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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2018

 

OR

 

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

 

For the transition period from            to

 

Commission File Number 001-35619

 

STEMLINE THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

45-0522567

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

750 Lexington Avenue

Eleventh Floor

New York, New York 10022

(Address including zip code of principal executive offices)

 

(646) 502-2311

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o

 

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

 

Large accelerated filer

o

 

 

Accelerated filer

x

Non-accelerated filer

o  (Do not check if a smaller reporting company)

 

 

Smaller reporting company

o

 

 

 

 

Emerging growth company

x

 

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

 

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

 

There were 30,273,930 shares of the registrant’s common stock, $0.0001 par value, outstanding as of May 10, 2018.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I: FINANCIAL INFORMATION

1

 

 

 

Item 1. Financial Statements

1

 

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

23

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

38

 

Item 4. Controls and Procedures

38

 

 

PART II: OTHER INFORMATION

39

 

 

 

Item 1. Legal Proceedings

39

 

Item 1A. Risk Factors

40

 

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

87

 

Item 3. Defaults upon Senior Securities

87

 

Item 4. Mine Safety Disclosures

87

 

Item 5. Other Information

87

 

Item 6. Exhibits

88

 

 

EXHIBIT INDEX

88

 

 

SIGNATURES

89

 

This Quarterly Report on Form 10-Q contains trademarks and trade names of Stemline Therapeutics, Inc., including our name and logo. All other trademarks, service marks, or trade names referenced in this Quarterly Report on Form 10-Q are the property of their respective owners.

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q (“Form 10-Q”) includes statements that are, or may be deemed, “forward-looking statements.” In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our history of net operating losses and uncertainty regarding our ability to obtain capital and achieve profitability, our ability to develop and commercialize our product candidates, our ability to advance our development programs, enroll our trials, and achieve clinical endpoints, our ability to use or expand our technology to build a pipeline of product candidates, our ability to obtain and maintain regulatory approval of our product candidates and comply with ongoing regulatory requirements, our ability to successfully operate in a competitive industry and gain market acceptance by physician, provider, patient, and payor communities, our reliance on third parties, unstable economic or market conditions, and our ability to obtain and adequately protect intellectual property rights for our product candidates.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that

 

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we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, they may not be predictive of results or developments in future periods.

 

Some of the factors that we believe could cause actual results to differ from those anticipated or predicted include:

 

·                                          the success and timing of our clinical trials, including safety and efficacy of our product candidates, patient accrual, unexpected or expected safety events, and the usability of data generated from our trials;

 

·                                          our ability to successfully file and obtain timely marketing approval from the U.S. Food and Drug Administration, or FDA, or comparable foreign regulatory agency for one or more Biologics License Applications, or BLAs, or New Drug Applications, NDAs or comparable foreign marketing submissions;

 

·                                          our ability to obtain and maintain marketing approval from regulatory agencies for our products in the U.S. and foreign countries;

 

·                                          our ability to adhere to ongoing compliance requirements of all health authorities, in the U.S. and foreign countries;

 

·                                          our ability to obtain and maintain adequate reimbursement for our products;

 

·                                          our ability to obtain the desired labeling of our products under any regulatory approval we might receive;

 

·                                          our plans to develop and commercialize our products;

 

·                                          the successful development and implementation of sales and marketing campaigns;

 

·                                          the loss of key scientific or management personnel;

 

·                                          the size and growth of the potential markets for our product candidates and our ability to serve those markets;

 

·                                          our ability to successfully compete in the potential markets for our product candidates, if commercialized;

 

·                                          regulatory developments in the United States and foreign countries;

 

·                                          the rate and degree of market acceptance of any of our product candidates;

 

·                                          new products, product candidates or new uses for existing products or technologies introduced or announced by our competitors and the timing of these introductions or announcements;

 

·                                          market conditions in the pharmaceutical and biotechnology sectors;

 

·                                          our available cash and investments;

 

·                                          the accuracy of our estimates regarding expenses, future income, capital requirements and needs for additional financing;

 

·                                          our ability to obtain additional funding;

 

·                                          our ability to obtain and maintain intellectual property protection for our product candidates;

 

·                                          our ability to maintain the license agreements for SL-401, SL-801, SL-701 and our other in-licensed product candidates;

 

·                                          the success and timing of our preclinical studies, including those intended to support an Investigational New Drug, or IND, application;

 

·                                          the ability of our product candidates to successfully perform and advance in clinical trials;

 

·                                          our ability to obtain and maintain authorization from regulatory authorities for use of our product candidates for initiation and conduct of clinical trials;

 

·                                          our ability to manufacture and supply our products, gain access to products we plan to use in combination studies and the performance of and reliance on third-party manufacturers and suppliers;

 

·                                          the performance of our clinical research organizations, clinical trial sponsors, and clinical trial investigators; and

 

·                                          our ability to successfully implement our strategy.

 

Any forward-looking statements that we make in this Form 10-Q speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Form 10-Q. You should also read carefully the factors described in the “Risk Factors” section of this Form 10-Q to better

 

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understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these risks and uncertainties, our actual results may differ materially from those reflected in the forward-looking statements in this Form 10-Q.

 

This Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third-parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.

 

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART I: FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

STEMLINE THERAPEUTICS, INC.
Balance Sheets

 

 

 

March 31,
2018
(Unaudited)

 

December 31,
2017

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

15,230,838

 

$

4,795,098

 

Short-term investments

 

84,276,796

 

46,924,612

 

Prepaid expenses and other current assets

 

1,097,642

 

469,067

 

Total current assets

 

100,605,276

 

52,188,777

 

Property and equipment, net

 

124,886

 

136,672

 

Long-term investments

 

6,733,137

 

14,468,414

 

Other assets

 

212,305

 

212,305

 

Total assets

 

$

107,675,604

 

$

67,006,168

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

19,488,507

 

$

19,742,087

 

Other current liabilities

 

96,827

 

96,826

 

Total current liabilities

 

19,585,334

 

19,838,913

 

Other liabilities

 

72,620

 

96,826

 

Total liabilities

 

19,657,954

 

19,935,739

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding at March 31, 2018 and December 31, 2017

 

 

 

Common stock $0.0001 par value, 53,750,000 shares authorized at March 31, 2018 and December 31, 2017. 30,216,530 shares issued and outstanding at March 31, 2018 and 25,313,595 shares issued and outstanding at December 31, 2017

 

3,022

 

2,531

 

Additional paid-in capital

 

310,857,448

 

251,489,546

 

Accumulated other comprehensive loss

 

(150,377

)

(145,958

)

Accumulated deficit

 

(222,692,443

)

(204,275,690

)

Total stockholders’ equity

 

88,017,650

 

47,070,429

 

Total liabilities and stockholders’ equity

 

$

107,675,604

 

$

67,006,168

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Statements of Operations
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Income:

 

 

 

 

 

Grant income

 

$

 

$

299,401

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

12,708,058

 

9,620,324

 

General and administrative

 

5,938,600

 

5,367,775

 

 

 

 

 

 

 

Total operating expenses

 

18,646,658

 

14,988,099

 

 

 

 

 

 

 

Loss from operations

 

(18,646,658

)

(14,688,698

)

Other expense

 

(3,897

)

 

Interest income

 

233,802

 

122,688

 

 

 

 

 

 

 

Net loss

 

$

(18,416,753

)

$

(14,566,010

)

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

$

(0.69

)

$

(0.67

)

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

26,845,983

 

21,810,559

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Statements of Comprehensive Loss
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Net loss

 

$

(18,416,753

)

$

(14,566,010

)

 

 

 

 

 

 

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments, net of tax

 

(8,316

)

7,610

 

Reclassification adjustment for loss on investments included in net loss

 

3,897

 

 

 

 

 

 

 

 

Other comprehensive gain (loss)

 

(4,419

)

7,610

 

Comprehensive loss

 

$

(18,421,172

)

$

(14,558,400

)

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Statement of Stockholders’ Equity
(Unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Capital

 

Capital

 

Loss

 

Deficit

 

Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

25,313,595

 

$

2,531

 

$

251,489,546

 

$

(145,958

)

$

(204,275,690

)

$

47,070,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock grants

 

541,254

 

54

 

(54

)

 

 

 

Stock-based compensation expense

 

 

 

2,206,427

 

 

 

2,206,427

 

Employee Stock Purchase Plan compensation expense

 

 

 

18,876

 

 

 

18,876

 

Issuance of common stock in connection with the ESPP

 

6,650

 

1

 

49,741

 

 

 

49,742

 

Issuance of common stock in connection with the exercise of stock options

 

69,201

 

7

 

1,089,909

 

 

 

1,089,916

 

Issuance of common stock in connection with the exercise of warrants

 

30,830

 

3

 

352,527

 

 

 

352,530

 

Issuance of common stock in connection with follow-on public offering, net

 

4,255,000

 

426

 

55,650,476

 

 

 

55,650,902

 

Net loss

 

 

 

 

 

(18,416,753

)

(18,416,753

)

Other comprehensive income

 

 

 

 

(4,419

)

 

(4,419

)

Balance, March 31, 2018

 

30,216,530

 

$

3,022

 

$

310,857,448

 

$

(150,377

)

$

(222,692,443

)

$

88,017,650

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Statements of Cash Flows
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(18,416,753

)

$

(14,566,010

)

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

 

 

 

 

 

Depreciation

 

11,786

 

952

 

Stock-based compensation expense

 

2,206,427

 

1,759,633

 

Employee Stock Purchase Plan compensation expense

 

18,876

 

17,923

 

Amortization of premium paid on marketable securities

 

(3,100

)

33,097

 

Net gain on sale of marketable securities

 

3,897

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

(628,575

)

(225,763

)

Accounts payable and accrued expenses

 

(253,580

)

3,250,747

 

Deferred grant income

 

 

(299,401

)

Other liabilities

 

(24,205

)

(17,775

)

 

 

 

 

 

 

Net cash used in operating activities

 

(17,085,227

)

(10,046,597

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of marketable securities

 

(44,688,793

)

(3,254,553

)

Sale and maturities of marketable securities

 

15,066,670

 

11,841,000

 

Net cash (used in) provided by investing activities

 

(29,622,123

)

8,586,447

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock from follow-on public offering, net

 

55,650,902

 

48,242,214

 

Proceeds from issuance of common stock from ESPP

 

49,742

 

31,659

 

Proceeds from exercise of stock options

 

1,089,916

 

 

Proceeds from exercise of warrants

 

352,530

 

 

Net cash provided by financing activities

 

57,143,090

 

48,273,873

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

10,435,740

 

46,813,723

 

Cash and cash equivalents at beginning of period

 

4,795,098

 

10,316,064

 

Cash and cash equivalents at end of period

 

$

15,230,838

 

$

57,129,787

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Notes to Unaudited Financial Statements
March 31, 2018

 

1.                                      Organization and Basis of Presentation

 

Organization

 

Stemline Therapeutics, Inc. (the “Company”) is a clinical stage biopharmaceutical company focused on discovering, acquiring, developing and potentially commercializing novel oncology therapeutics. The Company’s activities to date have primarily consisted of advancing its clinical stage programs, expanding and strengthening its intellectual property portfolio, identifying and acquiring additional product and technology rights and raising capital. The Company was incorporated in Delaware on August 8, 2003 and has its principal office in New York, New York.

 

The Company has incurred losses from operations since inception of $234.2 million. Since its inception, most of its resources have been dedicated to the discovery, acquisition, preclinical and clinical development of its product candidates. In particular, it has expended, and will continue to expend, substantial resources for the foreseeable future developing its clinical candidates, SL-401, SL-801, and SL-701, as well as its preclinical product candidates and drug discovery and acquisition efforts. These expenditures include costs associated with general and administrative costs, facilities costs, research and development, acquiring new technologies, manufacturing product candidates, conducting preclinical experiments and clinical trials, and obtaining regulatory approvals, as well as commercializing any products approved for sale. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its products currently in development. The Company expects its research and development expenses to trend higher in connection with its ongoing and planned clinical trials and related manufacturing efforts for SL-401, SL-801 and SL-701 and development of its other pre-clinical product candidates and platform technologies. The Company also anticipates that its general and administrative expenses will be higher in future periods due to the build out of a commercial infrastructure and regulatory compliance systems to support potential commercialization of SL-401 if an FDA or foreign equivalent health authority approval for marketing is obtained.

 

As a result, the Company expects to continue to incur significant and increasing operating losses for the foreseeable future. If adequate funds are not available to the Company on a timely basis, or at all, the Company may be required to terminate or delay clinical trials or other development activities for SL-401, SL-801, and SL-701, for one or more indications, or delay its establishment of sales and marketing capabilities or other activities that may be necessary to commercialize SL-401, SL-801, and SL-701, if the Company obtains marketing approval.

 

Basis of Presentation

 

The accompanying unaudited financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments (including normal recurring

 

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adjustments) considered necessary for fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. Operating results for the current interim period are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018 or any future periods. This Form 10-Q should be read in conjunction with the audited financial statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”). The Company believes that its existing cash, cash equivalents, short-term investments and long-term investments will be sufficient to cover its cash flow requirements for at least the next two years.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. (U.S. GAAP) requires management to make estimates and assumptions that affect the reported financial position at the date of the financial statements and the reported results of operations during the reporting period.  Such estimates and assumptions affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

2.                                      Summary of Significant Accounting Policies

 

The Company’s significant accounting policies are described in Note 2 of the Notes to the Financial Statements included in the 2017 Form 10-K. There have been no changes to those policies.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”), issued a comprehensive new revenue recognition Accounting Standards Update, Revenue From Contracts With Customers (Topic 606) (ASU2014-09). ASU 2014-09 provides guidance to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2016.  The Company adopted this guidance on January 1, 2018 using the full retrospective method.  The accounting standard had no impact to the financial position, results of operations or cash flows since the Company has no contracts with customers. Any future contracts with customers will be accounted for under the new guidance effective January 1, 2018.

