Table of Contents

 

 

 

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 September 30, 2016

 

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, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if smaller reporting company)

 

 

 

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

 

There were 19,158,732 shares of the registrant’s common stock, $0.0001 par value, outstanding as of November 8, 2016.

 

 

 



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STEMLINE THERAPEUTICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2016

 

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

4

Item 1. Financial Statements

4

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

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

Item 4. Controls and Procedures

26

PART II: OTHER INFORMATION

28

Item 1. Legal Proceedings

28

Item 1A. Risk Factors

28

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

53

Item 3. Defaults upon Senior Securities

53

Item 4. Mine Safety Disclosures

53

Item 5. Other Information

53

Item 6. Exhibits

53

SIGNATURES

54

Exhibit Index

55

 

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.

 

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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on 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 ongoing and planned discovery and development of drug candidates, the strength and breadth of our intellectual property, our ongoing and planned preclinical studies and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, the degree of clinical utility of our product candidates, particularly in specific patient populations, expectations regarding clinical trial data, our results of operations, financial condition, liquidity, prospects, growth and strategies, the length of time that we will be able to continue to fund our operating expenses and capital expenditures, our expected financing needs and sources of financing, the industry in which we operate and the trends that may affect the industry or us.

 

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 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 and patient accrual, and the accuracy of data generated from our trials;

·                  our ability to obtain and maintain marketing approval from regulatory agencies for our products;

·                  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;

·                  our plans to develop and commercialize our products;

·                  our ability to successfully file and obtain timely marketing approval for one or more Biologics License Applications, or BLA, or New Drug Applications, or NDA;

·                  the successful development and implementation of our 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 revenues, 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-701, SL-801 and our other in-licensed product candidates;

·                  the success and timing of our preclinical studies including IND enabling studies;

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

·                  our ability to obtain and maintain approval of our product candidates for trial initiation;

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

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

·                  our ability to successfully implement our strategy.

 

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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 understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate.

 

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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Table of Contents

 

PART I: FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

STEMLINE THERAPEUTICS, INC.

Balance Sheets

 

 

 

September 30,
2016
(Unaudited)

 

December 31, 2015

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,127,991

 

$

13,376,196

 

Short-term investments

 

41,375,137

 

32,663,245

 

Prepaid expenses and other current assets

 

523,612

 

651,889

 

Total current assets

 

51,026,740

 

46,691,330

 

Furniture and fixtures, net

 

23,482

 

95,661

 

Long-term investments

 

23,818,645

 

51,428,632

 

Other assets

 

212,305

 

 

Total assets

 

$

75,081,172

 

$

98,215,623

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

7,917,969

 

$

8,632,873

 

Current portion of deferred grant revenue

 

1,197,600

 

822,604

 

Total current liabilities

 

9,115,569

 

9,455,477

 

Deferred grant revenue, net of current portion

 

 

616,949

 

Other liabilities

 

159,975

 

31,241

 

Total liabilities

 

9,275,544

 

10,103,667

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding at September 30, 2016 and December 31, 2015

 

 

 

Common stock $0.0001 par value, 33,750,000 shares authorized at September 30, 2016 and December 31, 2015, 19,151,652 shares issued and outstanding at September 30, 2016 and 18,235,020 shares issued and outstanding at December 31, 2015

 

1,916

 

1,825

 

Additional paid-in capital

 

191,584,735

 

185,703,423

 

Accumulated other comprehensive loss

 

(47,512

)

(153,690

)

Accumulated deficit

 

(125,733,511

)

(97,439,602

)

Total stockholders’ equity

 

65,805,628

 

88,111,956

 

Total liabilities and stockholders’ equity

 

$

75,081,172

 

$

98,215,623

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.

Statements of Operations

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

Grant revenue

 

$

299,401

 

$

205,651

 

$

741,953

 

$

448,509

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

7,176,960

 

7,340,859

 

20,585,659

 

21,575,743

 

General and administrative

 

3,187,869

 

2,234,991

 

8,914,630

 

6,197,694

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

10,364,829

 

9,575,850

 

29,500,289

 

27,773,437

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(10,065,428

)

(9,370,199

)

(28,758,336

)

(27,324,928

)

 

 

 

 

 

 

 

 

 

 

Other income

 

1,378

 

 

11,736

 

1,609

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

132,006

 

137,123

 

417,113

 

259,064

 

 

 

 

 

 

 

 

 

 

 

Net loss before income taxes

 

(9,932,044

)

(9,233,076

)

(28,329,487

)

(27,064,255

)

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

8,822

 

 

35,578

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,923,222

)

$

(9,233,076

)

$

(28,293,909

)

$

(27,064,255

)

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

$

(0.56

)

$

(0.53

)

$

(1.59

)

$

(1.57

)

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

17,831,022

 

17,515,895

 

17,777,675

 

17,196,840

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.

Statements of Comprehensive Loss

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,923,222

)

$

(9,233,076

)

$

(28,293,909

)

$

(27,064,255

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments, net of tax

 

(10,975

)

21,554

 

117,914

 

34,224

 

Reclassification adjustment for gain on investments included in net loss

 

(1,378

)

 

(11,736

)

(1,609

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain (loss)

 

(12,353

)

21,554

 

106,178

 

32,615

 

Comprehensive loss

 

$

(9,935,575

)

$

(9,211,522

)

$

(28,187,731

)

$

(27,031,640

)

 

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

 

Gain (Loss)

 

Deficit

 

Equity

 

Balance, December 31, 2015

 

18,235,020

 

$

1,825

 

$

185,703,423

 

$

(153,690

)

$

(97,439,602

)

$

88,111,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock grants

 

906,476

 

91

 

(91

)

 

 

 

Forfeiture of restricted stock grants

 

(35,002

)

(4

)

4

 

 

 

 

Stock-based compensation expense

 

 

 

5,666,813

 

 

 

5,666,813

 

Employee Stock Purchase Plan compensation expense

 

 

 

43,258

 

 

 

43,258

 

Issuance of common stock in connection with the ESPP

 

11,407

 

1

 

59,953

 

 

 

59,954

 

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

 

33,751

 

3

 

111,375

 

 

 

111,378

 

Net loss

 

 

 

 

 

(28,293,909

)

(28,293,909

)

Other comprehensive income, net of tax

 

 

 

 

106,178

 

 

106,178

 

Balance, September 30, 2016

 

19,151,652

 

$

1,916

 

$

191,584,735

 

$

(47,512

)

$

(125,733,511

)

$

65,805,628

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.

Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(28,293,909

)

$

(27,064,255

)

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

 

 

 

 

 

Depreciation

 

79,306

 

115,000

 

Stock-based compensation expense

 

5,710,071

 

4,484,815

 

Amortization of premium paid on marketable securities

 

167,540

 

157,665

 

Net gain on sale of marketable securities

 

(11,736

)

(1,609

)

Income tax benefit from other comprehensive income

 

(35,578

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

128,277

 

766,103

 

Other assets

 

(212,305

)

 

Accounts payable and accrued expenses

 

(734,024

)

2,319,249

 

Deferred grant revenue

 

(241,953

)

214,601

 

Other liabilities

 

128,734

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

(23,315,577

)

(19,008,431

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of furniture and fixtures

 

(7,128

)

 

Purchase of marketable securities

 

(22,194,580

)

(88,084,690

)

Proceeds from redemption of marketable securities

 

41,097,748

 

38,911,353

 

 

 

 

 

 

 

Net cash provided by (used) in investing activities

 

18,896,040

 

(49,173,337

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock, net

 

59,954

 

64,106,372

 

Proceeds from exercise of stock options

 

111,378

 

354,751

 

 

 

 

 

 

 

Net cash provided by financing activities

 

171,332

 

64,461,123

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(4,248,205

)

(3,720,645

)

Cash and cash equivalents at beginning of period

 

13,376,196

 

25,007,217

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

9,127,991

 

$

21,286,572

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.

