.

Change in fair market value of financing derivative consists of losses on re-measurement of our financing derivative liability.

Comparison of Nine Months Ended September 30, 2015 and 2014

Research and development expenses decreased $6.4 million, from $19.5 million for the nine months ended September 30, 2014 to $13.1 million for the nine months ended September 30, 2015. The decrease is primarily attribuable to a $4.0 million decrease in clinical trial expenses, the majority of which related to the KB001-A program and the lenzilumab asthma study, partially offset by increased costs on the ifabotuzumab clinical study in 2015.  In addition, there was a $1.0 million decrease in contract manufacturing costs primarily related to lenzilumab manufacturing costs incurred in 2014, partially offset by increased manufacturing costs incurred in 2015 relating to an ifabotuzumab manufacturing run. The remainder of the decrease was primarily due to reductions in employee related costs resulting from restructuring activities undertaken in early 2015.

General and administrative expenses increased $0.2 million, from $7.9 million for the nine months ended September 30, 2014 to $8.1 million for the nine months ended September 30, 2015.  The balance remained relatively flat as the decrease in personnel expense resulting from the reduction in workforce was offset by restructuring costs recorded earlier in the year.

Interest expense of $0.9 million recognized for the nine months ended September 30, 2014 and $0.8 million recognized for the nine months ended September 30, 2015, was related to the Loan and Security Agreement.

Interest income and Other (expense) income, net, primarily consist of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.

Change in fair market value of financing derivative consists of losses on re-measurement of our financing derivative liability.

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 preferred stock, debt financings, interest income earned on cash, and cash equivalents, and marketable securities, borrowings against lines of credit, and receipts from agreements with Sanofi and Novartis. At September 30, 2015, we had cash and cash equivalents of $7.7 million, as well as restricted cash of $8.0 million, most of which related to capital placed in restricted accounts securing amounts owed to MidCap Financial under the Loan and Security Agreement.  In November 2015, we announced a board-approved restructuring plan to reduce costs and extend the cash runway in order to allow us to evaluate strategic alternatives for the products and the Company as a whole. As part of the restructuring plan, we elected to exercise our prepayment right to repay the loan in full and paid MidCap Financial $6.6 million in full settlement of the remaining outstanding principal balance, accrued interest, an exit fee and a reduced prepayment fee of 1%.  In addition, the Company undertook a reduction in force that eliminated the positions of 17 employees, or more than 60% of the Company’s workforce, which resulted in restructuring charges of approximately $0.5 million to be recorded in the fourth quarter of 2015.

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

Net cash used in operating activities was $21.1 million and $29.1 million for the nine months ended September 30, 2015 and 2014, respectively. The primary use of cash in each of the periods was to fund our operations related to the development of our product candidates. Cash used in operating activities of $21.1 million for the nine months ended September 30, 2015 primarily related to our net loss of $22.3 million, adjusted for non-cash items such as $0.9 million of stock-based compensation expense, $0.9 million relating to the fair value of stock options that were modified due to executive retirement and restructuring activities, depreciation and amortization of $0.1 million, noncash expense related to interest and the financing derivative of $0.4 million and other adjustments of $0.2 million, offset by  net cash outflows of $1.3 million related to changes in operating assets and liabilities. Cash used in operating activities of $29.1 million for the nine months ended September 30, 2014 primarily related to our net loss of $28.3 million, adjusted for non-cash items such as $1.5 million of stock-based compensation expense, depreciation and amortization of $0.3 million, amortization of premium on marketable securities of $0.4 million and other adjustments of $0.1 million offset by net cash outflows of $3.1 million related to changes in operating assets and liabilities.

Net cash provided by investing activities was $29.5 million for the nine months ended September 30, 2015, primarily related to proceeds from maturities of marketable securities of $33.4 million partially offset by purchases of investments of $3.7 million. Net cash used in investing activities was $16.0 million for the nine months ended September 30, 2014, primarily related to purchases of investments of $49.9 million and purchases of property and equipment of $0.3 million offset by proceeds from maturities of marketable securities of $34.2 million.