 

In January 2016, the FASB issued a new Accounting Standards Update, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.

 

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The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted for certain changes. The Company adopted this guidance on January 1, 2018 and it had no impact to the financial position, results of operations or cash flows.

 

In February 2016, the FASB issued a new Accounting Standards Update, Leases (ASU 2016-02), ASU 2016-02 is aimed at making leasing activities more transparent and comparable and requires most leases be recognized by lessees on the balance sheets as a right-of-use asset and corresponding lease liability, regardless of whether they are classified as finance or operating leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact of the new pronouncement on the Company’s financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows and amends certain disclosure requirements of ASC 230. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the guidance in the same period.  The Company adopted this guidance on January 1, 2018 and it had no impact to the statement of cash flows..

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting. ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. ASU 2017-09 is applied prospectively to awards modified on or after the effective date. The Company adopted ASU 2017-09 on January 1, 2018. There were no modifications that had an impact on the Company’s consolidated financial statements.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act” or the “Tax Act”) was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements, such as the reduction of the federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions. The reduction in the corporate tax rate under the TCJ Act will also require a one-time revaluation of certain tax-related assets to reflect their value at the lower corporate tax rate of 21%. As such, the Company currently calculates a reduction in the value of these assets of approximately $25.0 million, which is fully offset by a valuation allowance and has no impact on the income tax provision. The company is still evaluating the full impact of the TCJ Act but due to a full valuation against deferred taxes, the company estimates no impact to the income tax provision.

 

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete.

 

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To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

 

As noted in the 2017 Form 10-K, the Company was able to reasonably estimate certain tax effects and, therefore, recorded provisional adjustments associated with the impact of tax reform. The Company has not made any additional measurement-period adjustments related to tax reform during the quarter ended March 31, 2018. However, the Company is continuing to gather additional information to complete its accounting for these items and expects to complete its accounting within the prescribed measurement period.

 

3.                                      Liquidity and Capital Resources

 

As of March 31, 2018, the Company has approximately $106.2 million in cash, cash equivalents and short and long-term investment securities. The Company primarily invests in highly liquid cash equivalents, short-term investments and long-term investments in U.S. Treasury and Agency securities and related money market funds and FDIC-insured bank certificates of deposit, with the balance in commercial bank operating accounts.

 

4.                                      Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following at March 31, 2018 and December 31, 2017:

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Prepaid third party vendor costs

 

$

213,181

 

$

131,286

 

Deferred registration fees

 

153,156

 

143,924

 

Prepaid insurance

 

562,500

 

44,065

 

Other receivable

 

168,805

 

149,792

 

Total

 

$

1,097,642

 

$

469,067

 

 

5.                                      Property and Equipment, Net

 

Property and equipment, net, consist of the following at March 31, 2018 and December 31, 2017:

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Office furniture and fixtures

 

$

519,675

 

$

519,675

 

Leasehold improvements

 

82,694

 

82,694

 

Manufacturing equipment

 

13,000

 

13,000

 

Property and equipment

 

615,369

 

615,369

 

Less accumulated depreciation

 

(490,483

)

(478,697

)

Property and equipment, net

 

$

124,886

 

$

136,672

 

 

Depreciation expense was $11,786 and $952 for the three-month periods ended March 31, 2018 and 2017, respectively.

 

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6.                                      Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 — Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

 

Level 3 — Inputs that are unobservable for the asset or liability.

 

The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liability measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

Balance

 

 

 

Identical

 

Observable

 

Unobservable

 

at

 

 

 

Assets

 

Inputs

 

Inputs

 

March 31,

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2018

 

Assets:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio

 

$

58,953,100

 

$

 

$

 

$

58,953,100

 

Certificate of Deposits

 

 

32,056,833

 

 

32,056,833

 

Cash and cash equivalents

 

15,230,838

 

 

 

15,230,838

 

Total assets at fair value

 

$

74,183,938

 

$

32,056,833

 

$

 

$

106,240,771

 

 

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December 31, 2017

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

Balance

 

 

 

Identical

 

Observable

 

Unobservable

 

at

 

 

 

Assets

 

Inputs

 

Inputs

 

December 31,

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2017

 

Assets:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio

 

$

40,160,213

 

$

 

$

 

$

40,160,213

 

Certificate of Deposits

 

 

21,232,813

 

 

21,232,813

 

Cash and cash equivalents

 

4,795,098

 

 

 

4,795,098

 

Total assets at fair value

 

$

44,955,311

 

$

21,232,813

 

$

 

$

66,188,124

 

 

The following is a summary of cash equivalents and available-for-sale investments held by the Company at March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains*

 

Losses*

 

Value

 

Cash:

 

 

 

 

 

 

 

 

 

Cash from operating accounts

 

$

4,481,786

 

$

 

$

 

$

4,481,786

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

8,252,402

 

 

 

8,252,402

 

U.S. Treasury Securities

 

2,496,605

 

45

 

 

2,496,650

 

Total cash equivalents

 

10,749,007

 

45

 

 

10,749,052

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

15,230,793

 

45

 

 

$

15,230,838

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

13,460,278

 

 

(24,327

)

13,435,951

 

Federal farm credit bank

 

1,253,448

 

 

(1,109

)

1,252,339

 

Federal home loan bank

 

12,905,297

 

 

(29,088

)

12,876,209

 

Freddie Mac

 

8,908,660

 

 

(22,514

)

8,886,146

 

U.S. Treasury Securities

 

18,773,080

 

87

 

(20,275

)

18,752,892

 

Others

 

1,022,500

 

 

 

1,022,500

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

28,051,605

 

10

 

(856

)

28,050,759

 

 

 

 

 

 

 

 

 

 

 

Total short-term investments

 

84,374,868

 

97

 

(98,169

)

84,276,796

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Federal home loan bank

 

1,003,875

 

 

(8,440

)

995,435

 

Freddie Mac

 

999,602

 

 

(11,215

)

988,387

 

U.S. Treasury Securities

 

750,640

 

 

(7,399

)

743,241

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

4,006,074

 

 

 

4,006,074

 

 

 

 

 

 

 

 

 

 

 

Total long-term investments

 

6,760,191

 

 

(27,054

)

6,733,137

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

106,365,852

 

$

142

 

$

(125,223

)

$

106,240,771

 

 

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December 31, 2017

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains*

 

Losses*

 

Value

 

Cash:

 

 

 

 

 

 

 

 

 

Cash from operating accounts

 

$

3,088,659

 

$

 

$

 

$

3,088,659

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

1,706,439

 

 

 

1,706,439

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

4,795,098

 

 

 

$

4,795,098

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

13,631,041

 

 

(31,396

)

13,599,645

 

Federal farm credit bank

 

1,249,823

 

 

(1,869

)

1,247,954

 

Federal home loan bank

 

5,923,497

 

 

(14,197

)

5,909,300

 

Freddie Mac

 

5,409,227

 

 

(19,182

)

5,390,045

 

U.S. Treasury Securities

 

6,282,231

 

 

(12,578

)

6,269,653

 

Others

 

1,019,302

 

 

(612

)

1,018,690

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

13,489,241

 

84

 

 

13,489,325

 

 

 

 

 

 

 

 

 

 

 

Total short-term investments

 

47,004,362

 

84

 

(79,834

)

46,924,612

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Federal home loan bank

 

2,753,337

 

 

(15,529

)

2,737,808

 

Freddie Mac

 

2,509,471

 

 

(13,635

)

2,495,836

 

U.S. Treasury Securities

 

1,503,030

 

 

(11,748

)

1,491,282

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

7,743,488

 

 

 

7,743,488

 

 

 

 

 

 

 

 

 

 

 

Total long-term investments

 

14,509,326

 

 

(40,912

)

14,468,414

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

66,308,786

 

$

84

 

$

(120,746

)

$

66,188,124

 

 


*The gross unrealized gains and losses captured in this footnote is before tax.

 

At March 31, 2018 and December 31, 2017, the remaining contractual maturities of available-for-sale investments classified as current on the balance sheet were less than 12 months, and the remaining contractual maturities of available-for-sale investments classified as long-term were less than two years.

 

There were no available-for-sale securities in a continuous unrealized loss position for greater than twelve months at March 31, 2018 and December 31, 2017.  The Company has the ability to hold such securities with an unrealized loss until its forecasted recovery. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with an other-than-temporary impairment as of March 31, 2018.

 

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Fair Value of Financial Instruments

 

The Company’s financial instruments consist principally of cash and cash equivalents, investments, other current assets, accounts payable and accrued expenses. Cash and cash equivalents, short-term investments and long-term investments are carried at fair value (see above). Financial instruments including other current assets, accounts payable and accrued expenses are carried at cost, which approximate fair value given their short-term nature.

 

7.                                      Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the following at March 31, 2018 and December 31, 2017:

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Accrued research and development costs

 

$

14,508,972

 

$

14,841,071

 

Accrued compensation

 

1,945,483

 

2,940,039

 

Accrued legal

 

1,238,063

 

780,664

 

Other accrued liabilities

 

1,795,989

 

1,180,313

 

Total accounts payable and accrued expenses

 

$

19,488,507

 

$

19,742,087

 

 

8.                                      Common Stock

 

On January 26, 2018, the Company completed a fourth follow-on public offering, selling 3,700,000 shares at an offering price of $14 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 555,000 shares at an offering price of $14 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment option, were $59.6 million, and net proceeds received after underwriting fees and offering expenses were approximately $55.7 million.

 

In January 2013, the Company issued warrants to purchase up to 99,529 shares of the Company’s common stock. The warrants became exercisable during January 2014. The warrants are exercisable for cash or on a cashless basis at a price per share equal to $15.00. The term of the warrants is five years and they expire on January 28, 2018. During January 2018, the Company’s warrant holders elected to exercise warrants to purchase 99,529 shares of the Company’s common stock whereby the Company received approximately $0.4 million in connection with this exercise. A portion of the transaction was processed via a cashless exercise.

 

As of March 31, 2018 and December 31, 2017, the Company was authorized to issue 53,750,000 shares of common stock.

 

Dividends on common stock will be paid when, and if, declared by the board of directors. Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. The Company will, at all times, reserve and keep available, out of its authorized but unissued shares of common stock, sufficient shares to affect the conversion of shares from the exercise of stock options.

 

9.                                      Accumulated Other Comprehensive Loss

 

The changes in accumulated balances for each component of other comprehensive loss are as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(145,958

)

$

(99,802

)

Other comprehensive (loss) income before reclassification

 

(8,316

)

7,610

 

Amounts reclassified from accumulated other comprehensive income (loss)*

 

3,897

 

 

Total other comprehensive (loss) income

 

(4,419

)

7,610

 

 

 

 

 

 

 

Balance at end of period

 

$

(150,377

)

$

(92,192

)

 


*Amounts reclassified affect other income in the statements of operations.

 

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10.                               Net (Loss) Income Per Common Share

 

The Company accounts for and discloses net loss per share using the treasury stock method.  Net loss per common share, or basic loss per share, is computed by dividing net loss by the weighted-average number of common shares outstanding. Since the Company is in a net loss for all periods presented, diluted net loss per share is not presented since the common stock equivalents would have an anti-dilutive effect on the per share calculation.

 

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Basic and diluted net loss per common share calculation:

 

 

 

 

 

Net loss

 

$

(18,416,753

)

$

(14,566,010

)

Basic and diluted weighted-average common shares

 

26,845,983

 

21,810,559

 

Basic and diluted net loss per share

 

$

(0.69

)

$

(0.67

)

 

The difference between basic and diluted weighted-average common shares generally results from the assumption that dilutive stock options outstanding were exercised, dilutive restricted stock has vested, and outstanding warrants are issued. For the three-month periods ended March 31, 2018 and 2017, the Company reported a loss from operations and therefore, all potentially dilutive stock options, restricted stock, and outstanding warrants as of such date were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive. The total shares of stock options, restricted stock, and outstanding warrants that could potentially dilute earnings per share in the future, but which were not included in the calculation of diluted net loss per share because their affect would have been anti-dilutive were as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Restricted stock

 

1,840,125

 

1,719,763

 

Options outstanding

 

3,128,627

 

3,084,414

 

Warrants

 

 

99,529

 

Total

 

4,968,752

 

4,903,706

 

 

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11.                               Grant Income

 

In October 2013, the Company entered into a contract relating to the Therapy Acceleration Program (“the TAP Agreement”) with The Leukemia and Lymphoma Society (“LLS”). LLS is a national voluntary health agency which, among other activities, encourages and sponsors research relating to blood cancers to develop therapies to cure or mitigate these diseases. To further its mission, LLS provides research funding to entities that can demonstrate after LLS’s review process that their proposed research projects have scientific promise to advance LLS’s effort to find treatments and cures for blood cancers and their complications. Pursuant to the TAP Agreement, LLS agreed to provide funding to the Company not to exceed $3.5 million to fund the Company’s development program related to the Company’s preclinical and clinical product development activities. Through March 31, 2018, the Company has received $3.0 million based on milestones achieved. The Company could receive the additional $0.5 million based on the completion of a milestone event. The Company has recognized approximately $0 and $0.3 million of income related to the LLS grant for the three-month periods ended March 31, 2018 and 2017, respectively, which reflects income recognized on a straight-line basis based on the Company’s best estimates of work performed and qualifying costs incurred. The TAP Agreement terminates when there are no longer any payment obligations for either LLS or Stemline.

 

12.                               Income Taxes

 

The Company did not record any other income tax provisions or benefits relating to its net operating losses for the three-month periods ended March 31, 2018 and March 31, 2017, respectively, due to the fact that the Company cannot benefit from its net operating losses or other deferred tax assets. The Company does not currently have the ability to carry back losses to previous years to recover taxes paid and future utilization of these losses is uncertain.