Notes to Unaudited Financial Statements

September 30, 2016

 

1. Organization and Basis of Presentation

 

Organization

 

Stemline Therapeutics, Inc. (the “Company”) is a clinical stage biopharmaceutical company focused on discovering, acquiring, developing and commercializing proprietary oncology therapeutics. The Company’s activities to date have primarily consisted of advancing its clinical stage programs, developing its preclinical stage assets, fortifying 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.

 

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 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, 2016 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, 2015 (“2015 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to investments, property and equipment, accrued expenses, share-based compensation and income taxes. The estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes differing from those on which the Company bases its assumptions.

 

Reclassifications

 

Certain reclassifications totaling $822,604 have been made to the financial statements for the period ended December 31, 2015 to conform to the current portion of deferred revenue presentation in the financial statements for the period ended September 30, 2016. These reclassifications to adjust accounts payable and accrued expense had no impact on previously reported net loss or stockholders’ equity.

 

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 2015 Form 10-K. There have been no changes to those policies.

 

Recently Issued Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements To Employee Share-Based Payment Accounting, which allows for the simplification of several aspects of the accounting for share-based payment transactions. The standard is effective for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.

 

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3. Liquidity and Capital Resources

 

As of September 30, 2016, the Company has approximately $74.3 million in cash, cash equivalents, 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 September 30, 2016 and December 31, 2015:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Prepaid third-party vendor costs

 

$

261,304

 

$

195,305

 

Prepaid insurance

 

169,551

 

51,623

 

Deposits

 

 

106,243

 

Other Receivable

 

92,757

 

298,718

 

Total

 

$

523,612

 

$

651,889

 

 

5. Furniture and Fixtures

 

Furniture and fixtures consist of the following at September 30, 2016 and December 31, 2015:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Office furniture and fixtures

 

$

486,586

 

$

479,458

 

Less accumulated depreciation

 

(463,104

)

(383,797

)

Furniture and fixtures, net

 

$

23,482

 

$

95,661

 

 

Depreciation expense was $79,306 and $115,000 for the nine-month periods ended September 30, 2016 and 2015, respectively. Depreciation expense was $952 and $38,333 for the three-month periods ended September 30, 2016 and 2015, respectively.

 

6. Fair Value Measurements

 

The Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

 

Financial assets recorded at fair value on the Company’s balance sheets are categorized as follows:

 

Level 1: Unadjusted quoted prices for identical assets in an active market.

 

Level 2: Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full-term of the asset. Level 2 inputs include the following:

 

·                                          quoted prices for similar assets in active markets,

·                                          quoted prices for identical or similar assets in non-active markets,

·                                          inputs other than quoted market prices that are observable, and

·                                          inputs that are derived principally from or corroborated by observable market data through correlation or other means.

 

Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs reflect management’s own assessment about the assumptions a market participant would use in pricing the asset.

 

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There were no transfers between levels in the fair value hierarchy during any period presented herein. The Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015 consist of the following:

 

 

 

September 30, 2016

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

Balance

 

 

 

Identical

 

Observable

 

Unobservable

 

at

 

 

 

Assets

 

Inputs

 

Inputs

 

September 30,

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2016

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,127,991

 

$

 

$

 

$

9,127,991

 

Short-term investments

 

21,123,088

 

20,252,049

 

 

41,375,137

 

Long-term investments

 

17,994,239

 

5,824,406

 

 

23,818,645

 

Total assets at fair value

 

$

48,245,318

 

$

26,076,455

 

$

 

$

74,321,773

 

 

 

 

December 31, 2015

 

 

 

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)

 

2015

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,376,196

 

$

 

$

 

$

13,376,196

 

Short-term investments

 

16,515,871

 

16,147,374

 

 

32,663,245

 

Long-term investments

 

37,217,727

 

14,210,905

 

 

51,428,632

 

Total assets at fair value

 

$

67,109,794

 

$

30,358,279

 

$

 

$

97,468,073

 

 

The following is a summary of cash equivalents and available-for-sale investments held by the Company at September 30, 2016 and December 31, 2015:

 

 

 

September 30, 2016

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Cash:

 

 

 

 

 

 

 

 

 

Cash from operating accounts

 

$

2,321,486

 

$

 

$

 

$

2,321,486

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,806,505

 

$

 

$

 

$

6,806,505

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

2,109,094

 

288

 

(454

)

2,108,928

 

Federal farm credit bank

 

2,061,220

 

2,835

 

 

2,064,055

 

Federal home loan bank

 

10,230,949

 

6,328

 

(1,640

)

10,235,637

 

Freddie Mac

 

6,711,326

 

3,142

 

 

6,714,468

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

20,248,529

 

3,520

 

 

20,252,049

 

 

 

 

 

 

 

 

 

 

 

Total Short-term investments

 

41,361,118

 

16,113

 

(2,094

)

41,375,137

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

5,866,250

 

912

 

(7,149

)

5,860,013

 

Federal farm credit bank

 

2,306,338

 

 

(890

)

2,305,448

 

Federal home loan bank

 

1,906,009

 

1,577

 

 

1,907,586

 

Freddie Mac

 

7,922,837

 

183

 

(1,828

)

7,921,192

 

 

11



Table of Contents

 

 

 

September 30, 2016

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Certificate of Deposits

 

5,824,044

 

362

 

 

5,824,406

 

 

 

 

 

 

 

 

 

 

 

Total Long-term investments

 

23,825,478

 

3,034

 

(9,867

)

23,818,645

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

74,314,587

 

$

19,147

 

$

(11,961

)

$

74,321,773

 

 

 

 

December 31, 2015

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Cash:

 

 

 

 

 

 

 

 

 

Cash from operating accounts

 

$

5,462,081

 

$

 

$

 

$

5,462,081

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

7,914,115

 

$

 

$

 

$

7,914,115

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

2,005,785

 

 

(2,942

)

2,002,843

 

Federal farm credit bank

 

1,076,445

 

 

(1,856

)

1,074,589

 

Federal home loan bank

 

12,445,530

 

61

 

(9,764

)

12,435,827

 

Freddie Mac

 

1,005,272

 

 

(2,660

)

1,002,612

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

16,150,513

 

295

 

(3,434

)

16,147,374

 

 

 

 

 

 

 

 

 

 

 

Total Short-term investments

 

32,683,545

 

356

 

(20,656

)

32,663,245

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

4,366,424

 

 

(15,213

)

4,351,211

 

Federal farm credit bank

 

6,290,607

 

 

(27,957

)

6,262,650

 

Federal home loan bank

 

14,113,301

 

 

(44,803

)

14,068,498

 

Freddie Mac

 

12,576,749

 

 

(41,382

)

12,535,367

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

14,214,941

 

703

 

(4,738

)

14,210,906

 

 

 

 

 

 

 

 

 

 

 

Total Long-term investments

 

51,562,022

 

703

 

(134,093

)

51,428,632

 

Total

 

$

97,621,763

 

$

1,059

 

$

(154,749

)

$

97,468,073

 

 

At September 30, 2016 and December 31, 2015, 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 September 30, 2016 and December 31, 2015.