Net cash used in financing activities was $11.7 million for the nine months ended September 30, 2015 relating to an increase in restricted cash of $8.3 million relating to notes payable obligations and $3.4 million relating to the payments on our borrowings. Net cash provided by financing activities was $2.1 million for the nine months ended September 30, 2014, and consisted primarily of proceeds from issuance of debt of $5.0 million offset by payments on our borrowings of $2.9 million.

In connection with our emergence from bankruptcy, we closed an $11 million financing that provided the funds required to exit our Chapter 11 proceeding as well as our current working capital. However, we will require substantial additional capital to support our business efforts, including obtaining regulatory approvals for benznidazole or other product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. The amount of capital we will require and the timing of our need for additional capital will depend on many factors, including:

·

the type, number, timing, progress, costs, and results of the product candidate development programs that we are pursuing or may choose to pursue in the future;

·

the scope, progress, expansion, costs, and results of our pre-clinical and clinical trials;

·

the timing of and costs involved in obtaining regulatory approvals;

·

our ability to establish and maintain development partnering arrangements and any associated funding;

·

the emergence of competing products or technologies and other adverse market developments;

·

the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

 

 

·

the resources we devote to marketing, and, if approved, commercializing our product candidates;

·

the scope, progress, expansion and costs of manufacturing our product candidates; and

·

the costs associated with being a public company.

 

We anticipate that in the future we will seek additional financing from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all.

If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months.  These conditions raise substantial doubt about our ability to continue as a going concern.

On July 13, 2015, we effected a one-for-eight reverse stock split of our outstanding common stock pursuant to an amendment to the Company’s certificate of incorporation. As a result of the reverse stock split, each eight shares of the Company’s common stock were combined into one share of common stock. The reverse stock split was effective with respect to stockholders of record at the close of business on July 13, 2015, and trading of the Company’s common stock on the Nasdaq Global Market began on a split-adjusted basis on July 14, 2015.  The reverse stock split was accounted for retroactively and is reflected in the Company’s common stock, warrant, stock option and restricted stock activity as of and for the three and nine months ended September 30, 2015 and 2014. Unless stated otherwise, all share data in this Quarterly Report on Form 10-Q have been adjusted, as appropriate, to reflect the reverse stock split.

On January 13, 2016, our common stock was suspended from the Nasdaq Global Market and began trading on the over-the-counter market under the KBIOQ symbol.  On January 26, 2016, NASDAQ filed a Form 25 with the Securities and Exchange Commission to complete the delisting of our common stock, and the delisting was effective on February 5, 2016.  Although our common stock is listed for quotation on the OTC Pink marketplace operated by OTC Markets Group, Inc., trading is limited and an active market for our common stock may never develop in the future, which could harm our ability to raise capital to continue to fund operations.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

Item 4.

Controls and Procedures.

Management’s Evaluation of our Disclosure Controls and Procedures

“Disclosure controls and procedures,” as defined in Rules 13a‑15(e) and 15d‑15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, those designed to ensure that this information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management, including our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation and in light of our inability to timely file this Quarterly Report on Form 10-Q, our Chief Executive Officer and Interim Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of September 30, 2015 to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during our fiscal quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

Item 6.

Exhibits.

A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

 

 

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.

		KALOBIOS PHARMACEUTICALS, INC.
Date: September 1, 2016		By:	/s/ Cameron Durrant
			Cameron Durrant
			Chief Executive Officer
			(Principal Executive Officer)
Date: September 1, 2016		By:	/s/ Dean Witter
			Dean Witter, III
			Interim Chief Financial Officer
			(Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

*	Indicates management contract or compensatory plan.

†

The Certifications attached as Exhibits 32.1 and 32.2 that accompanies this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of KaloBios Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

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