 

The Company files income tax returns in the United States and in the State of New York. The Company’s 2014 and 2015 tax years are currently being audited by the Internal Revenue Service and there are no ongoing audits in state taxing jurisdictions.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards.

 

Valuation allowances reduce deferred tax assets to the amounts that are more likely than not to be realized. As of March 31, 2018, the Company has recorded additional deferred tax assets which are fully offset by a valuation allowance. Realization of the deferred tax assets is dependent on generating sufficient taxable income in the future. At present, the likelihood of the Company being able to fully utilize its deferred income tax benefits against future income is uncertain.

 

13.                               Stock-Based Compensation

 

The Company’s 2016 Stock Equity Incentive Plan (the “2016 Plan”) was adopted by the board of directors and approved by the stockholders in May 2016.  The 2016 Plan authorizes the Company

 

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to grant up to 1,812,932 shares of common stock to eligible employees, directors, and non-employee consultants and advisors to the Company. During June 2017, an amendment was approved by the stockholders to increase the authorized shares under the 2016 plan by 1,200,000 shares. Under the provisions of the 2016 Plan, no option will have a term in excess of 10 years.

 

The Company’s 2012 Stock Equity Incentive Plan (the “2012 Plan”), which was adopted by the board of directors and approved by the stockholders in July 2012, became effective immediately prior to the closing of the Company’s initial public offering. In addition, the Company’s 2004 Stock Option and Grant Plan (the “2004 Plan”) was terminated effective immediately prior to the closing of the Company’s initial public offering. The 2012 Plan authorized the Company to grant up to 1,663,727 shares of common stock to eligible employees, directors, and non-employee consultants and advisors to the Company. Under the provisions of the 2012 Plan, no option will have a term in excess of 10 years. With the adoption of the 2016 plan, all authorized but un-issued shares, totaling 12,932, under the 2012 plan were converted to the 2016 plan.  All future awards will be granted out of the 2016 plan.

 

As of March 31, 2018, there were 525,857 shares of common stock available for future grants under the 2016 Plan.

 

Total compensation cost that has been charged against operations related to the above plans was approximately $2.2 million and $1.8 million for the three-month periods ended March 31, 2018 and 2017, respectively. As a result of the valuation allowance against the Company’s deferred tax assets, there was no net adjustment to retained earnings for the change in accounting for unrecognized windfall tax benefits.

 

The following table summarizes stock-based compensation related to the above plans by expense category for the three-month periods ended March 31, 2018 and 2017, respectively:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Research and development

 

$

970,624

 

$

697,636

 

General and administrative

 

1,235,803

 

1,061,997

 

Total

 

$

2,206,427

 

$

1,759,633

 

 

Stock Options

 

The Company grants stock options to employees, directors and non-employee consultants, with exercise prices equal to the closing price of the underlying shares of the Company’s common stock on the date that the options are granted. Options granted have a term of 10 years from the grant date. Options granted to employees generally vest over a four-year period from date of grant or if vesting based on market condition, awards vest based on the derived service period which is the estimated period of time that would be required to satisfy the market condition. Options granted to directors vest in equal yearly installments over a three-year period from the date of grant. Options to directors are granted on an annual basis and represent compensation for services performed on the Board of Directors. Compensation cost for stock options granted to employees

 

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and directors is charged against operations using the straight-line attribution method between the grant date for the option and each vesting date. The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost.

 

The weighted-average key assumptions used in determining the fair value of options granted for the three-month periods ended March 31, 2018 and 2017, respectively are as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Weighted-average volatility

 

77.96

%

N/A

 

Weighted-average risk-free interest rate

 

2.63

%

N/A

 

Weighted-average expected term in years

 

6.26

 

N/A

 

Dividend yield

 

 

N/A

 

 

Due to the lack of trading history, the Company’s computation of stock-price volatility is based on the volatility rates of comparable publicly held companies over a period equal to the estimated useful life of the options granted by the Company. The Company’s computation of expected life was determined using the “simplified” method which is the midpoint between the vesting date and the end of the contractual term. The Company believes that it does not have sufficient reliable exercise data in order to justify the use of a method other than the “simplified” method of estimating the expected exercise term of employee stock option grants. The Company has paid no dividends to stockholders. The risk-free interest rate is based on the zero-coupon U.S. Treasury yield at the date of grant for a term equivalent to the expected term of the option.

 

For the three-month period ended March 31, 2018, the Company issued 69,201 shares, of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of approximately $1.1 million. As of March 31, 2018, there was approximately $5.0 million of unrecognized compensation cost related to unamortized stock option compensation which is expected to be recognized over a remaining weighted-average period of approximately 1.5 years.

 

The following table summarizes the activity related to the Company’s stock options for the three months ended March 31, 2018:

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual 
Life

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2017

 

3,174,964

 

$

8.74

 

 

 

 

 

Options granted

 

73,000

 

15.18

 

 

 

 

 

Options exercised

 

(69,201

)

15.75

 

 

 

 

 

Options forfeited

 

(50,136

)

21.25

 

 

 

 

 

Outstanding at March 31, 2018

 

3,128,627

 

$

8.53

 

6.29

 

$

23,723,293

 

Options exercisable at March 31, 2018

 

2,163,499

 

$

8.79

 

5.47

 

$

16,556,428

 

 

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The aggregate intrinsic value in the previous table reflects the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the quarter ended March 31, 2018 and the exercise price of the options, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all option holders exercised their options on March 31, 2018. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s common stock.

 

Restricted Stock

 

The Company grants restricted stock to its employees, directors, and non-employee consultants. Restricted stock is recorded as deferred compensation and charged against income on a straight-line basis over the vesting period, which ranges from immediate to four years in duration. If vesting of the award is based on a performance or market condition, awards vest based on the derived service period which is the estimated period of time that would be required to satisfy the performance or market condition. Restricted stock awards to directors vest in equal installments over a three-year period from the grant date. Compensation cost for restricted stock is based on the award’s grant date fair value, which is the closing market price of the Company’s common stock on the grant date, multiplied by the number of shares awarded.

 

The following table summarizes the activity related to the Company’s restricted stock for the three months ended March 31, 2018:

 

 

 

Number of Shares

 

Weighted-
Average Grant
Date Fair Value
Per Share

 

Outstanding at December 31, 2017

 

1,724,837

 

$

7.83

 

Shares granted

 

541,254

 

17.11

 

Shares vested

 

(425,966

)

8.12

 

Shares forfeited

 

 

 

Outstanding at March 31, 2018

 

1,840,125

 

$

14.25

 

 

For the three-month period ended March 31, 2018, the Company granted 541,254 shares of restricted stock, at a weighted-average grant date fair value of $17.11 per share amounting to approximately $9.3 million in total aggregate fair value. As of March 31, 2018, 1,840,125 shares remained unvested and there was approximately $17.4 million of unrecognized compensation cost related to restricted stock which is expected to be recognized over a remaining weighted-average period of approximately 2.4 years. The total fair value of restricted stock vested during the three-month periods ended March 31, 2018 and 2017 was approximately $3.5 million and $2.0 million, respectively.

 

Awards Granted to Non-Employee Consultants

 

The Company grants stock options, restricted stock, and unrestricted stock to non-employee consultants. The Company periodically re-measures the fair value of stock-based awards issued to non-employees and records expense over the requisite service period. Total compensation cost charged against operations related to stock-based awards granted to non-employee consultants was approximately $0.2 million and $23,687 for the three-month periods ended March 31, 2018 and 2017, respectively.

 

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Employee Stock Purchase Plan

 

In September 2015, the Company adopted its 2015 Employee Stock Purchase Plan (the “2015 ESPP”). The 2015 ESPP is qualified as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the “IRC”). Under the 2015 ESPP, the Company will grant rights to purchase shares of common stock under the 2015 ESPP (“Rights”) at prices not less than 85% of the lesser of (i) the fair value of the shares on the date of grant of such Rights or (ii) the fair value of the shares on the date such Rights are exercised. Therefore, the 2015 ESPP is considered compensatory under FASB ASC 718 since, along with other factors, it includes a purchase discount of greater than 5%. The Company recorded approximately $18,876 and $17,923 of compensation expense for the three months ended March 31, 2018 and 2017, respectively, related to participation in the 2015 ESPP.

 

14.                               Commitments and Contingencies

 

The Company has entered into research and development agreements with third-parties for the development of oncology products and technologies. According to these agreements, the Company typically funds the development of such assets and potentially makes development-based milestone payments, and royalty and sales-based milestone payments based on net sales should the product candidates be approved for marketing. The timing and the amounts of milestone and royalty payments in the future are not certain.

 

The Company has also entered into license agreements, including ones with licenses to certain intellectual property rights, in the field of oncology and other indications. The Company is generally required to make upfront payments as well as other payments upon successful completion of preclinical, clinical, regulatory or sales milestones, should such milestones occur. In addition, these agreements generally would require the Company to pay royalties on sales of the products arising from these agreements, should a product candidate under the license agreement receive regulatory approval. These agreements generally permit the Company to terminate the agreement with no significant continuing obligation.

 

Under the Company’s research and development and/or license agreements, if the Company were to achieve certain milestones, primarily late stage clinical trial events, marketing approval, and sales, the Company could be required to pay up to a total of $217.2 million in future periods.  As of March 31, 2018, the Company has paid or accrued $6.5 million in payments pursuant to such agreements. If a product candidate under such agreements were to receive marketing approval, royalty payments, largely single digit, are payable on commercial sales of certain products.

 

The Company has committed to make potential future milestone and royalty payments to third-parties as part of its research and development and licensing agreements. Payments generally become due and payable only upon the achievement of certain developmental, regulatory and/or commercial milestones. Because the achievement of these milestones is neither guaranteed nor reasonably estimable, the Company has not recorded a liability on its balance sheet for any such contingencies.

 

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Contractual Agreements

 

In February 2013, the Company entered into a bioprocessing services agreement with a vendor for approximately $2.9 million if all services are performed under the contract. As of December 31, 2014, the contract services were performed on the initial work order and had been paid by the Company. During 2014 through 2018, the Company entered into new work order agreements with this vendor totaling approximately $23.9 million, with services to be rendered on these agreements through 2018. From inception through March 31, 2018, the Company has received and paid for services relating to these agreements in the amount of $18.6 million.

 

The Company has agreements in place with contract research organizations, or CROs, in connection with its clinical programs. The Company’s total expenditures in the future would be approximately $4.7 million assuming the successful advancement of its programs.

 

Therapy Acceleration Program Agreement with The Leukemia and Lymphoma Society

 

In October 2013, the Company entered into a contract relating to the TAP Agreement with the LLS. The LLS is a national voluntary health agency which, among other activities, encourages and sponsors research relating to blood cancers to develop therapies to cure or mitigate these diseases. To further its mission, LLS provides research funding to entities that can demonstrate after LLS’s review process that their proposed research projects have scientific promise to advance LLS’s effort to find treatments and cures for blood cancers and their complications. Pursuant to the TAP Agreement, LLS agreed to provide funding to the Company not to exceed $3.5 million to fund the Company’s development program related to the Company’s preclinical and clinical product development activities. Through March 31, 2018, the Company has received $3.0 million based on milestones achieved. The Company could receive the additional $0.5 million based on the completion of a milestone event.

 

Pursuant to the TAP Agreement, the Company shall repay to LLS, subject to the obtaining of certain post-approval milestones, an amount not to exceed three (3) times the dollar amount provided by LLS to the Company.

 

Lease Agreement

 

In July 2013, the Company entered into a leasing agreement with respect to its corporate offices at 750 Lexington Avenue, New York, New York, for a monthly rent of $50,625. The term of this lease agreement was 36 months.

 

In February 2016, the Company entered into a new leasing agreement with respect to its corporate offices at 750 Lexington Avenue, New York, New York, for a monthly rent of $69,750 and a 42-month term. The term of this lease agreement commenced on July 1, 2016 and is set to expire on December 31, 2019. The aggregate minimum lease commitment over the 42-month term of the lease is approximately $2.7 million. The Company has provided the landlord with a security deposit equal to three months’ rent, totaling $209,250, recorded in other assets.

 

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The Company’s future annual minimum lease payments for each of the following calendar years are as follows:

 

Remainder of 2018

 

627,750

 

2019

 

837,000

 

Total minimum payments

 

$

1,464,750

 

 

Rent expense charged to operations was $187,522 and $192,852 for the three-month periods ended March 31, 2018 and 2017, respectively. Rent expense is included in general and administrative expenses in the Company’s Statements of Operations.

 

Contingencies

 

In February 2017, four putative class action lawsuits were filed against the Company and certain of its officers and directors in the Southern District of New York, alleging violations of the Exchange Act and Rule 10b-5 promulgated thereunder and violations of Section 11 and 15 of the Securities Act of 1933, or the Securities Act, arising from our January 2017 follow-on public offering. In April 2017, the United States District Court for the Southern District of New York consolidated these four shareholder actions into a single action. On May 2, 2017, a shareholder derivative litigation was filed in New York Supreme Court in New York County against all of the Company’s directors and certain of its officers. The Company is named only as a nominal defendant. On March 15, 2018, the United States District Court for the Southern District of New York granted the defendants’ motion to dismiss the consolidated action in its entirety. All claims in the Amended Complaint were to be dismissed with prejudice unless Plaintiffs filed for leave to amend their complaint within thirty days of March 15, 2018. On April 13, 2018, the Court entered judgment dismissing the consolidated shareholder action with prejudice pursuant to its March 15, 2018 order, noting that Plaintiffs did not move for leave to amend their complaint.  Instead, on April 11, 2018, Plaintiffs filed a notice of appeal from the Court’s March 15, 2018 order.