 

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.

 

12



Table of Contents

 

7. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the following at September 30, 2016 and December 31, 2015:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Accrued research and development costs

 

$

5,811,179

 

$

5,303,990

 

Accrued compensation

 

1,509,203

 

2,727,965

 

Accrued professional fees

 

236,752

 

245,329

 

Other accrued liabilities

 

360,835

 

355,589

 

Total

 

$

7,917,969

 

$

8,632,873

 

 

8. Common Stock

 

In the first quarter of 2015, the Company completed an underwritten follow-on public offering, selling 3,800,000 shares at an offering price of $15.75 per share and the underwriters exercised in full their over-allotment option to purchase an additional 553,877 shares at an offering price of $15.75 per share (the “Secondary Offering”). Aggregate gross proceeds from the Secondary Offering were $68.6 million, and net proceeds received after underwriting fees and offering expenses were approximately $64.1 million.

 

As of September 30, 2016 and December 31, 2015, the Company was authorized to issue 33,750,000 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 effect the conversion of shares from the exercise of stock options.

 

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.

 

9. Accumulated Other Comprehensive Gain (Loss)

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(35,159

)

$

14,061

 

$

(153,690

)

$

3,000

 

Other comprehensive income (loss) before reclassification

 

(17,339

)

21,554

 

172,612

 

34,224

 

Amounts reclassified from accumulated other comprehensive income (loss)*

 

(1,378

)

 

(11,736

)

(1,609

)

Income tax provision

 

6,364

 

 

(54,698

)

 

Total other comprehensive income

 

(12,353

)

21,554

 

106,178

 

32,615

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

(47,512

)

$

35,615

 

$

(47,512

)

$

35,615

 

 


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

 

10. Net (Loss) Income Per Common Share

 

The Company accounts for and discloses net income (loss) per share using the treasury stock method. Net income (loss) per common share, or basic income (loss) per share, is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Net income (loss) per common share assuming dilutions, or diluted income (loss) per share, is computed by reflecting the potential dilution from the exercise of in-the-money stock options, non-vested restricted stock and non-vested restricted stock units.

 

13



Table of Contents

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Basic and diluted net loss per common share calculation:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,923,222

)

$

(9,233,076

)

$

(28,293,909

)

$

(27,064,255

)

Basic and diluted weighted-average common shares

 

17,831,022

 

17,515,895

 

17,777,675

 

17,196,840

 

Basic and diluted net loss per share

 

$

(0.56

)

$

(0.53

)

$

(1.59

)

$

(1.57

)

 

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 nine-month periods ended September 30, 2016 and 2015, 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:

 

 

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

Restricted stock

 

1,304,974

 

449,068

 

Options outstanding

 

3,147,545

 

2,145,536

 

Warrants

 

99,529

 

99,529

 

Total

 

4,552,048

 

2,694,133

 

 

11. Grant Revenue

 

The Company has not generated any revenue from product sales and it has generated minimal revenues to date relating to $3.0 million in research grants received from the Leukemia and Lymphoma Society, or LLS. In the future, the Company may generate revenue from product sales. In October 2013, the Company entered into an agreement with LLS, which among other activities, sponsors research relating to hematologic cancers. LLS has agreed to provide funding to the Company of up to $3.5 million based on the achievement of certain milestones. The Company could receive an additional $0.5 million based on the completion of certain additional milestone events. The Company recognized approximately $0.7 million and $0.4 million of revenue related to this funding for the nine-month periods ended September 30, 2016 and September 30, 2015, respectively, which reflects nine months of revenue recognized on a straight line basis, based on the Company’s best estimates of work performed and qualifying costs incurred. The Company recognized approximately $0.3 million and $0.2 million of revenue related to this funding for the three-month periods ended September 30, 2016 and September 30, 2015, respectively. This agreement terminates when there are no longer any payment obligations.

 

12. Income Taxes

 

For the three and nine months ended September 30, 2016 the Company recognized $8,822 and $35,578, respectively, of income tax benefit as a result of the application of intraperiod tax allocation provisions of ASC 740, under which the Company is required to consider all items (including items recorded in other comprehensive income) in determining the amount of tax benefit that should be allocated to net loss. The non-cash income tax benefit was offset in full by income tax expense recorded in other comprehensive income of $54,698 and a tax provision liability of $19,120.

 

The Company did not record any other income tax provisions or benefits relating to its net operating losses for the nine-month periods ended September 30, 2016 and 2015, respectively, due to the fact that the Company cannot benefit from its net operating losses or other deferred tax assets. The Company has never had 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 is not currently being audited by the Internal Revenue Service or any state taxing jurisdiction.

 

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.

 

14



Table of Contents

 

Valuation allowances reduce deferred tax assets to the amounts that are more likely than not to be realized. As of September 30, 2016, 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 to grant up to 1,812,932 shares of common stock to eligible employees, directors, and non-employee consultants and advisors to the Company. 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 in the form of options to purchase common stock of the Company at a price not less than the estimated fair value at the date of grant. Under the provisions of the 2012 Plan, no option will have a term in excess of 10 years.

 

As of September 30, 2016, there were 835,431 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 $5.7 million and $4.5 million for the nine-month periods ended September 30, 2016 and 2015, respectively. The Company does not recognize a tax benefit with respect to an excess stock compensation deduction until the deduction actually reduces the Company’s income tax liability. No income tax benefit was recognized in the statements of operations for share-based compensation arrangements for the nine-month periods ended September 30, 2016 and 2015.

 

The following table summarizes stock-based compensation related to the above plans by expense category for the three-month and nine-month periods ended September 30, 2016 and 2015, respectively:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Research and development

 

$

1,368,932

 

$

1,047,970

 

$

2,536,118

 

$

2,717,766

 

General and administrative

 

1,348,946

 

703,943

 

3,130,695

 

1,767,049

 

Total

 

$

2,717,878

 

$

1,751,913

 

$

5,666,813

 

$

4,484,815

 

 

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, generally, have a term of 10 years from the grant date. Options granted to employees generally vest over a four-year period and 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 by the board of directors. Compensation cost for stock options granted to employees and Directors are charged against operations using the straight-line attribution method between the grant date for the option and each vesting date. The Company has also granted market based awards to an employee and an non-employee consultant in which the compensation cost will be charged against operations using the accelerated attribution method regardless of whether or not market conditions are met. 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 and nine-month periods ended September 30, 2016 and 2015, respectively are as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Weighted-average volatility

 

73.82

%

76.00

%

73.52

%

78.75

%

Weighted-average risk-free interest rate

 

1.22

%

1.76

%

1.56

%

1.84

%

Weighted-average expected term in years

 

5.45

 

6.17

 

6.03

 

6.16

 

Dividend yield

 

0

%

0

%

0

%

0

%

 

15



Table of Contents

 

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 nine-month periods ended September 30, 2016 and September 30, 2015, the Company issued 33,751 and 86,736 shares, respectively, of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $111,378 and $354,751, respectively. As of September 30, 2016, there was approximately $7.2 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to unamortized stock option compensation which is expected to be recognized over a remaining weighted-average period of approximately 2.21 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