 

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The Company intends to vigorously defend against these actions. However, there is no assurance that the Company will be successful in its defense or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of the actions. The Company is unable to predict the outcome or reasonably estimate a range of possible loss at this time.

 

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

 

Unless the context requires otherwise, references in this report to “Stemline,” “Company,” “we,” “us” and “our” refer to Stemline Therapeutics, Inc.

 

The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in “Item 1A. Risk Factors.” See also the “Special Cautionary Notice Regarding Forward-Looking Statements” set forth at the beginning of this report.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in our audited financial statements and notes thereto for the year ended December 31, 2017, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2017 Form 10-K to which the reader is directed for additional information.

 

Overview

 

We are a clinical stage biopharmaceutical company focused on discovering, acquiring, developing and potentially commercializing innovative oncology therapeutics that target difficult to treat cancers. Our clinical pipeline includes: SL-401, SL-801, and SL-701.

 

SL-401

 

SL-401 is a novel targeted therapy directed to the interleukin-3 receptor-a, or CD123, a target present on a wide range of malignancies. SL-401 has completed a pivotal Phase 2 trial in patients with blastic plasmacytoid dendritic cell neoplasm, or BPDCN, an indication for which SL-401 has received Breakthrough Therapy designation, or BTD, from the U.S. Food and Drug Administration, or FDA. The pivotal trial has met its primary endpoint and we have initiated a rolling Biologics License Application, or BLA, submission with the FDA seeking marketing approval.

 

In December 2017, we presented detailed data from the pivotal trial at the 2017 American Society of Hematology, or ASH, Annual Meeting and Exposition, in Atlanta, GA. The pivotal trial of SL-401 in BPDCN was a multicenter, open label, non-randomized, single arm clinical trial. We believe this trial is the largest multicenter prospective study ever conducted in BPDCN. The trial enrolled 45 BPDCN (32 first-line, 13 relapsed/refractory) patients at 7 sites in the U.S. Patients received SL-401 dosed intravenously on days 1-5 of a 21-day cycle for multiple consecutive cycles. The trial consisted of 3 stages: Stage 1 (lead-in, dose escalation), Stage 2 (expansion), and Stage 3 (pivotal, confirmatory). To ensure ongoing patient access to SL-401, we are currently enrolling both first-line and relapsed/refractory BPDCN patients in an additional cohort, Stage 4.

 

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Stage 3 of the Phase 2 trial was designed to provide the pivotal, confirmatory evidence of efficacy of SL-401 in BPDCN. In Stage 3, 13 first-line BPDCN patients were enrolled and received SL-401 at 12 mcg/kg/day, the dose determined by previous stages. Stage 3 met its primary endpoint, with a CR + CRc rate of 54% (7/13) (95% Confidence Interval: 25.1, 80.8) by investigator assessment. The lower bound of the 95% confidence interval of the primary endpoint exceeded the pre-specified 10% rate. Overall response rate, or ORR, was 77% (10/13). 46% (6/13) of patients were bridged to stem cell transplant, or SCT, following remission on SL-401. 86% (6/7) of complete responders were relapse-free at 5+ to 8+ months, ongoing as of the presentation. Across all 3 stages, in first-line BPDCN patients who received SL-401 at 12 mcg/kg/day, the ORR was 90% (26/29) with a 72% (21/29) rate of CR + CRc + CRi (CR = complete response; CRc = clinical complete response: absence of gross disease with minimal residual skin abnormality; CRi = CR with incomplete hematologic recovery) by investigator assessment. 45% (13/29) of these patients were bridged to SCT following remission on SL-401. In relapsed/refractory BPDCN patients (all of whom received SL-401 at 12 mcg/kg/day in Stages 1 and 2; n=13), there was a 69% (9/13) ORR and a 38% (5/13) CR + CRc + CRi rate.

 

The most common treatment-related adverse events, or TRAEs, across BPDCN and other clinical trials (acute myeloid leukemia, or AML, myeloproliferative neoplasms, or MPN, and multiple myeloma) with SL-401 at 12 mcg/kg/day were hypoalbuminemia (49%), alanine aminotransferase increase (48%), aspartate aminotransferase increase (48%), thrombocytopenia (29%), and nausea (27%). Capillary leak syndrome, or CLS, occurred in 20% of patients and was grade 5 in 0.8% (1/119) of patients across all trial indications at 12 mcg/kg/day and 2.0% (3/153) of all patients across all trial indications at all doses, as previously reported.

 

We have initiated submission of a rolling BLA with the FDA and expect to complete the rolling submission in 2Q 2018. If successful, we project marketing approval could be attained in the 4Q18/1Q19 timeframe. Accordingly, pre-launch activities are underway in preparation for potential commercialization. Additionally, later this year, we anticipate feedback from the European Medicines Agency, or EMA, regarding the timing of a potential regulatory filing in the European Union.

 

In parallel, we are also conducting additional clinical development activities with SL-401. SL-401 is being assessed in Phase 1/2 clinical trials of patients with chronic myelomonocytic leukemia, or CMML, myelofibrosis, or MF, AML, and multiple myeloma.

 

As reported at the 2017 ASH annual meeting in December 2017, 24 patients with advanced MPN (11 relapsed/refractory CMML; 12 relapsed/refractory MF) received SL-401 in Stages 1 and 2. In Stage 1, 12 mcg/kg/day was the highest tested dose for MPN, and a maximum tolerated dose, or MTD, was not reached. Stage 1 (n=9 patients) completed enrollment, and Stage 2 (n=15 patients) is ongoing. Median age was 69 years (range: 43-81); 54% were male. 71% (17/24) of patients had splenomegaly by physical examination. In Stage 1, no dose limiting toxicities, or DLT, were identified and a MTD was not reached. In Stages 1 and 2, the most common treatment-related adverse events, or TRAEs, included hypoalbuminemia (33%), thrombocytopenia (33%), and fatigue (29%). Most common TRAEs (grade 3 or higher), include thrombocytopenia (24%) and anemia (19%). Capillary leak was reported in 24% (5/21) evaluable patients: 4 cases were grades 1-2 and 1 case was grade 3.

 

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In relapsed/refractory CMML, 71% (5/7) of patients with baseline splenomegaly had a >50% reduction in spleen size by physical examination. One relapsed/refractory CMML patient had a CR (14+ months on treatment) comprised of a bone marrow CR, or BMCR, and a 100% spleen reduction (5 to 0 cm, or not palpable).

 

In relapsed/refractory MF, 50% (5/10) of patients with baseline splenomegaly had spleen reductions of >25% (range: 29-100%) by physical exam, including 3 patients (30%) with spleen reductions >35%. Notably, 2 out of 3 patients had baseline thrombocytopenia: 1 patient with platelets <100K/microliter and 1 patient with platelets <50K/microliter.

 

We continue patient enrollment and follow-up in the trial. Based on the results to date, we believe SL-401’s favorable tolerability and preliminary signs of activity support continued development and evaluation of possible registration-directed trial designs. Updates relating to this trial are expected later this year, including decisions regarding next steps for SL-401 in one or more of these indications. Factors that may impact next steps include enrollment trends, overall safety and efficacy results, regulatory paths, commercial landscape, and other medical, business, and practical considerations.

 

SL-401 was granted BTD by the FDA, for the treatment of patients with BPDCN in August 2016. The FDA granted Orphan Drug designation, or ODD, to SL-401 for the treatment of AML in February 2011 and for BPDCN in June 2013. The EMA granted ODD to SL-401 for the treatment of AML in October 2015 and for BPDCN in November 2015.

 

SL-801

 

SL-801 is a structurally novel, oral, small molecule, reversible inhibitor of Exportin-1, or XPO1, a nuclear transport protein implicated in a variety of malignancies. SL-801 has demonstrated preclinical in vitro and in vivo antitumor activity against a wide array of solid and hematologic cancers. SL-801’s potential ability to reversibly bind XPO1 may offer the possibility to mitigate side effects and help optimize the therapeutic index. We are currently enrolling patients with advanced solid tumors in a Phase 1 dose escalation trial of single agent SL-801.

 

In September 2017, we presented an update on the SL-801 Phase 1 trial in patients with advanced solid tumors at the European Society of Medical Oncology, or ESMO, Annual Congress 2017 in Madrid, Spain. No DLT or MTD was identified. The most common TRAEs, through six dosing cohorts, include nausea (42%), fatigue (29%), diarrhea (21%), vomiting (17%), and decreased appetite (17%). The most common TRAEs, grade 3, were nausea (4%) and diarrhea (4%). There were no TRAEs above grade 3. Through these six dosing cohorts, stable disease, or SD, was reported in 38% (9/24) of patients, with tumor shrinkages (range: 3% to 21%) noted in some heavily pre-treated patients. Dose escalation is ongoing.

 

Data from the SL-801 trial were selected for poster presentation at the upcoming American Society of Clinical Oncology, or ASCO, meeting in June 2018.

 

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SL-701

 

SL-701 is an immunotherapy designed to direct the immune system to attack targets present on certain malignancies including brain cancer. SL-701 is comprised of several short synthetic peptides that correspond to epitopes of targets including IL-13Rα2, EphA2, and survivin; two of these synthetic peptides (IL-13Rα2 and survivin) are mutant and believed to enhance immune activity. We completed a Phase 2 trial of SL-701 in adult patients with second-line glioblastoma, or GBM, and data are being analyzed and will be considered when deciding next steps for the program.

 

In November, 2017, data from the trial were presented at the Annual Meeting of the Society for Neuro-Oncology, or SNO in San Francisco, CA. The trial consisted of 2 stages: Stage 1 and Stage 2. Stage 1 enrolled 46 patients and administered SL-701 as a single agent, with the immunostimulants GM-CSF and Imiquimod. Stage 2 enrolled 28 patients and administered SL-701 in combination with bevacizumab, with the immunostimulant poly-ICLC. SL-701 was generally well-tolerated. The most common TRAEs, were fatigue (22%) and injection site reaction (18%). In Stage 1, one patient had a partial response, or PR, of 18+ month duration (ongoing), and there were 15 SDs, 6 of which were at least 5 months duration (range: 5 to 28+ months, ongoing). In Stage 2, two patients achieved CR and 4 patients had PRs, for an ORR of 21% (6/28). In Stage 2, the median overall survival, or OS, was 11.7 months with a 48% 12-month OS rate. In addition, analyses indicate that SL-701 generated target-specific CD8+ T-cell responses in some patients experiencing clinical benefit, consistent with its mechanism of action. Data continue to be being analyzed and will be considered when deciding next steps for the program. These steps may include conducting larger studies, including randomized studies, single arm studies, further combination studies with novel agents, (e.g., checkpoint inhibitors), that could be conducted alone or via partnerships, or cessation of the program. If additional studies are conducted, this may entail significant manufacturing campaigns and commitments around SL-701 and certain immunostimulants depending upon the choice and availability of immunostimulants.

 

Data from the SL-701 trial were selected for poster presentation at the upcoming ASCO meeting in June 2018.

 

SL-701 was awarded ODD from the FDA for the treatment of glioma in January 2015.

 

Preclinical pipeline

 

SL-501 and SL-101

 

We believe that CD123 is a rapidly emerging target in oncology with potential for broad application in hematologic cancer with promise beyond hematologic cancer in certain solid tumors and autoimmune disease. With this in mind, we are developing a platform of compounds that target CD123, led by our lead clinical stage asset, SL-401. SL-501 and SL-101 are both novel CD123-targeted therapies in preclinical development.

 

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SL-501 is a high-affinity variant of SL-401 that has shown potency, in vitro and in vivo, against several hematologic tumor types, including AML, chronic myeloid leukemia, or CML, Hodgkin’s lymphoma, or HL, and Non-Hodgkin’s lymphoma, or NHL. SL-101 is a single chain monoclonal antibody fragment (mAb)-conjugate that binds to CD123 and has shown in vitro and in vivo activity against a variety of hematologic cancers.

 

In addition to oncology opportunities, there may also be utility for CD123-targeted agents in various autoimmune diseases, such as scleroderma and cutaneous lupus, in which the CD123-expressing plasmacytoid dendritic cell, or pDC, the precursor cell of BPDCN, may play a role. With this in mind, we are currently conducting preclinical experiments in this area and expect updates later this year in autoimmune disease.

 

SL-901

 

SL-901 is an oral, small molecule kinase inhibitor. In December 2017, we in-licensed this drug candidate from UCB Biopharma Sprl, or UCB. Prior to in-licensing, the agent had demonstrated preclinical activity in several tumors, and was evaluated in an abbreviated Phase 1 clinical trial in Europe. Neither a DLT nor MTD was reached in the trial, and we believe further dose escalation is warranted. A PR in one patient with advanced lung cancer was reported. We are currently evaluating plans, including to produce drug supply under good manufacturing practice, to enable a new regulatory filing to continue clinical dose escalation.

 

Financings

 

We have devoted substantially all of our resources to develop our product candidates, manufacture our product candidates, prepare for commercialization, build our intellectual property portfolio, execute our business plan, raise capital, and provide general and administrative support for these operations. We have generated minimal income to date, have not generated any income from product sales, and have funded our operations primarily through public and private sales of common stock and private sales of convertible preferred stock to our investors. From inception through March 31, 2018, we have received net proceeds of $269.6 million from the sale of common stock, $12.5 million from the sale of convertible preferred stock and $0.9 million from the issuance of convertible debt. The convertible preferred stock was retired in March 2010 and the convertible debt was converted into common stock in April 2013.

 

On January 26, 2018, we completed a fourth follow-on public offering, selling 3,700,000 shares at an offering price of $14 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 555,000 shares at an offering price of $14 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment option, were $59.6 million, and net proceeds received after underwriting fees and offering expenses were approximately $55.7 million.