 

The following table summarizes the activity related to the Company’s stock options for the nine months ended September 30, 2016:

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual Life

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2015

 

2,121,726

 

$

10.74

 

 

 

 

 

Options granted

 

1,121,686

 

5.24

 

 

 

 

 

Options exercised

 

(33,751

)

3.30

 

 

 

 

 

Options forfeited

 

(62,116

)

18.34

 

 

 

 

 

Outstanding at September 30, 2016

 

3,147,545

 

$

8.71

 

7.25

 

$

13,668,456

 

Options exercisable at September 30, 2016

 

1,319,888

 

$

8.35

 

5.29

 

$

6,835,927

 

 

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 September 30, 2016 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 September 30, 2016. 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 earnings on a straight-line basis over the vesting period, which ranges from immediate to four years in duration. The Company has also granted market based awards to an employee in which the compensation cost will be charged against operations using the accelerated attribution method regardless of whether or not market conditions are met. Restricted stock may be granted to Directors and represents compensation for services performed on the Company’s board of directors. 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 nine months ended September 30, 2016:

 

 

 

Number of Shares

 

Weighted-
Average Grant
Date Fair Value
Per Share

 

Outstanding at December 31, 2015

 

553,045

 

$

13.91

 

Shares granted

 

906,476

 

4.84

 

Shares vested

 

(119,545

)

16.63

 

Shares forfeited

 

(35,002

)

10.99

 

Outstanding at September 30, 2016

 

1,304,974

 

$

7.44

 

 

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Table of Contents

 

For the nine-month period ended September 30, 2016, the Company granted 906,476 shares of restricted stock, at a weighted-average grant date fair value of $4.84 per share amounting to approximately $4.4 million in total aggregate fair value. As of September 30, 2016, 1,304,974 shares remained unvested and there was approximately $5.7 million of unrecognized compensation cost related to restricted stock which is expected to be recognized over a remaining weighted-average period of approximately 2.56 years. The total fair value of restricted stock vested during the nine-month periods ended September 30, 2016 and September 30, 2015 was approximately $2.0 million and $1.3 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 $0.3 million for the nine-month periods ended September 30, 2016 and 2015, respectively.

 

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%. For the nine months ended September 30, 2016, the Company recorded approximately $43,258 of compensation expense, 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 milestone and royalty payments based on successful development and commercialization of these assets including their net sales in the future. The timing and the amount of milestone and royalty payments in the future are not certain.

 

Under the Company’s license agreements, upon achieving certain milestones largely consisting of late stage clinical trial events and marketing approval and sales, the Company could be required to pay up to a total of $112.9 million in future periods. From inception through September 30, 2016, the Company has paid or accrued $4.6 million in payments resulting from such agreements. Royalty payments, largely single digit, are payable on commercial sales of certain products.

 

The Company has also licensed additional rights, including to certain intellectual property, 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. In addition, these agreements generally require the Company to pay royalties on sales of the products arising from these agreements. These agreements generally permit the Company to terminate the agreement with no significant continuing obligation.

 

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 probable nor reasonably estimable, the Company has not recorded a liability on its balance sheet for any such contingencies.

 

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 2016, the Company entered into new work order agreements with this vendor totaling approximately $6.1 million, with services to be rendered on these agreements through 2016. The Company has received and paid for services relating to these agreements in the amount of $5.1 million.

 

The Company has agreements with third party service providers in connection with its clinical programs. The Company’s total expenditures in the future would be approximately $7.3 million if not cancelled upon reasonable notice to the service provider and assuming the successful advancement of its programs.

 

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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 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.

 

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

 

Remainder of 2016

 

$

209,250

 

2017

 

837,000

 

2018

 

837,000

 

2019

 

837,000

 

Total minimum payments

 

$

2,720,250

 

 

Rent expense charged to operations was $533,305 and $455,952 for the nine-month periods ended September 30, 2016 and 2015, respectively.  Rent expense is included in general and administrative expenses in the Company’s Statements of Operations.

 

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 “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, 2015, and Management’s Discussion and Analysis of Financial Condition and Results of Operation included in our 2015 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 commercializing proprietary oncology therapeutics. We are currently developing three clinical stage product candidates, SL-401, SL-701 and SL-801.

 

SL-401

 

Patients are currently enrolling in SL-401 clinical trials in multiple indications, including a Phase 2 potentially pivotal trial in patients with blastic plasmacytoid dendritic cell neoplasm, or BPDCN. SL-401 as a single agent is also being advanced through clinical trials in acute myeloid leukemia, or AML, and myeloproliferative neoplasms, or MPN. In addition, SL-401 is being evaluated in combination with traditional therapies in a Phase 1/2 trial in patients with relapsed or refractory, or r/r, multiple myeloma.

 

SL-401 is a targeted therapy directed to the interleukin-3 receptor, or IL-3R (CD123). CD123 is present on a wide range of hematologic cancers including BPDCN, AML, certain MPNs, multiple myeloma, chronic myeloid leukemia, or CML, and other leukemias and lymphomas. SL-401 has demonstrated potent anti-tumor activity against a wide range of hematologic cancers in in vitro and in vivo preclinical models, including BPDCN, AML, MPN, multiple myeloma, CML, and other leukemic and lymphoid malignancies.

 

We are also developing SL-501, a next generation CD123-targeted therapy, which is currently in investigational new drug, or IND, enabling studies.

 

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Previously, SL-401 was evaluated in an investigator-sponsored Phase 1/2 clinical trial in patients with advanced hematologic cancers; a trial which has since completed. In this trial, SL-401 was administered via daily intravenous infusion for up to five days, for only a single cycle, and demonstrated a manageable safety profile and anti-tumor activity, including complete responses, or CRs, largely in BPDCN but also in r/r AML (Frankel et al. Blood 124, 2014; ASH 2013 Poster #2682; ASH 2015 Poster #3795).

 

Currently, we are enrolling patients in the following corporate-sponsored SL-401 clinical trials in which SL-401 is administered in a multi-cycle regimen (via daily intravenous infusion for up to five days, repeated every 3-4 weeks):

 

·                  A Phase 2 potentially pivotal trial in patients with BPDCN;

·                  A Phase 2 trial in patients with AML in CR with minimal residual disease, or MRD;

·                  A Phase 2 trial in patients with advanced, high-risk MPNs; and

·                  A Phase 1/2 trial, in combination with pomalidomide and dexamethasone, in patients with r/r multiple myeloma.

 

SL-401 was granted Breakthrough Therapy Designation, or BTD, by the U.S. Food and Drug Administration, or FDA, in August 2016. In addition, SL-401 was granted Orphan Drug Designation for the treatment of BPDCN and AML from both the FDA and the European Medicines Agency, or EMA.

 

SL-401 in BPDCN

 

Patients are currently enrolling into our ongoing, Phase 2 potentially pivotal trial of SL-401 in BPDCN. The trial is a single arm, open-label, multicenter study. The two-stage trial consists of a lead-in, dose escalation stage that included BPDCN and relapsed/refractory AML patients (Stage 1) followed by an expansion stage of BPDCN patients only (Stage 2) that utilizes the dose and regimen determined in Stage 1. Stage 1 of the trial has completed and enrollment in Stage 2 is ongoing. This trial is designed to support potential registration in BPDCN and we expect input from the FDA in the near-term regarding our potential registration pathway in BPDCN.