 

During January 2018, our warrant holders elected to exercise warrants to purchase 99,529 shares of our common stock whereby we received approximately $0.4 million in connection with this exercise. A portion of these transactions were processed via

 

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cashless exercises.  As of March 31, 2018, there are no warrants outstanding.

 

We have never been profitable and our net loss from operations for the three months ended March 31, 2018 and 2017 was $18.4 million and $14.6 million, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to trend higher in connection with our ongoing activities, particularly as we advance our product candidates through preclinical activities and clinical trials to seek regulatory approval and, if approved, commercialize such product candidates. Accordingly, we may need additional financing to support our continuing operations. We will seek to fund our operations through public or private equity or debt financings or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant income to achieve profitability, and we may never do so.

 

Litigation

 

From time to time, we are involved in legal proceedings in the ordinary course of our business. Refer to Footnote 14: Commitments and Contingencies for more information on legal proceedings.

 

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Financial Operations Overview

 

Income

 

We have not generated any income from product sales and we have generated minimal income to date, all relating to a $3.0 million research funding received from the Leukemia and Lymphoma Society, or LLS. As of March 31, 2018, we have fully recognized the $3.0 million in income received from the LLS. In the future, we may generate income from product sales, contingent on marketing approval for one of our product candidates and market acceptance of that product. In addition, to the extent we enter into licensing or collaboration arrangements, we may have additional sources of income.

 

If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future income, and our results of operations and financial position, would be materially adversely affected.

 

Research and Development Expenses

 

The following table shows our research and development expenses for the three-month periods ended March 31, 2018 and 2017, respectively:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

SL-401

 

$

8,006,591

 

$

6,228,498

 

SL-801

 

799,908

 

588,844

 

SL-701

 

164,168

 

466,581

 

Personnel expenses

 

3,136,482

 

2,102,974

 

Other expenses

 

600,909

 

233,427

 

Total

 

$

12,708,058

 

$

9,620,324

 

 

Research and development expenses consist of costs associated with the development of our product candidates and our platform technology, which include:

 

·                                          clinical trial costs;

 

·                                          chemistry, manufacturing and controls, or CMC, related costs, particularly as they relate to process characterization and validation expenses for SL-401 as required to support BLA submission requirements;

 

·                                          nonclinical costs;

 

·                                          regulatory costs including BLA related expenses;

 

·                                          employee-related expenses, including salaries, benefits, travel and stock-based compensation expense, and consultant costs;

 

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·                                          costs associated with work contracted and conducted by third-party contract research organizations, or CROs, contract manufacturing organizations, or CMOs, academic institutions and consultants; and

 

·                                          license fees and milestone payments related to in-licensed products and technology.

 

We expense research and development costs to operations as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities expenses when the services have been performed or when the goods have been received, rather than when the payments are made.

 

We use our employee and infrastructure resources across multiple research and development projects. We do not allocate employee-related expenses or depreciation to any particular project. The components of our research and development costs are described in more detail in “Results of Operations.”

 

We anticipate that our research and development expenses will trend higher in future periods as we continue to seek to complete development of our most advanced product candidates, SL-401, SL-801, and SL-701, prepare to commercialize SL-401, and continue to develop our other product candidates and our platform technology. We anticipate that the majority of our research and development expense will be devoted to the development of SL-401, SL-801, and SL-701.

 

The successful development of our product candidates is highly uncertain. As of this time, other than as discussed above, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete development of our product candidates or the period, if any, in which material net cash inflows from our product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

·                                          the scope, enrollment, rate of progress and costs of our planned, as well as any additional, clinical trials and other research and development activities;

 

·                                          timing and results of future clinical trials;

 

·                                          the potential benefits of our product candidates over other therapies;

 

·                                          the potential safety risks of our product candidate compared to other therapies;

 

·                                          the costs, timing and outcome of regulatory submissions and approvals;

 

·                                          our ability to market and commercialize, either on our own or with strategic partners, and achieve market acceptance for any of our product candidates that we are developing or may develop in the future;

 

·                                          our ability to manufacture, at a reasonable expense, adequate supplies or our product candidates for use in planned and future clinical trials and/or commercial distribution in the event of a successful regulatory approval; and

 

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·                                          the costs of preparing, filing, prosecuting, defending and enforcing patents and other intellectual property.

 

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

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation expense. The primary functions included in our general and administrative expenses are commercial operations, legal, finance, human resources, investor relations, and business development. Other general and administrative expenses include facility costs, insurance expense and professional fees for legal, business development, consulting and accounting services.

 

We anticipate that our general and administrative expenses will be higher in future periods due to the build out of a commercial infrastructure and regulatory compliance systems to support potential commercialization of SL-401 if an FDA or foreign equivalent health authority approval for marketing is obtained.

 

Interest Income

 

Interest income consists of interest earned on our cash, cash equivalents, short-term investments and long-term investments. Given the current interest rate environment and that our primary investment is in 100% U.S. Treasury and Agency securities and related money market funds coupled with FDIC-insured bank certificates of deposits, we expect interest income to be minimal in future quarters.

 

Critical Accounting Policies and Estimates

 

To understand our financial statements, it is important to understand our critical accounting policies and estimates. We prepare our financial statements in accordance with generally accepted accounting principles, or GAAP. The preparation of financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

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For a discussion of our critical accounting estimates, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Form 10-K. There were no material changes in our critical accounting estimates or accounting policies during the three months ended March 31, 2018.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”), issued a comprehensive new revenue recognition Accounting Standards Update, Revenue From Contracts With Customers (Topic 606) (ASU2014-09). ASU 2014-09 provides guidance to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2016.  We adopted this guidance on January 1, 2018 using the full retrospective method.  The accounting standard had no impact to the financial position, results of operations or cash flows since we have no contracts with customers. Any future contracts with customers will be accounted for under the new guidance effective January 1, 2018.

 

In January 2016, the FASB issued a new Accounting Standards Update, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted for certain changes. We adopted this guidance on January 1, 2018 and it had no impact to the financial position, results of operations or cash flows.

 

In February 2016, the FASB issued a new Accounting Standards Update, Leases (ASU 2016-02), ASU 2016-02 is aimed at making leasing activities more transparent and comparable and requires most leases be recognized by lessees on the balance sheets as a right-of-use asset and corresponding lease liability, regardless of whether they are classified as finance or operating leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. We are currently evaluating the impact of the new pronouncement on our financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows and amends certain disclosure requirements of ASC 230. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. For all other entities, it is effective for

 

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fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the guidance in the same period.  We adopted this guidance on January 1, 2018 and it had no impact to the statement of cash flows.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting. ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. ASU 2017-09 is applied prospectively to awards modified on or after the effective date. We adopted ASU 2017-09 on January 1, 2018. There were no modifications that had an impact on our consolidated financial statements.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act” or the “Tax Act”) was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements, such as the reduction of the federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions. The reduction in the corporate tax rate under the TCJ Act will also require a one-time revaluation of certain tax-related assets to reflect their value at the lower corporate tax rate of 21%. As such, we currently calculates a reduction in the value of these assets of approximately $25.0 million, which is fully offset by a valuation allowance and has no impact on the income tax provision. We are still evaluating the full impact of the TCJ Act but due to a full valuation against deferred taxes, we estimate there will be no impact to the income tax provision.

 

The SEC staff issued Staff Accounting Bulletin, or SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

 

For various reasons that are discussed more fully below, we have not completed our accounting for the income tax effects of certain elements of the Tax Act. As noted in the 2017 Form 10-K, we were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the impact of tax reform. We have not made any additional measurement-period adjustments related to tax reform during the quarter ended March 31, 2018. However, we are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the prescribed measurement period.

 

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Results of Operations

 

Comparison of Three Months Ended March 31, 2018 and 2017

 

Research and development expense.  Research and development expense was $12.7 million for the quarter ended March 31, 2018, compared with $9.6 million for the quarter ended March 31, 2017, representing an increase of $3.1 million. The higher costs are primarily driven by an increase in regulatory, manufacturing, and pre-commercial expenses in support of our BLA filing and potential commercialization of SL-401.

 

General and administrative expense.  General and administrative expense was $5.9 million for the quarter ended March 31, 2018, compared with $5.4 million for the quarter ended March 31, 2017, representing an increase of $0.5 million. The increase in expense was due to $0.9 million in higher pre-launch expenses in support of preparing for a potential commercialization of SL-401 in BPDCN, if marketing approval from the FDA is received. Additionally, the higher costs resulted from a $0.9 million increase in non-cash stock-based compensation expense and increased headcount. Partially offsetting the higher costs was a decrease in legal expenses by $1.3 million.

 

Interest income.  Interest income was $0.2 million for the quarter ended March 31, 2018, compared with $0.1 million for the quarter ended March 31, 2017.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

As of March 31, 2018, our cash, cash equivalents and short and long-term investments totaled $106.2 million. We primarily invest our cash, cash equivalents, short-term investments and long-term investments in U.S. Treasury and Agency securities and related money market funds and FDIC-insured bank certificates of deposit, with the balance in commercial bank operating accounts. We believe that our existing cash, cash equivalents, short-term investments and long-term investments will be sufficient to fund our operations for at least the next two years.

 

We have financed our operations to date primarily through proceeds from public sales of common stock via our 2013 initial public offering, or IPO, and three subsequent follow-on public offerings. To date, we have not generated any income from the sale of products. We have incurred losses and generated negative cash flows from operations since inception.

 

Since inception and through March 31, 2018, we received net proceeds of $269.6 million primarily from the public sale of common stock from our 2013 IPO and four subsequent follow-on public offerings. On January 26, 2018, we completed a fourth follow-on public offering, selling 3,700,000 shares at an offering price of $14 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 555,000 shares at an offering price of $14 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment option, were $59.6 million, and net proceeds received after underwriting fees and offering expenses were approximately $55.7 million.

 

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Cash Flows

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Net cash used in operating activities

 

$

(17,085,227

)

$

(10,046,597

)

Net cash (used in) provided by investing activities

 

(29,622,123

)

8,586,447

 

Net cash provided by financing activities

 

57,143,090

 

48,273,873

 

Net increase in cash and cash equivalents

 

$

10,435,740

 

$

46,813,723

 

 

Operating activities.  The use of cash in all periods resulted primarily from our net losses adjusted for stock-based compensation expense, non-cash depreciation expense and changes in the components of working capital. The net cash used in operating activities during the three months ended March 31, 2018 and 2017 primarily resulted from research and development expenses as we continue our clinical trial activities relating to SL-401, SL-801, and SL-701. Additional research and development costs also include CMC-related expenses for the manufacture of drug substance and drug product of our product candidates in development. Also, for the three months ended March 31, 2018, the net cash used in operating activities also included pre-launch expenses in support of preparing for potential commercialization of SL-401 in BPDCN, if marketing approval from the FDA is received.

 

Investing activities.  The net cash provided by and used in financing activities for the three months ended March 31, 2018 and 2017, respectively, reflects purchases and redemptions of short-term and long-term investments within our U.S. Treasury-related investment and bank certificate of deposit portfolios, net of maturities.

 

Financing activities.  The net cash provided by financing activities for the three months ended March 31, 2018 resulted primarily from our January 2018 issuance and sale of 4,255,000 common shares via our follow-on public offering.  We sold 3,700,000 shares at an offering price of $14 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 555,000 shares at an offering price of $14 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment option, were $59.6 million, and net proceeds received after underwriting fees and offering expenses were approximately $55.7 million. The net cash provided by financing activities for the three months March 31, 2017 resulted primarily from the issuance of stock related to our follow-on public offering completed on January 20, 2017. We sold 4,500,000 shares at an offering price of $10 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 675,000 shares at an offering price of $10 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment option, were $51.8 million, and net proceeds received, after underwriting fees of $3.2 million and offering expenses of $0.4 million, were approximately $48.2 million.

 

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Funding Requirements

 

All of our product candidates are still in clinical or preclinical development. We expect to continue to incur significant expenses and increased operating losses for the foreseeable future. We anticipate that our expenses will increase if and as we:

 

·                                          continue the ongoing clinical trials, and initiate the planned clinical trials, of our product candidates;

 

·                                          continue the research and development of our other product candidates;

 

·                                          seek to identify additional product candidates;

 

·                                          acquire or in-license other products and technologies;

 

·                                          seek marketing approvals for our product candidates that successfully complete pre-market clinical trials;

 

·                                          establish, either on our own or with strategic partners, a manufacturing, sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

 

·                                          continue to incur legal expenses relating to our ongoing litigation;

 

·                                          maintain, leverage and expand our intellectual property portfolio; and

 

·                                          add operational, financial and management information systems and related personnel, including personnel to support our product development and future commercialization efforts.

 

We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements for at least the next two years.  We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third-parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current product candidates. Our future capital requirements will depend on many factors, including:

 

·                                          the progress and results of the ongoing and future clinical trials of our product candidates;

 

·                                          the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for our product candidates now or in the future;

 

·                                          the extent to which we acquire or in-license other products and technologies;

 

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·                                          the costs, timing and outcome of regulatory review of our product candidates;

 

·                                          the costs of future commercialization activities, including product sales promotion, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;

 

·                                          income, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;

 

·                                          the progress of our ongoing litigation with third parties;

 

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

 

·                                          our ability to establish any future collaboration arrangements on favorable terms, if at all.