 

In June 2016, our academic investigators delivered oral presentations on the Phase 2 SL-401 clinical data in BPDCN at the annual meetings of the American Society of Clinical Oncology, or ASCO, in Chicago, Illinois, and the European Hematology Association, or EHA, in Copenhagen, Denmark. The data included 24 BPDCN patients treated with SL-401, of which 19 patients were evaluable at the time. Results demonstrated a safety profile which has remained manageable over increasing treatment duration, drug exposure, and patient experience. In addition, SL-401 demonstrated high overall response rates, or ORR, in both first-line and r/r BPDCN patients. Response duration and preliminary progression-free survival, or PFS, and overall survival, or OS, data were promising and patient enrollment was ongoing.

 

As of July 2016, 26 adult BPDCN patients received SL-401 in a multi-cycle regimen; an additional 3 pediatric patients received SL-401 under compassionate use. SL-401’s safety profile has continued to remain predictable and manageable over increasing treatment duration, drug exposure, and patient experience. SL-401 has continued to produce a high ORR (86%; 18/21) across all lines and all doses of evaluable adult patients. Data from the pediatric compassionate patients (n=3) are pending and will be reported separately. In the first-line setting at all tested doses, the ORR in evaluable adult patients is 100% (14/14), consisting of 9 CRs, 3 clinical complete responses, or CRcs (CRc defined as a CR in non-skin organs with gross reduction in cutaneous lesions and residual microscopic skin disease), and 2 partial responses, or PRs. Five of these first-line patients who experienced a major response with SL-401 (3 CR, 1 CRc, 1 PR) were subsequently bridged to stem cell transplant, or SCT, and remain progression free. Duration data continue to mature, with 75% (9/12) of evaluable first-line adult patients treated at the maximum tested dose of 12 ug/kg remaining progression free for 3+ to 16+ months (ongoing), including a patient who has been receiving SL-401 for 12+ months [16+ cycles] (ongoing). In the r/r setting, the ORR is >50% (4/7) in currently evaluable patients, including a r/r patient who experienced a major response while on SL-401 and was then successfully bridged to SCT and remains progression free for 4+ months (ongoing). OS and PFS data continue to trend favorably, and new patients are enrolling into the trial. It is our intention to present updated data from this trial at the upcoming American Society of Hematology, or ASH, conference in December 2016.

 

SL-401 in AML in remission with high relapse risk including minimal residual disease

 

We are currently enrolling AML patients in remission with MRD in a single arm, open-label, multicenter Phase 2 clinical trial. This trial has a lead-in dose escalation stage (Stage 1) and an expansion stage (Stage 2) designed to enroll patients at the dose and regimen determined by Stage 1. The objectives of the clinical study are to determine 1) safety and optimal dose in this indication, 2) SL-401’s ability to lessen MRD burden, and 3) whether CR duration can be extended by SL-401 relative to historical data. Stage 1 of the trial has been completed and enrollment in Stage 2 is ongoing.

 

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SL-401 in high-risk myeloproliferative neoplasms

 

We are currently enrolling patients with certain advanced, high-risk MPNs, including chronic myelomonocytic leukemia, or CMML, myelofibrosis, systemic mastocytosis, and hypereosinophilic disorder, in a single arm, open-label, multicenter Phase 2 clinical trial. This trial has a lead-in dose escalation stage (Stage 1) and an expansion stage (Stage 2) designed to enroll patients at the dose and regimen determined by Stage 1. The objectives of this clinical study are to determine 1) safety and optimal dose in this indication, and 2) signals of clinical activity. Stage 1 of this trial has been completed and enrollment in Stage 2 is ongoing.

 

SL-401 in combination with pomalidomide and dexamethasone in relapsed/refractory multiple myeloma

 

We are currently enrolling patients in a single arm, open-label, multicenter Phase 1/2 clinical trial evaluating SL-401 in combination with pomalidomide and dexamethasone in r/r multiple myeloma patients. This trial has a lead-in dose escalation stage (Stage 1) and an expansion stage (Stage 2) designed to enroll patients at the dose and regimen determined by Stage 1. The objectives of the clinical study are to determine 1) the safety and optimal dose of SL-401 when administered in combination with pomalidomide and dexamethasone, and 2) signals of clinical activity. The trial is currently enrolling patients in Stage 1.

 

SL-701

 

SL-701 is an immunotherapy designed to activate the immune system to attack brain cancer and other malignancies. SL-701 is comprised of several synthetic peptides that correspond to targets on brain cancer cells and other malignancies, including IL-13Rα2, EphA2, and survivin. Two of these peptides are novel mutants, corresponding to IL-13Rα2 and survivin, artificially designed to be potentially immunogenic to amplify the anti-tumor immune response.

 

In several completed investigator-sponsored Phase 1/2 clinical trials, an earlier version of this therapy, delivered with an immunostimulant, poly-ICLC, a toll-like receptor 3, or TLR3, agonist shown to activate NK cells and CD8+ T cells, demonstrated anti-tumor activity, including several tumor shrinkages and disease stabilizations in adult and pediatric patients with high grade glioma, including glioblastoma, or GBM (Okada. J Clin Oncol. 2011, ASCO 2011 Poster#2506, AACR 2012 Poster#LB-135).

 

SL-701 has been granted Orphan Drug Designation by the FDA for the treatment of glioma.

 

SL-701 Phase 2 in Second Line GBM

 

In the initial stage (Stage 1) of our corporate-sponsored trial in adult patients with second-line GBM, SL-701 was administered via subcutaneous injection with the immunostimulants, GM-CSF and imiquimod. We have completed patient enrollment in this stage and patients continue to be followed for safety and efficacy. Currently, in Stage 2 of the trial, adult patients with second-line GBM are receiving SL-701 and poly-ICLC, the immunostimulant used in the previous investigator-sponsored studies. In addition, we have added bevacizumab (Avastin®) to the regimen. We expect preliminary data from this study later this year and on into next year.

 

SL-801

 

SL-801 is a structurally novel, oral, small molecule, reversible inhibitor of Exportin-1, or XPO1, a tumor-promoting nuclear transport protein. XPO1 has been shown to regulate nuclear import and export of tumor suppressor proteins and oncogenic cell growth regulators, and is overexpressed by many cancer types. Inhibition of XPO1 has been shown to restore tumor suppressor function and proper cell cycle regulation, leading to death of cancer cells. Clinically, we believe that data indicate that XPO1 is a validated target in a variety of solid and hematological cancers. SL-801 has demonstrated potent preclinical in vitro and in vivo antitumor activity against a wide array of solid and hematologic cancers. Moreover, we believe that by virtue of its relatively reversible inhibition of XPO1, SL-801 may possess a favorable therapeutic window in the clinic.

 

SL-801 Phase 1 — Advanced Solid Tumors

 

We are currently enrolling patients with advanced solid tumors in a Phase 1, dose escalation trial of SL-801. We have cleared the first three dosing cohorts, and the fourth cohort is currently open. The trial is designed to evaluate safety, establish an effective dosing regimen, as well as identify initial signals of efficacy. We also plan to initiate a Phase 1 trial in patients with advanced hematologic cancers in the future.