 

Until such time, if ever, as we can generate substantial product income, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third-parties, we may have to relinquish valuable rights to our technologies, future income streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

 

If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any relationships with any organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Tax Loss Carryforwards

 

As of March 31, 2018, we had net operating losses of $143.1 million for federal and $146.9 for state purposes, which are available to reduce future taxable income. We also had federal tax credits of approximately $31.6 million, which may be used to offset future tax liabilities. The net operating

 

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loss and tax credit carryforwards will expire at various dates through 2037, except for net operating losses generated starting on January 1, 2018 and going forward, which have an unlimited life. Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual utilization limitation pursuant to the change in ownership rules of Internal Revenue Code Section 382 and 383. The amount of the annual limitation is determined based on the value of our company immediately prior to an ownership change. Subsequent ownership changes may further affect the limitation in future years. At March 31, 2018, we recorded a 100% valuation allowance against our net operating loss and tax credit carryforwards, as we believe it is more likely than not that the tax benefits will not be fully realized.

 

Jumpstart Our Business Startups Act of 2012

 

The JOBS Act permits an “emerging growth company,” of which we are one, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have “opted out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to market risk related to changes in interest rates. We had cash, cash equivalents, short-term investments and long-term investments of $106.2 million as of March 31, 2018 and $105.8 million as of March 31, 2017, consisting of cash, U.S. Treasury and Agency securities, Treasury-related money market funds and FDIC-insured bank certificates of deposit. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are primarily in Treasury-related debt securities and bank certificates of deposit. Our available for sale securities are subject to interest rate risk and will fall in fair market value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

 

We contract with CROs and CMOs. We may be subject to fluctuations in foreign currency rates in connection with these agreements. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. As of March 31, 2018 and March 31, 2017, all of our liabilities were denominated in our functional currency.

 

Item 4.  Controls and Procedures.

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Accounting Officer (principal financial officer), evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures”, as defined in Rules 13a-15I and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are

 

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designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s, rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2018, our Chief Executive Officer and Chief Accounting Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

Changes to Internal Controls Over Financial Reporting

 

There has been no change in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

Our management, including our Chief Executive Officer and Chief Accounting Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

PART II: OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

From time to time, we are involved in legal proceedings in the ordinary course of our business. Refer to Footnote 14: Commitments and Contingencies for more information on legal proceedings.

 

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Item 1A.  Risk Factors.

 

You should carefully consider the following risks and uncertainties. If any of the following occurs, our business, financial condition and/or operating results could be materially harmed. These factors could cause the trading price of our common stock to decline, and you could lose all or a substantial part of your investment.

 

Risks Related to Development, Clinical Testing, Regulatory Approval, and Commercialization of Our Product Candidates

 

We are heavily dependent on the success of our clinical product candidates, SL-401, SL-801, and SL-701, and we cannot provide any assurance that any of our product candidates will be approved, commercialized, or successfully marketed in the future.

 

To date, we have invested a significant portion of our efforts and financial resources in the acquisition and development of our product candidates, SL-401, SL-801, and SL-701 which we are advancing through clinical development. Our future success depends heavily on our ability to successfully manufacture, develop, obtain regulatory approval for, and commercialize these product candidates, which may never occur. We currently generate no income from our product candidates, and we may never be able to develop or commercialize a marketable drug.

 

Before we generate any income from product sales in the United States or elsewhere, we must complete preclinical and clinical development of one or more of our product candidates, conduct human subject research, submit clinical and manufacturing data to the U.S. Food and Drug Administration, or FDA (or foreign equivalent), qualify a third-party contract manufacturing organization, or CMO, satisfy the FDA that our CMO is capable of manufacturing the product in compliance with the FDA’s current good manufacturing practices, or CGMPs, submit a Biologics License Application, or BLA (or foreign equivalent), receive regulatory approval from the FDA or foreign regulatory agency, build a commercial organization, make substantial investments and undertake significant marketing efforts ourselves or in partnership with others to ensure compliant marketing and market acceptance of any products we commercialize. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates.

 

We have not submitted a complete BLA or a New Drug Application, or NDA, to the FDA, or similar market approval applications to comparable foreign authorities, for any of our product candidates. We cannot be certain that any BLA or NDA will be filed within a specified period of time, or that any BLA or NDA or similar foreign marketing application will allow us to obtain or maintain marketing approval.  In addition, any marketing approval we may obtain may be for uses more limited than we expect or include contraindications or risk measures that limit its market acceptance.  We also cannot be certain that any of our product candidates will be successful in clinical trials that the clinical trials or data will support filing a BLA or NDA in the U.S. or elsewhere. We also cannot be certain that any of our product candidates will receive regulatory approval for trial initiation or marketing. Further, the FDA, an independent review committee, or IRC, or an oncologic drugs advisory committee, or ODAC, may not agree with the interpretation by our investigators or us of the clinical safety and efficacy of our product candidates and our

 

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product candidates may not receive regulatory approval. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market one or more of our product candidates, our income will be dependent, in part, upon the prescribing information, adoption within clinical practice guidelines, and the size of the markets in the territories for which we gain regulatory approval and have commercial rights. In addition, our income will be dependent, in part, upon the market acceptance of our products once approved as well as upon reimbursement and coverage, among other things. If the markets for patient subsets that we are targeting are not as significant as we estimate, we may not generate significant income from sales of such products, if approved.

 

We do not have the resources to conduct and oversee our product development programs without assistance from third parties. In the execution of our product development programs, we may have to rely on collaborations with clinical partners as well as clinical research organizations, or CROs, CMOs, vendors and other service providers. Failure of these entities to satisfactorily conduct clinical research or to provide the services requested by us may negatively impact our product development programs, including but not limited to program delays or preventing approval of our product candidates. We plan to seek regulatory approval to commercialize our product candidates in the United States, and potentially in the European Union and additional foreign countries. While the scope of regulatory review and approval is typically similar in other countries, to obtain separate regulatory review and approval in many other countries, we must comply with the numerous and varying regulatory requirements of such countries regarding safety and efficacy, clinical trials, manufacturing, post-marketing commitments, and commercial sales, pricing and distribution of our product candidates, and we cannot predict success in these jurisdictions.

 

Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

 

Clinical testing is expensive and can take a substantial amount of time to complete. Its outcome is inherently uncertain. In addition, failure can occur at any time during clinical development, including after significant resources have been invested. We cannot predict whether we will encounter challenges with any of our clinical trials that will cause us, or regulatory authorities, to delay, suspend or terminate those trials.

 

Clinical trials can be delayed or halted for many reasons, including:

 

·                                          delays or failure reaching agreement on acceptable terms with prospective CMOs, CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly depending on the circumstances;

 

·                                          failure of our third-party contractors, including CROs and CMOs, or our investigators, to comply with regulatory requirements or otherwise meet contractual obligations in a timely manner;

 

·                                          delays or failure in obtaining the necessary approvals from regulators, institutional review boards, or IRBs, or scientific review committees, or SRCs, in order to commence or continue a clinical trial;

 

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·                                          our inability to manufacture, or obtain from third-parties, adequate supply of drug substance, drug product or adjuvant therapies sufficient to complete our preclinical studies and clinical trials;

 

·                                          risk of loss of drug product, adjuvants and/or other components of the product, due to third-party storage and distribution of such supplies;

 

·                                          the FDA, or other regulatory authority, issuing a clinical hold or requiring alterations to any of our study designs, including extending a study or requiring new studies, overall strategy or manufacturing plans;

 

·                                          delays in patient enrollment, variability in the number and types of patients available for clinical trials, poor accrual, or high drop-out rates of patients in our clinical trials;

 

·                                          clinical trial sites deviating from trial protocols or dropping out of a trial and our inability to add new clinical trial sites;

 

·                                          difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

 

·                                          poor effectiveness of our product candidates during clinical trials;

 

·                                          safety issues, including serious adverse events associated with our product candidates and patients’ exposure to unacceptable health risks;

 

·                                          receipt by a competitor of marketing approval for a product targeting an indication that one of our product candidates target, such that we are not “first to market” with our product candidate;

 

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

 

·                                          differing interpretations of data by the FDA or similar foreign regulatory agencies.

 

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRB where such trial is being conducted, by the Data Safety Monitoring Board, or DSMB, if one is utilized for any such trial, or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including, among other things, failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, regulatory violations identified during an inspection of the clinical trial operations or trial site, imposition of a clinical hold by the FDA or other regulatory authorities, study subject safety concerns, adverse events or severe adverse events including deaths, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. For example, we have observed serious adverse events, including deaths, from or relating to capillary leak syndrome, or CLS, with SL-401. The occurrence of these and other adverse events could jeopardize or preclude our ability to develop,

 

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obtain or maintain marketing approval for, or successfully commercialize, market, and sell any or all of our product candidates for one or more indications.

 

We intend to have ongoing interactions with the FDA over the course of 2018 and beyond regarding our product candidates, including our SL-401 Phase 2 pivotal trial in patients with blastic plasmacytoid dendritic cell neoplasm, or BPDCN. If the FDA reviews these data and determines additional data are needed to support a submission for regulatory approval in BPDCN, or that the data will not support a submission for regulatory approval in BPDCN, this could delay or halt our clinical trials or commercialization plans for SL-401 or our other product candidates, including requiring us to enroll additional cohorts or conduct additional clinical trials.

 

We have also advanced SL-801 into a Phase 1 clinical trial. There are unknown risks for SL-801 with respect to dosing, administration, pharmacokinetics, bioavailability, safety and efficacy that we expect we will learn about during clinical development which could halt or delay this development program and which could alter our current strategy for the development of this product candidate.

 

We may not have the necessary expertise or capabilities, including adequate staffing, to successfully manage the execution and completion of any of our clinical trials, prepare clinical study reports and marketing authorization applications, and ultimately obtain marketing approval for our product candidates in a timely manner, or at all.

 

In any clinical trial of a product candidate, the results of such trial may not be adequate to support submission of a marketing application or marketing approval. Because our product candidates are intended for use in life-threatening diseases, in many cases we ultimately intend to seek marketing approval for each product candidate based on the results of a single clinical trial which may be open-label and single-group in nature. As a result, these trials may receive enhanced scrutiny from the FDA. For any such trial, if the FDA disagrees with our choice, or definition, of primary endpoint or the results for the primary endpoint are not robust or significant or clinically beneficial enough, including relative to control, or historical data, the FDA may refuse to approve a BLA or NDA based on such intended pivotal trial, despite meeting a primary endpoint of the study. In addition, the results of any such intended pivotal trial may be subject to confounding factors, or may not be adequately supported by other study endpoints, including possibly overall survival, or OS, overall response rate, or ORR, rate of complete response, or CR, and/or response duration, in which case the FDA may refuse to approve a BLA or NDA based on such intended pivotal trial, despite meeting a primary endpoint of the study. The FDA may also require the completion of additional clinical trials before or as a condition for approving our product candidates.

 

If we experience delays in the completion of, or a termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, which will have a negative impact on our ability to commence product sales and generate product income from any of our product candidates. In addition, any delays in completing our clinical trials will increase our costs and slow down our product candidate development and approval process and may negatively impact our ability to raise additional capital to support these increased costs. Delays in completing our clinical trials could also allow our competitors to obtain marketing approval before we do or shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates. Any of these occurrences may harm our business, financial

 

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condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

 

Reports of adverse events or other safety concerns involving SL-401, SL-801, or SL-701 could delay clinical development, delay or prevent us from obtaining or maintaining regulatory approvals, or negatively impact sales or the commercial prospects for our product candidates.

 

Reports of adverse events or other safety concerns involving our clinical drug candidates including SL-401, SL-801, or SL-701 could interrupt, delay or halt our clinical trials. For example, CLS is a known, sometimes fatal, and well-documented side effect of SL-401. Reports of additional CLS cases, or other adverse events or other safety concerns involving SL-401 or our other product candidates, could result in clinical trial delays including regulatory authorities placing trials on clinical hold or denying or withdrawing approval for trials of any or all indications. Further, there are no assurances that patients receiving SL-401 or our other product candidates with co-morbid diseases and/or indications not previously well-studied, will not experience new or different serious adverse events in the future. Likewise, reports of adverse events or other safety concerns involving SL-401 or our other product candidates could interrupt, delay or halt ongoing or planned clinical trials of such product candidates, could require redesign of study protocols and conduct of additional trials, could result in our inability to file for or obtain regulatory approvals for any of our product candidates, or negatively impact commercial prospects for our product candidates.

 

Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.

 

The results of preclinical studies and early stage, including investigator-sponsored, clinical trials and late stage clinical trials of product candidates may not be predictive of the results of subsequent later stage, including corporate sponsored, clinical trials. Product candidates in later stage or larger clinical trials may fail to show the safety and efficacy results demonstrated in earlier studies despite having progressed through preclinical studies and earlier clinical trials. Many companies in the biopharmaceutical industry have suffered significant setbacks in later stage clinical trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier studies. Similarly, our clinical trial results may not be successful for these or other reasons. For example, Stage 3 results from the Phase 2 pivotal trial of SL-401 in BPDCN may not corroborate the earlier Stage 1 and 2 results and/or may not be adequate for marketing approval for any of a number of reasons including clinical safety and efficacy results, including choice and definition of endpoints and regulatory hurdles for success, as well as data from chemistry, manufacturing and controls, or CMC, clinical pharmacology, bioanalytical, immunogenicity, non-clinical, and other areas.

 

This drug development risk is heightened by any changes in ongoing and future clinical trials compared to completed clinical trials. As product candidates are advanced through preclinical studies to early and later stage clinical trials and towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration and dosing, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for late stage clinical trials, approval and commercialization, such changes do carry the

 

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risk that they will not achieve these intended objectives. For example, the results of our ongoing and future clinical trials may be adversely affected by the following changes:

 

·                                          As we optimize and scale-up production of SL-401, SL-801, and SL-701 there have been manufacturing, formulation, fill-finish and other process and analytical changes that are part of the optimization and scale-up necessary for producing drug substance and drug product of a quality, quantity and stability sufficient for later stage clinical development and commercialization. Delays, including failures, in any of these steps may delay initiation and completion of clinical trials, regulatory submissions, or commercial launch. We may also need to demonstrate comparability between newly manufactured drug substance and/or drug product relative to previously manufactured drug substance and/or drug product. Demonstrating comparability may cause us to incur additional costs or delay initiation or completion of our clinical trials including the need or choice to initiate a dose escalation study and, if unsuccessful, could require us to complete additional preclinical or clinical studies of our product candidates. Failure to demonstrate comparability could also result in delays in regulatory submissions or commercial launch. We are also developing a new lyophilized formulation of SL-401. In the event it does not demonstrate adequacy or comparability with the current liquid/frozen formulation, regulatory approval and/or commercial utilization of SL-401 could be negatively impacted.