 

We have devoted substantially all of our resources to advancing our clinical stage candidates into and through clinical trials, formulating a clinical and regulatory development strategy, manufacturing our product candidates, developing our preclinical pipeline,  fortifying our intellectual property portfolio, identifying and acquiring additional product and technology rights, providing general and administrative support for these operations, and raising capital. We have generated minimal revenues to date, have not generated any revenue from product sales, and have funded our operations primarily through public sales of common stock to our investors. From

 

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inception through September 30, 2016, we raised $165.7 million primarily from the public sale of common stock relating to our 2013 Initial Public Offering, or IPO, and two subsequent secondary offerings. During the first quarter of 2015, we raised gross cash proceeds of $68.6 million ($64.1 million cash proceeds, net of expenses) from the underwritten public secondary offering and sale of 4,353,877 shares of our common stock.

 

We have never been profitable and our net losses from operations for the nine months ended September 30, 2016 and 2015 were $28.3 million and $27.1 million, respectively. We expect our expenses to moderately increase 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 may 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 revenues to achieve profitability, and we may never do so.

 

Financial Operations Overview

 

Revenue

 

We have not generated any revenue from product sales and we have generated minimal revenues to date all relating to a $3.0 million research funding received to date from the Leukemia and Lymphoma Society, or LLS, where we recognized revenue of $0.7 million for the nine-month period ended September 30, 2016, which reflects nine months of revenue recognized on a straight line basis, based on the Company’s best estimates of work performed and qualifying cost incurred. In the future, we may generate revenue from product sales. In addition, to the extent we enter into licensing or collaboration arrangements, we may have additional sources of revenue.

 

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 revenue, 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 and nine-month periods ended September 30, 2016 and 2015:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

SL-401

 

3,889,790

 

3,274,049

 

10,365,203

 

9,872,535

 

SL-701

 

(173,811

)

1,106,562

 

1,806,554

 

2,955,219

 

SL-801

 

762,857

 

643,823

 

1,895,484

 

1,572,770

 

Personnel expenses

 

2,505,888

 

2,139,920

 

5,972,606

 

6,415,266

 

Other expenses

 

192,236

 

176,505

 

545,812

 

759,953

 

Total

 

7,176,960

 

7,340,859

 

20,585,659

 

21,575,743

 

 

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;

 

·                  nonclinical costs;

 

·                  regulatory expenses including Biologics License application, or BLA, related costs;

 

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

 

·                  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.

 

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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 as an expense 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 moderately increase in future periods as we continue to develop SL-401, SL-701, SL-801, and continue to develop our other product candidates and our platform technology. We anticipate the majority of our research and development expense will be devoted to the development of SL-401, SL-701, and SL-801.

 

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, 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;

 

·                  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;

 

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

 

·                  the costs of preparing, filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.

 

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 U.S. Food and Drug Administration, or 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 or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

 

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 legal, finance, human resources, investor relations, commercial operations and business development departments. 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 increase in future periods due to the planned build out of a commercial infrastructure to support a potential commercial product launch for SL-401 if an FDA 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 market and that our primary investments are in 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.

 

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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.

 

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 2015 Form 10-K. There were no material changes in our critical accounting estimates or accounting policies during the nine months ended September 30, 2016.

 

Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements To Employee Share-Based Payment Accounting, which allows for the simplification of several aspects of the accounting for share-based payment transactions. The standard is effective for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.

 

Results of Operations

 

Comparison of Three Months Ended September 30, 2016 and 2015

 

Research and development expense.  Research and development expense was $7.2 million for the quarter ended September 30, 2016, compared with $7.3 million for the quarter ended September 30, 2015, representing a decrease of $0.1 million.

 

General and administrative expense.  General and administrative expense was $3.2 million for the quarter ended September 30, 2016, compared with $2.2 million for the quarter ended September 30, 2015, representing an increase of $1.0 million. The increase in expense was primarily attributable to higher non-cash stock based compensation and payroll costs relating to employees.

 

Interest income.  Interest income was $132,006 for the quarter ended September 30, 2016, compared with $137,123 for the quarter ended September 30, 2015. The slightly lower income is due to the year over year reduction in our cash, short-term investment and long-term investment balances.

 

Comparison of Nine Months Ended September 30, 2016 and 2015

 

Research and development expense.  Research and development expense was $20.6 million for the nine months ended September 30, 2016, compared with $21.6 million for the nine months ended September 30, 2015, representing a decrease of $1.0 million. The lower expenses in 2016 compared to the same period in the prior year were primarily attributable to higher clinical site startup fees in the prior year.

 

General and administrative expense.  General and administrative expense was $8.9 million for the nine months ended September 30, 2016, compared with $6.2 million for the nine months ended September 30, 2015, representing an increase of $2.7 million. The increase in expense year over year was primarily attributable to higher non-cash stock based compensation and payroll costs relating to employees.

 

Interest income.  Interest income was $417,113 for the nine months ended September 30, 2016, compared with $259,064 for the nine months ended September 30, 2015. The higher income is due to a change in the composition of our investment portfolio to include higher yielding FDIC insured certificates of deposit.

 

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Liquidity and Capital Resources

 

Sources of Liquidity

 

As of September 30, 2016, our cash, cash equivalents and short and long-term investments totaled $74.3 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 including cash proceeds received from our Secondary Offering in the first quarter of 2015, will be sufficient to fund our operations and our capital expenditures 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 IPO and two subsequent secondary offerings. To date, we have not generated any revenue from the sale of products. We have incurred losses and generated negative cash flows from operations since inception.

 

Since inception and through September 30, 2016, we received net proceeds of $165.7 million primarily from the public sale of common stock from our 2013 IPO and two subsequent follow-on secondary offerings. During the first quarter of 2015, we completed an underwritten follow-on public offering, selling 3,800,000 shares at an offering price of $15.75 per share and the underwriters exercised in full their over-allotment option to purchase an additional 553,877 shares at an offering price of $15.75 per share. Aggregate gross proceeds from the secondary offering were $68.6 million, and net cash proceeds received after underwriting fees and offering expenses were approximately $64.1 million.

 

Cash Flows

 

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

 

 

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

Net cash used in operating activities

 

$

(23,315,577

)

$

(19,008,431

)

Net cash provided by/(used) in investing activities

 

18,896,040

 

(49,173,337

)

Net cash provided by financing activities

 

171,332

 

64,461,123

 

Net (decrease) increase in cash and cash equivalents

 

$

(4,248,205

)

$

(3,720,645

)

 

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 nine months ended September 30, 2016 and 2015 primarily resulted from research and development expenses as we ramped up our clinical activities relating to SL-401, SL-701, and SL-801. 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.

 

Investing activities.  The net cash provided by and used in financing activities for the nine months ended September 30, 2016 and 2015, 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 nine months September 30, 2016 resulted from the issuance of stock related to the 2015 Employee Stock Purchase Plan and exercise of employee stock options.  The net cash provided by financing activities for the nine months ended September 30, 2015 resulted primarily from our Secondary Offering and sale of 4,353,877 shares of our common stock which generated gross cash proceeds of $68.6 million ($64.1 million cash proceeds, net of expenses).