 

·                                          We have changed the experimental regimen of SL-401 to a multi-cycle regimen, in which patients will receive more than one treatment cycle, rather than a single-cycle treatment as used in the completed investigator-initiated clinical trial. Although we anticipate that patients receiving multiple cycles of SL-401 may derive greater clinical benefit than from a single cycle, there is a risk of toxicity or a lack of efficacy arising from multiple cycles.

 

·                                          We are, or may in the future be, treating patients with certain diseases or conditions that have not been previously treated with SL-401. In these instances, we may choose to treat patients at several different doses and use multi-cycle dosing regimens to determine the optimal doses and schedules for both near-term and long-term safety and disease control in each indication.  Use of SL-401 in new disease populations and at new dosing regimens could produce unforeseen adverse reactions and events that could impact the development and ability to obtain marketing approval for SL-401.

 

·                                          We may determine, based on safety and efficacy, that certain doses and regimens of SL-401 for particular indications are optimal for initial near-term therapy whereas the same, or other, doses and regimens are optimal for longer-term maintenance therapy.

 

·                                          We are developing SL-701 as an injection administered under the skin, or subcutaneously, in our trials. Two previous investigator-sponsored trials of an earlier version of SL-701 used this method of delivery. Another previous investigator-sponsored trial of an earlier version of SL-701 used a different method

 

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of delivery, in which dendritic cells, which are a type of immune cell, were removed from the patient, exposed to immunogenic peptides, and then re-injected into or near a lymph node of the patient (intra/peri-nodally). Our plan continued the subcutaneous injection method used in two of the previous studies and represents a change from one of the previous studies.

 

·                                          We manufactured and formulated SL-701 as a mixture of IL-13Ra2 mutant peptide, EphA2 peptide, a new survivin mutant peptide, and a tetanus toxoid peptide. An earlier version of this immunotherapy, which included IL-13Ra2 mutant and EphA2 peptides, was mixed with additional peptides in previous studies, including a different survivin peptide in some studies.

 

·                                          In the initial stage of our SL-701 corporate-sponsored trial we used granulocyte-macrophage-colony-stimulating factor, or GM-CSF, and imiquimod as the immunostimulants. In the second stage of our SL-701 trial, we used poly-ICLC as the immunostimulant, which was the immunostimulant used, along with an earlier version of SL-701, in the previous investigator-sponsored study but is not currently commercially available. If the poly-ICLC regimen is found to be superior, it would require successful registration and commercialization of poly-ICLC in addition to SL-701 to support product launch, which would entail a more complicated regulatory and commercialization strategy than required for a single product launch.

 

·                                          In some of our current or future trials, we are, or may, combine our product candidates with each other or with other therapies such as chemotherapy, radiation, targeted therapy, or anti-angiogenic therapy which could result in unforeseen toxicities.

 

Any of the aforementioned, or other, changes could make the timing, including initiation, patient accrual, or results of our clinical trials or other future clinical trials less predictable and could cause our product candidates to perform differently, including causing toxicities, which could delay or suspend completion of our clinical trials, delay or prevent approval of our product candidates, and/or jeopardize our ability to obtain regulatory approval, commence product sales and generate income.

 

If we experience delays in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

 

We may not be able to continue clinical trials for our product candidates if we are unable to enroll a sufficient number of eligible patients to participate in these trials, including as required by the FDA or other regulatory authorities. Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new

 

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drugs that may be approved or may commence competing clinical trials for the indications we are investigating. SL-401 and SL-701 are being developed in hematologic and brain cancers, respectively, both of which are orphan indications (i.e., rare diseases) with small available study populations. SL-401 is being developed initially in BPDCN and other rare diseases, including certain myeloproliferative disorders, as well as AML, and SL-701 is being developed in brain cancer. Some of these represent orphan indications for which there are very limited independently reported data on annual incidences. If the prevalence of these diseases are very low, including lower than our estimates or estimates of our third-party contractors, this could significantly delay patient enrollment in any one or more of our ongoing or future clinical trials. SL-801 is being assessed in a number of advanced solid tumors, some of which may have low prevalence rates and which could significantly delay patient enrollment in any one or more of our ongoing or future clinical trials.

 

Further, if we fail to enroll and maintain the number of patients for which the clinical trial was designed, the statistical power of that clinical trial may be reduced, which would make it harder to demonstrate that the product candidate being tested in such clinical trial is safe and effective. Additionally, enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our common stock to decline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays or may require us to terminate or not initiate one or more clinical trials.

 

The regulatory review and approval processes of the FDA and comparable foreign authorities are lengthy, time-consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

 

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable and depends upon numerous factors, including the substantial discretion of the regulatory authorities which could include the pre-requisite of an advisory panel, e.g. ODAC, review. In addition, approval policies, regulations, or the type and amount of preclinical, CMC, clinical pharmacology, and clinical data necessary to gain approval may change during the course of a product candidate’s clinical development, and may vary among jurisdictions. We may be required to undertake and complete certain additional preclinical, CMC, clinical pharmacology, bioanalytical, immunogenicity or clinical studies to generate additional data required to support the submission of an Investigational New Drug application, or IND, or a BLA or an NDA to the FDA or comparable foreign authorities. An inadequacy in any of these areas, or a lack of personnel, financial resources or performance, including by third parties, could result in a delayed or unsuccessful regulatory filing. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. Furthermore, approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA.

 

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Our product candidates alone or in combination with any adjuvant, immunostimulant including GM-CSF or Imiquimod or poly-ICLC, or other agents with which we may combine our drug candidates, could fail to receive regulatory approval for many reasons, including the following:

 

·                                          the FDA or comparable foreign regulatory authorities may disagree with the design, conduct or findings of our clinical trials;

 

·                                          the FDA or comparable foreign regulatory authorities may identify protocol deviations or data quality or integrity concerns with our preclinical or clinical trials;

 

·                                          we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;

 

·                                          the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;

 

·                                          we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

·                                          the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data or the study design or execution from preclinical studies or clinical trials;

 

·                                          the FDA or comparable foreign regulatory authorities may not accept our definition, or criteria, for primary endpoint and/or other endpoints for evaluation of clinical benefit, patient efficacy and potential marketing approval, despite meeting the primary endpoint of the trial;

 

·                                          the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a BLA or an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;

 

·                                          we may fail to secure an appropriate right of reference to the data from clinical trials of our product candidates that we did not sponsor;

 

·                                          the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies;

 

·                                          the FDA or comparable foreign regulatory authorities may fail to approve any companion diagnostics we develop; and

 

·                                          the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

 

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This lengthy and costly review process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market any of our other product candidates that we may advance into and through clinical trials, which would significantly harm our business.

 

In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post-marketing commitments, including additional clinical trials, observation studies, and/or pregnancy registries which could impact market adoption and acceptance and exceed commercialization budgets. Regulatory authorities may also approve a product candidate with a label that includes labeling claims which may be undesirable for the successful commercialization of that product candidate, including product contraindications, warnings or precautions, the need for inpatient versus outpatient administration, or limitations on administration schedule such as number of infusions or cycles. In addition, we may not be able to ultimately achieve the price we intend to charge for our product candidates or obtain satisfactory reimbursement or coverage for our product candidates. Moreover, in many foreign countries, a product candidate must be approved for reimbursement before it can be approved for sale in that country and the reimbursement may be suboptimal. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

 

Our approach to the discovery and development of product candidates includes the targeting of cancer stem cells (CSC) which is unproven, and we do not know whether we will be able to develop any products of commercial value.

 

Research on CSCs is an emerging field and, consequently, there is ongoing debate regarding the importance of CSCs as an underlying cause of tumor initiation, propagation, recurrence, resistance, and metastasis. In addition, there is some debate in the scientific community regarding the defining characteristics of these cells.

 

Although there is general consensus that some cancer cells have tumor-initiating capacity, there also is some debate in the scientific community regarding the defining characteristics and the origin of these cells. Some believe that normal adult stem cells transform into CSCs. Others believe that non-CSC cancer cells can transform into CSCs and, therefore, a definitive CSC cannot be readily isolated or targeted. In addition, some believe that targeting CSCs should be sufficient for a positive clinical outcome, while others believe that, at times or always, targeting CSCs should be coupled with targeting tumor bulk for a positive clinical outcome.

 

Based on preclinical and clinical data, we believe that, for some cancers, SL-401 may target both tumor bulk and CSCs. However, it is conceivable that SL-401 and any other product candidates that we develop may not effectively target tumor bulk or CSCs or, even if they do, they may not have a beneficial or durable clinical outcome that outweighs the risks associated with the product. In addition, it is conceivable that our platform technology may ultimately fail to identify any commercially viable drugs to treat human patients with cancer or any other disease or condition.

 

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If we are not successful in discovering, developing and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives may be impaired.

 

Although we expect to focus a substantial amount of our efforts on the continued clinical testing and regulatory interactions for our clinical stage drug candidates, SL-401, SL-801, and SL-701, another key element of our strategy is to identify and test additional compounds. A portion of the preclinical research that we are conducting involves new and unproven drug discovery methods, including our proprietary StemScreen® platform technology, as well as the preclinical testing of new compounds and potential new uses of existing compounds. The drug discovery that we are conducting using our StemScreen® platform technology may not be successful in identifying compounds that are useful in treating humans with cancer. Research programs designed to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development or commercialization for many reasons, including the following:

 

·                                          the research methodology used may not be successful in identifying potential product candidates;

 

·                                          competitors may develop alternatives that render our product candidates obsolete;

 

·                                          a product candidate may, on further study, be shown to have harmful effects or other characteristics that indicate it is unlikely to be safe and effective or otherwise does not meet applicable regulatory criteria;

 

·                                          a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and

 

·                                          a product candidate may not be accepted as safe and effective by regulatory authorities, patients, the medical community or third-party payors.

 

If we are unable to identify suitable compounds for preclinical and clinical development, we may not be able to obtain sufficient product income in future periods, which could result in significant harm to our financial position and adversely impact our stock price.

 

Even if we receive regulatory approval for any of our product candidates, we will be subject to ongoing FDA regulatory requirements, which require significant resources. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

 

Any regulatory approvals that we or our potential strategic partners receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, may contain product contraindications, warnings, or precautions that limit use of our product candidates or may contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of our product candidates. In addition, if the FDA approves any of

 

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our product candidates, the manufacturing processes, testing, packaging, labeling, storage, distribution, field alert or biological product deviation reporting, adverse event reporting, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory compliance requirements. These requirements include submissions of safety and other post-marketing information and reports, as well as continued compliance with CGMPs for commercial manufacturing and good clinical practices, or GCPs, for any clinical trials that we conduct post-approval. In addition, any regulatory approvals covered under certain U.S. federal health care programs will trigger compliance with the Federal Physician Payment Sunshine Act reporting requirements and compliance with state marketing disclosure laws may also attach in certain jurisdictions. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

·                                          restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

·                                          warning letters, untitled letters, or holds on clinical trials;

 

·                                          refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our strategic partners, or suspension or revocation of product license approvals;

 

·                                          product seizure or detention, or refusal to permit the import or export of products;

 

·                                          investigations or inspections by government entities, including FDA or foreign health authorities; and

 

·                                          injunctions, fines, corporate integrity agreements, or the imposition of other civil penalties or criminal penalties.

 

We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business.

 

Risks Related to Our Financial Position and Capital Requirements

 

We have incurred net operating losses since our inception and anticipate that we will continue to incur substantial operating losses for the foreseeable future. We may never achieve or sustain profitability, which would depress the market price of our common stock, and could cause you to lose all or a part of your investment.

 

We have incurred net losses from operations from our inception through March 31, 2018 of approximately $234.2 million. We do not know whether or when we will become profitable. To date, we have not commercialized any products or generated any income from product sales. Our

 

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losses have resulted principally from costs incurred in development and discovery activities. We anticipate that our operating losses will substantially increase over the next several years as we execute our plan to expand our discovery, research, development and potential commercialization activities. We believe that our existing cash, cash equivalents, short-term investments and long-term investments including the cash proceeds received from our follow-on public offering during the first quarter of 2018, will be sufficient to fund our operations and our capital expenditures for at least the next two years. If our cash is insufficient to meet future operating requirements, we will have to raise additional funds. If we are unable to obtain additional funds on terms favorable to us or at all, we may be required to cease or reduce our operating activities or sell or license to third-parties some or all of our intellectual property. If we raise additional funds by selling additional shares of our capital stock, the ownership interests of our stockholders will be diluted. If we need to raise additional funds through the sale or license of our intellectual property, we may be unable to do so on terms favorable to us, if at all. In addition, if we do not continue to meet our diligence obligations under our license agreements for our product candidates that we have in-licensed, including SL-401, SL-801, and SL-701, we will lose our rights to develop and commercialize those product candidates.

 

If we do not successfully develop and obtain regulatory approval for our existing and future product candidates and effectively manufacture, market and sell any product candidates that are approved, we may never generate product sales, and even if we do generate product sales, we may never achieve or sustain profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the market price of our common stock also could cause you to lose all or a part of your investment.

 

We will require additional financing to achieve our goals, and a failure to obtain this capital when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts.