 

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 substantially if and as we:

 

·                  continue the ongoing clinical trials, and initiate the planned clinical trials, of our product candidates, SL-401, SL-701 and SL-801;

 

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·                  continue the research and development of our other product candidates, including SL-501, and our platform technology;

 

·                  seek to identify additional product candidates;

 

·                  acquire or in-license other products and technologies;

 

·                  seek marketing approvals for our product candidates that successfully complete 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;

 

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

 

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

 

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;

 

·                  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;

 

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

 

·                  our ability to obtain government funding and operational support for our planned clinical trial of SL-701 in our clinical programs;

 

·                  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 revenues, 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 revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

 

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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.

 

The Company has agreements with third party service providers in connection with its clinical programs. The Company’s total expenditures in the future would be approximately $7.3 million if not cancelled upon reasonable notice to the service provider and assuming the successful advancement of its programs.

 

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 September 30, 2016, we had net operating losses of $80.2 million for both federal and state purposes, which are available to reduce future taxable income. We also had federal tax credits of approximately $14.9 million, which may be used to offset future tax liabilities. The net operating loss and tax credit carryforwards will expire at various dates through 2036. 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 the ownership change. Subsequent ownership changes may further affect the limitation in future years. At September 30, 2016, 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 equivalent, short-term investments and long-term investments of $74.3 million as of September 30, 2016 and $97.5 million as of December 31, 2015, consisting of cash, U.S. Treasury and Agency securities and 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 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 September 30, 2016 and December 31, 2015, 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 principal executive officer and our 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. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s, or SEC, rules and forms. Disclosure controls and procedures include, without limitation, controls and

 

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procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

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, the Company’s 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.

 

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PART II: OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

We are not currently subject to any material legal proceedings.

 

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-701, and SL-801, 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-701 and SL-801, which we are advancing through clinical development. Our future success depends heavily on our ability to successfully manufacture, develop, obtain regulatory approval, and commercialize these product candidates, which may never occur. We currently generate no revenues from our product candidates, and we may never be able to develop or commercialize a marketable drug.

 

Before we generate any revenues from product sales, 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, qualify a third-party contract manufacturing organization, or CMO, receive regulatory approval in one or more jurisdictions, satisfy the FDA that our CMO is capable of manufacturing the product in compliance with the FDA’s current good manufacturing practice regulations, or cGMP, build a commercial organization, make substantial investments and undertake significant marketing efforts ourselves or in partnership with others. 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 biologics license application, or 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 will allow us to obtain or maintain marketing approval.  We also cannot be certain that any of our product candidates will be successful in clinical trials or receive regulatory approval for trial initiation or marketing. Further, the FDA may not agree with our interpretation of the clinical safety and efficacy of our product candidates and our product candidates may not receive regulatory approval even if they are successful in clinical trials. 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 revenues will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval and have commercial rights. In addition, our revenues will be dependent, in part, upon the market acceptance of our products once approved. If the markets for patient subsets that we are targeting are not as significant as we estimate, we may not generate significant revenues from sales of such products, if approved.

 

We may 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, CROs, vendors and service providers. Failure of these entities to satisfactorily conduct clinical research or to provide the services requested by the company may negatively impact on 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 similar in other countries, to obtain separate regulatory review and approval in many other countries we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy, clinical trials and commercial sales, pricing and distribution of our product candidates, and we cannot predict success in these jurisdictions.

 

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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 or to market our product candidates;

 

·                  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 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 protocol 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 targets, such that we are not “first to market” with our product candidate;

 

·                  governmental or regulatory delays and changes in regulatory 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 institutional review boards, or IRBs, 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, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, safety issues or adverse side effects, 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.

 

We intend to have one or more interactions with the FDA in the second half of 2016 regarding our SL-401 Phase 2 potentially pivotal trial in BPDCN.  If the FDA does not agree with our proposals or a mutual compromise is not reached, this trial may not be recognized as a pivotal trial, which could delay or halt our clinical trials or commercialization plans for SL-401, including requiring us to conduct additional clinical trials.

 

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We are advancing SL-801 into and through clinical trials.  There are unknown risks with respect to dosing, administration, pharmacokinetics, bioavailability, safety and efficacy that we expect we will learn about during clinical development.

 

We have not yet completed a corporate-sponsored clinical trial. Consequently, 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, and ultimately obtain marketing approval for our product candidates in a timely manner, or at all.

 

If we are able to conduct a pivotal clinical trial of a product candidate, the results of such trial may not be adequate to support marketing approval. Because our product candidates are intended for use in life-threatening diseases, in most cases, we ultimately intend to seek marketing approval for each product candidate based on the results of a single pivotal clinical trial. As a result, these trials may receive enhanced scrutiny from the FDA. For any such pivotal trial, if the FDA disagrees with our choice of primary endpoint or the results for the primary endpoint are not robust or significant relative to control, are subject to confounding factors, or are not adequately supported by other study endpoints, including possibly overall survival, or OS, or overall response rate, or ORR, the FDA may refuse to approve a BLA or NDA based on such intended pivotal trial. The FDA may require the completion of additional clinical trials 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 revenues 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 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.

 

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 of product candidates may not be predictive of the results of subsequent later stage, including corporate sponsored, clinical trials. Product candidates in later stage 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.

 

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 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-701 and SL-801, 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. 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.

 

·                  We have changed the treatment 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.

 

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·                  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.

 

·                  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 utilizing an earlier version of SL-701 used this method of delivery. Another previous investigator-sponsored trial utilizing an earlier version of SL-701 used a different method 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 continues the subcutaneous injection method used in two of the previous studies and represents a change from one of the previous studies.

 

·                  We are manufacturing and formulating 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 current stage of our SL-701 trial, we are using poly-ICLC as the immunostimulant, which was the immunostimulant used, along with an earlier version of SL-701, in the previous investigator-sponsored study.

 

·                  In some of our current or future trials, we may combine SL-401, SL-701, or SL-801 with other therapies such as chemotherapy, radiation, targeted therapy, or anti-angiogenic therapy. We may not have yet clinically tested these combinations. While there do not appear to be overlapping toxicities with these combinations, there is always the risk of unforeseen toxicities. We are currently combining SL-401 with pomalidomide in myeloma and SL-701 with bevacizumab and immunostimulants in brain cancer.

 

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 commence product sales and generate revenues.

 

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 locate and enroll a sufficient number of eligible patients to participate in these trials 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 drugs that may be approved 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). 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 adult and pediatric brain cancer. Some of these represent orphan indications for which there are very limited independently reported data on annual incidences. If the incidences 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 developed in a number of advanced solid tumors, some of which may be orphan indications.

 

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 abandon one or more clinical trials.

 

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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. In addition, approval policies, regulations, or the type and amount of preclinical 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 or clinical studies to generate data related to toxicity and other data required to support the submission of an IND or a BLA or an NDA to the FDA or comparable foreign authorities. 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.

 

Our product candidates alone or in combination with any adjuvant, immunostimulant including 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 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 from preclinical studies or clinical trials;

 

·                  the FDA may not accept our definition of response or our criteria for other endpoints for evaluation of patient efficacy and potential marketing approval;

 

·                  the data collected from clinical trials of our product candidates or the adequacy of our right of reference to it 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;

 

·                  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.

 

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 SL-401, SL-701, SL-801, or 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, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate, including based on product contraindications, warnings or precautions. In addition, we may not be able to ultimately achieve the price we intend to charge 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. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

 

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Our approach to the discovery and development of product candidates that target cancer stem cells (CSC) 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.

 

We believe that, for some cancers, SL-401 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 clinical outcome. 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.

 

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 potential approval of SL-401, SL-701, and SL-801, another key element of our strategy is to identify and test additional compounds. A portion of the research that we are conducting involves new and unproven drug discovery methods, including our proprietary StemScreen® platform technology, as well as the 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 side effects or other characteristics that indicate it is unlikely to be 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 revenues 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 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

 

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include submissions of safety and other post-marketing information and reports, as well as continued compliance with cGMP for commercial manufacturing and compliance with cGMP and good clinical practices, or GCP, for any clinical trials that we conduct post-approval. In addition, any regulatory approvals will trigger compliance with the Federal Physician Payment Sunshine Act reporting requirements or related state marketing disclosure laws. 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 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; and

 

·                  injunctions, fines 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 September 30, 2016 of approximately $137.9 million. We do not know whether or when we will become profitable. To date, we have not commercialized any products or generated any revenues from product sales. Our 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 Secondary Offering during the first quarter of 2015, 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-701, and SL-801, 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 may continue to expend substantial resources for the development of SL-401, SL-701, and SL-801, as well as 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.

 

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We have no significant current source of revenue to sustain our present activities, and we do not expect to generate revenue 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 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, obtaining 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 and medical 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 (including patient accrual) or other research and development activities for one or more of our product candidates;

 

·                  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.

 

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

 

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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.

 

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 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 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 pre-clinical and clinical development plans and the potential commercial demand for our product(s);

 

·                  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.

 

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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 are targeting. 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 second competitor.

 

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 target CSCs, including Verastem, Inc., OncoMed Pharmaceuticals, Inc., Sumitomo Dainippon Pharma Co. Ltd., Bionomics Limited and Stemcentrx, Inc. There are also several biopharmaceutical companies that do not appear to be primarily focused on CSCs, but may be developing at least one CSC-directed compound. These companies include Astellas Pharma US, Inc., Boehringer Ingelheim GmbH, Geron Corp., GlaxoSmithKline plc, Macrogenics Inc., Micromet, Inc. (an Amgen, Inc. company), Pfizer Inc., Roche Holding AG, Sanofi U.S. LLC, 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 and Johnson, Karyopharm Therapeutics, Inc., Novartis AG, Seattle Genetics, Inc., and Sunesis Pharmaceuticals, Inc., 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® (Merck & Co., Inc.). 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® (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 are superior 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 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 November 8, 2016, we had 28 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 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 be employed by 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 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 employee fraud or other misconduct. Misconduct by employees 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 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 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, 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 injury or is found to be otherwise unsuitable during product testing, clinical study, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. 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;

 

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·                  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 revenue;

 

·                  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 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 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:

 

·                  the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid;

 

·                  the federal False Claims Act imposes criminal and civil penalties, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government and also includes provisions allowing for private, civil whistleblower or “qui tam” actions;

 

·                  the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program. HIPAA and HITECH also regulate the use and disclosure of identifiable health information by healthcare providers, health plans and healthcare clearinghouses, and impose obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of identifiable health information as well as requiring notification of regulatory breaches. HIPAA and HITECH violations may prompt civil and criminal enforcement actions as well as enforcement by state attorneys general;

 

·                  the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

·                  the federal transparency requirements under the Health Care Reform Law requires manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests;

 

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·                  analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures; and

 

·                  analogous anti-kickback, fraud and abuse and healthcare laws and regulations in foreign countries.

 

Efforts to ensure that our business arrangements with third-parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

 

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third-parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

 

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.

 

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

Risks Related to Commercialization of Our Product Candidates

 

If we are unable to establish or implement our own sales, marketing and distribution capabilities in a timely matter or enter into licensing or collaboration agreements for these purposes, we may not be successful in commercializing our product candidates.

 

We currently have a relatively small number of employees and do not have a sales or marketing infrastructure, and we, including our executive officers, do not have any significant sales, marketing or distribution experience. We will be opportunistic in seeking to either build our own commercial infrastructure to commercialize SL-401, SL-701, SL-801, and any future product candidates if and when they are approved, or enter into licensing or collaboration agreements to assist in the future development and commercialization of such product candidates.

 

To develop internal sales, distribution and marketing capabilities, we will have to invest significant amounts of financial and management resources, some of which will be committed prior to any confirmation that SL-401, SL-701, and/or SL-801 will be approved. For product candidates for which we decide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including:

 

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

 

·                  the inability of sales personnel to obtain access to physicians or educate adequate numbers of physicians to prescribe any future products;

 

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

 

·                  unforeseen costs and expenses associated with creating an independent sales and marketing organization;

 

·                  our inability to build our own commercial infrastructure to manufacture, market and sell our product candidates; and

 

·                  our inability to build and staff, or enter a partnership to support, a commercial distribution capability.

 

Where and when appropriate, we may elect to utilize contract sales forces or strategic partners to assist in the commercialization of our product candidates. If we enter into arrangements with third-parties to perform sales, marketing and distribution services for our products, the resulting revenues or the profitability from these revenues to us are likely to be lower than if we had sold, marketed and distributed our products ourselves. In addition, we may not be successful in entering into arrangements with third-parties to sell, market and distribute our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third-parties, and any of these third-parties may fail to devote the necessary resources and attention to sell, market and distribute our products effectively and may engage in conduct that subjects us to significant regulatory enforcement action.

 

If we do not establish sales, marketing and distribution capabilities successfully and in compliance with legal and regulatory requirements, either on our own or in collaboration with third-parties, we will not be successful in commercializing our product candidates.

 

Our commercial success depends upon attaining significant market acceptance of our product candidates, if approved, including SL-401, SL-701, and SL-801, among physicians and other healthcare providers, patients, third-party payors and, in the cancer market, acceptance by the operators of major cancer clinics.

 

Even if SL-401, SL-701, SL-801, or any other product candidate that we may develop or acquire in the future obtains regulatory approval, the product may not gain market acceptance among physicians, third-party payors, patients and the medical community. For example, current cancer treatments such as chemotherapy and radiation therapy are well established in the medical community, and doctors may continue to rely on these treatments. The degree of market acceptance of any products for which we receive approval for commercial sale depends on a number of factors, including:

 

·                  the efficacy and safety of our products, as demonstrated in clinical trials, and the degree to which our products represent a clinically meaningful improvement in care as compared with other available therapies;

 

·                  the clinical indications for which our products are approved;

 

·                  acceptance by physicians, operators of major cancer clinics and patients of our products as a safe and effective treatment;

 

·                  the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

·                  the potential and perceived advantages of our products over alternative treatments;

 

·                  the cost of treatment in relation to alternative treatments;

 

·                  the availability of adequate reimbursement and pricing by third-parties and government authorities;

 

·                  the continued projected growth of oncology drug markets;

 

·                  relative convenience and ease of administration;

 

·                  the prevalence and severity of adverse side effects; and

 

·                  the effectiveness of our sales and marketing efforts.

 

If our approved drugs fail to achieve market acceptance, we would not be able to generate significant revenue.

 

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Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which would harm our business.

 

The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In the United States, recently passed legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain marketing approval.

 

Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will cover and how much they will pay for them. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.

 

There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

 

Healthcare policy changes may have a material adverse effect on us.

 

Our business may be affected by the efforts of government and third-party payors to contain or reduce the cost of healthcare through various means. For exampl