 

Since our inception, most of our resources have been dedicated to the discovery, acquisition and preclinical and clinical development of our product candidates. We have expended and believe that we will continue to expend substantial resources for the development of SL-401, SL-801, and SL-701, and may expend additional resources on other product candidates and drug discovery and acquisition efforts. These expenditures will include costs associated with general administration, facilities, research and development, acquiring new technologies, manufacturing product candidates, conducting preclinical experiments and clinical trials, obtaining regulatory approvals, commercializing any products approved for sale, and costs associated with operating as a public company.

 

We have no significant current source of income to sustain our present activities, and we do not expect to generate income until, and unless, we obtain approval from the FDA or other regulatory authorities, and we successfully commercialize one or more of our compounds. As the outcome of our ongoing and future clinical trials is highly uncertain, our estimates of clinical trial costs necessary to successfully complete the development and commercialization of our product candidates may differ significantly from our actual costs. In addition, other unanticipated costs may arise. As a result of these and other factors currently unknown to us, we may need to seek

 

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additional funds sooner than planned, through public or private equity, debt financings or other sources, such as strategic partnerships and alliances and licensing arrangements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

 

Our future capital requirements depend on many factors, including:

 

·                                          the number and characteristics of the product candidates we pursue;

 

·                                          the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials;

 

·                                          the ability of our product candidates to progress through clinical development successfully;

 

·                                          the timing of, and the costs involved in, seeking regulatory approvals for our product candidates;

 

·                                          the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales and distribution costs;

 

·                                          the cost associated with securing and establishing commercialization and manufacturing capabilities for our product candidates and any products we successfully commercialize;

 

·                                          our ability to establish and maintain strategic partnerships, licensing or other arrangements and the economic and other terms of such agreements;

 

·                                          the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;

 

·                                          the timing, receipt and amount of sales of, or royalties on, our future products, if any;

 

·                                          our need and ability to hire additional management and scientific, medical, and sales and marketing personnel;

 

·                                          the effect of competing technological and market developments; and

 

·                                          our need to implement additional internal systems and infrastructure, including financial and reporting systems.

 

Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to:

 

·                                          delay, limit, reduce or terminate preclinical studies, clinical trials or other research and development activities for one or more of our product candidates;

 

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·                                          delay, limit, reduce or terminate manufacturing of our product candidates; or

 

·                                          delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates and ensure their acceptance by third-party payors and the market.

 

We will need to raise additional funds to complete our clinical trials and achieve positive cash flow.

 

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

 

We will likely seek to raise additional capital through a combination of private and public equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect stockholder rights. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third-parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

 

There can be no assurance that deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by an economic downturn, a volatile business environment or an unpredictable and unstable market. If equity and credit markets deteriorate, it may make any necessary equity, debt, or other financing more difficult to secure, more costly, more dilutive, and less favorable to existing shareholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon our business and clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget. There is a possibility that our stock price may decline, due in part to the volatility of the stock market and the general economic downturn.

 

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Even if we receive regulatory approval for any of our product candidates, sales of our products depend on reimbursement by government health administration authorities, private health insurers and other organizations. If we are unable to obtain, or maintain at anticipated levels, reimbursement for our products, or coverage is reduced, our pricing may be affected or our product sales, results of operations or financial condition could be harmed.

 

We may not be able to sell our products on a profitable basis or our profitability may be reduced if we are required to sell our products at lower than anticipated prices or reimbursement is unavailable or limited in scope or amount. Our products may be priced significantly more expensive than traditional drug treatments and almost all patients require some form of third party coverage to afford their cost. We anticipate that we will depend, to a significant extent, on governmental payers, such as Medicare and Medicaid in the U.S. or country specific governmental organizations in foreign countries, and private third-party payers to defray the cost of our products to patients. These entities may refuse to provide coverage and reimbursement, determine to provide a lower level of coverage and reimbursement than anticipated, or reduce previously approved levels of coverage and reimbursement, including in the form of higher mandatory rebates or modified pricing terms.

 

In certain countries where we sell or are seeking or may seek to commercialize our products, pricing, coverage and level of reimbursement or funding of prescription drugs are subject to governmental control. We may be unable to timely or successfully negotiate coverage, pricing, and reimbursement on terms that are favorable to us, or such coverage, pricing, and reimbursement may differ in separate regions in the same country. In some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country, which may include a combination of distinct potential payers, including private insurance and governmental payers as well as an health technology assessment of medicinal products for pricing and reimbursement methodologies. Therefore, we may not successfully conclude the necessary processes and commercialize our products in every, or even most countries in which we seek to sell our products.

 

A significant reduction in the amount of reimbursement or pricing for our products in one or more countries may reduce our profitability and adversely affect our financial condition. Certain countries establish pricing and reimbursement amounts by reference to the price of the same or similar products in other countries. Therefore, if coverage or the level of reimbursement is limited in one or more countries, we may be unable to obtain or maintain anticipated pricing or reimbursement in current or new territories. In the U.S., the European Union member states, and elsewhere, there have been, and we expect there will continue to be, efforts to control and reduce healthcare costs. In the U.S. for example, the price of drugs has come under intense scrutiny by the U.S. Congress. Third party payers decide which drugs they will pay for and establish reimbursement and co-payment levels. Government and other third-party payers are increasingly challenging the prices charged for healthcare products, examining the cost effectiveness of drugs in addition to their safety and efficacy, and limiting or attempting to limit both coverage and the level of reimbursement for prescription drugs.

 

Health insurance programs may restrict coverage of some products by using payer formularies under which only selected drugs are covered, variable co-payments that make drugs that are not preferred by the payer more expensive for patients, and by using utilization management controls, such as requirements for prior authorization or failure first on another type of treatment. Payers may especially impose these obstacles to coverage for higher-priced drugs, and consequently our products may be subject to payer-driven restrictions. Additionally, U.S. payers are increasingly considering new metrics as the basis for reimbursement rates.

 

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In countries where patients have access to insurance, their insurance co-payment amounts or other benefit limits may represent a barrier to obtaining or continuing use of our potential products. We anticipate providing support for non-profit organizations that assist patients in accessing treatment for certain diseases. Such organizations assist patients whose insurance coverage imposes prohibitive co-payment amounts or other expensive financial obligations. Such organizations’ ability to provide assistance to patients is dependent on funding from external sources, and we cannot guarantee that such funding will be provided at adequate levels, if at all. We also may provide our products without charge to patients who have no insurance coverage for drugs through related charitable purposes. We are not able to predict the financial impact of the support we may provide for these and other charitable purposes; however, substantial support could have a material adverse effect on our profitability in the future.

 

Our commercial success depends on obtaining and maintaining reimbursement at anticipated levels for our products. It may be difficult to project the impact of evolving reimbursement mechanics on the willingness of payers to cover our products. If we are unable to obtain or maintain coverage, or coverage is reduced in one or more countries, our pricing may be affected or our product sales, results of operations or financial condition could be harmed.

 

Risks Related to Our Business and Industry

 

We are a clinical stage company with no approved products, which makes it difficult to assess our future viability.

 

We are a clinical stage biopharmaceutical company with a limited operating history. We have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. For example, to execute our business plan, we will need to successfully:

 

·                                          execute product candidate development activities;

 

·                                          obtain required regulatory approvals for the development and commercialization of our product candidates;

 

·                                          maintain, defend, leverage and expand our intellectual property portfolio;

 

·                                          build, deploy, and maintain sales, distribution and marketing capabilities, either on our own or in collaboration with strategic partners should our products obtain market approval;

 

·                                          gain market and third-party payor acceptance for our products should they obtain market approval;

 

·                                          develop and maintain CGMP compliant manufacturing and distribution capabilities sufficient to support the intended scope of our preclinical and clinical development plans and the potential commercial demand for our product(s);

 

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·                                          complete required process characterization and validation activities to support any planned regulatory submission, which historically has included manufacture of at least 3 consecutive successful process validation batches for drug substance and at least 3 consecutive successful process validation batches for drug product;

 

·                                          develop and maintain any strategic relationships we elect to enter into;

 

·                                          satisfy our obligations under our license and other agreements; and

 

·                                          manage our spending as costs and expenses increase due to drug discovery, preclinical development, clinical trials, regulatory approvals, manufacturing and commercialization.

 

If we are unsuccessful in accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business or continue our operations.

 

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

 

Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of product candidates. Our competitors may succeed in developing competing products before we do for the same indications we are pursuing, obtaining regulatory approval for products or gaining acceptance for the same markets that we plan to target. If we are not “first to market” with one of our product candidates, our competitive position could be compromised because it may be more difficult for us to obtain marketing approval for that product candidate and successfully market that product candidate as a competitor. Even if we are “first to market” with one or more of our product candidates, a competitor could develop an alternative therapy for our approved indication(s) that demonstrates a superior efficacy and/or safety profile relative to our approved product(s).

 

We expect any product candidate that we commercialize will compete with products from other companies in the biotechnology and pharmaceutical industries. For example, there are a number of biopharmaceutical companies focused on developing therapeutics that may potentially compete including Astellas Pharma U.S., Inc., Bionomics Limited, Boehringer Ingelheim GmbH, Geron Corp., GlaxoSmithKline plc, Macrogenics Inc., Micromet, Inc. (an Amgen, Inc. company), OncoMed Pharmaceuticals, Inc., Pfizer Inc., Roche Holding AG, Sanofi U.S. LLC, Stemcentrx, Inc., Sumitomo Dainippon Pharma Co. Ltd., Verastem, Inc., and others. Additionally, there are a number of companies working to develop new treatments, which may compete with SL-401 and SL-801, including AbbVie, Agios, Inc., Ambit Biosciences Corporation (now a Daiichi Sankyo company), Amgen, Astex Pharmaceuticals (now an Otsuka Pharmaceutical company), Celator Pharmaceuticals, Inc., Celgene Corporation, Cellectis, Cyclacel Pharmaceuticals, Inc., Eisai Co. Ltd., Genmab, Genzyme Corporation (now a Sanofi company) Immunogen, Janssen Pharmaceutical Companies of Johnson & Johnson, Karyopharm Therapeutics, Inc., MustangBio, Inc., Novartis AG, Seattle Genetics, Inc., Sunesis Pharmaceuticals, Inc., and Xencor, among others. There are also a number of drugs used for the treatment of brain cancer that may compete with SL-701, including, Avastin® (Roche Holding AG), Gliadel® (Eisai Co. Ltd.), and Temodar®

 

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(Merck & Co., Inc.). There are a number of companies working to develop brain cancer therapeutics with programs in clinical testing, including Agenus Inc., Bristol-Myers Squibb, Inc., Cortice Biosciences, Inc., Celldex Therapeutics, Inc., CytRx Corporation, GenSpera, Inc., GlaxoSmithKline plc., ImmunoCellular Therapeutics, Ltd., Northwest Biotherapeutics, Inc., Novartis AG, Roche Holding AG, and others.

 

Many of our competitors have substantially greater commercial infrastructures and financial, technical and personnel resources than we have. In addition, many are farther along in their clinical development programs.  We may not be able to compete unless we successfully:

 

·                                          design and develop products that address an unmet medical need or demonstrate a superior benefit/risk profile to other products in the market;

 

·                                          conduct successful preclinical and clinical trials;

 

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

 

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

 

·                                          obtain required regulatory approvals; and

 

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

 

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

 

If we fail to attract and keep senior management and key scientific and marketing personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our product candidates.

 

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management as well as other employees, consultants and scientific and medical collaborators. As of May 10, 2018, we had 46 full-time employees, which may make us more reliant on our individual employees than companies with a greater number of employees. Although none of these individuals has informed us to date that he or she intends to retire or resign in the near future, the loss of services of any of these individuals or one or more of our other members of senior management could delay or prevent the successful development of our product pipeline, completion of our ongoing and future clinical trials or the commercialization and successful marketing launch of our product candidates.

 

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Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We will need to hire additional personnel as we expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms.

 

In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may also be engaged with employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

 

If our employees or third parties acting on our behalf commit fraud or other misconduct, including noncompliance with regulatory standards and requirements, our business may experience serious adverse consequences.

 

We are exposed to the risk of fraud or other misconduct by employees and third parties acting on our behalf. Misconduct by employees or third parties could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee and third-party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

 

We may encounter difficulties in managing our growth and expanding our operations successfully.

 

As we seek to advance our product candidates through clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third-parties to provide these capabilities for us. As our operations expand, we expect that we will need to identify, commence and manage additional relationships with various strategic partners, qualified suppliers, manufacturers and other third-parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate additional

 

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management, administrative and sales and marketing personnel. The hiring, training and integration of new employees may be more difficult, costly and/or time-consuming for us because we have fewer resources than a larger organization. We may not be able to accomplish these tasks, or to accomplish them in a timely fashion, and our failure to accomplish any of them could prevent us from successfully growing our company.

 

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

 

We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes or contributes to an injury or is found to be otherwise defective during product testing, clinical study, clinical use, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Fraud-based claims as well as claims made pursuant to state consumer protection acts are also a possibility. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

·                                          decreased demand for our product candidates or products that we may develop;

 

·                                          injury to our reputation;

 

·                                          withdrawal of clinical trial participants and inability to enroll future clinical trial participants;

 

·                                          costs to defend the related litigation;

 

·                                          a diversion of management’s time and our resources;

 

·                                          substantial monetary awards to trial participants or patients;

 

·                                          product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

·                                          loss of income;

 

·                                          the inability to commercialize our product candidates; and

 

·                                          a decline in our stock price.

 

Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. Although we maintain liability insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our

 

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insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

 

Our relationships with customers and third-party payors in the United States and elsewhere will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to civil, criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

Healthcare providers, physicians and third-party payors in the United States and elsewhere play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal, state and foreign healthcare laws and regulations include the following:

 

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