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EX-31.2 - CERTIFICATION OF JULIA M. EASTLAND, CHIEF FINANCIAL OFFICER. - Cascadian Therapeutics, Inc.d249358dex312.htm
EX-32.1 - CERTIFICATION OF CHRISTOPHER S. HENNEY, PHD. - Cascadian Therapeutics, Inc.d249358dex321.htm
EX-32.2 - CERTIFICATION OF JULIA M. EASTLAND, CHIEF FINANCIAL OFFICER. - Cascadian Therapeutics, Inc.d249358dex322.htm
EXCEL - IDEA: XBRL DOCUMENT - Cascadian Therapeutics, Inc.Financial_Report.xls
EX-31.1 - CERTIFICATION OF CHRISTOPHER S. HENNEY, PHD. - Cascadian Therapeutics, Inc.d249358dex311.htm
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2011

or

 

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

For the transition period from             to             

Commission file number: 001-33882

 

 

ONCOTHYREON INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-0868560

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2601 Fourth Ave., Suite 500

Seattle, Washington

  98121
(Address of principal executive offices)   (Zip Code)

(206) 801-2100

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer    ¨       

Accelerated filer

 

x

Non-accelerated filer   ¨   (Do not check if a smaller reporting company)   Smaller reporting company   ¨

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

As of November 8, 2011 the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 42,682,565

 

 

 


Table of Contents

ONCOTHYREON INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2011

INDEX

 

          Page  

PART I — FINANCIAL INFORMATION

     1   
  

Item 1. Financial Statements (Unaudited)

     1   
  

Condensed Consolidated Balance Sheets

     1   
  

Condensed Consolidated Statements of Operations

     2   
  

Condensed Consolidated Statements of Cash Flows

     3   
  

Notes to the Condensed Consolidated Financial Statements

     4   
  

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

     15   
  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     25   
  

Item 4. Controls and Procedures

     25   

PART II — OTHER INFORMATION

     27   
  

Item 1. Legal Proceedings

     27   
  

Item 1A. Risk Factors

     27   
  

Item 6. Exhibits

     44   

 

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Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ONCOTHYREON INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

     September 30,     December 31,  
     2011     2010  
     (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 11,000      $ 5,514   

Short-term investments

     48,616        23,363   

Government grant receivable

     —          489   

Prepaid expenses

     748        583   

Other current assets

     567        131   
  

 

 

   

 

 

 

Total current assets

     60,931        30,080   

Long-term investments

     2,555        —     

Property and equipment, net

     1,687        1,958   

Other assets

     269        290   

Goodwill

     2,117        2,117   
  

 

 

   

 

 

 

Total assets

   $ 67,559      $ 34,445   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 465      $ 624   

Accrued liabilities

     943        533   

Accrued compensation and related liabilities

     817        686   

Current portion of notes payable

     1,590        —     

Current portion of deferred revenue

     —          18   
  

 

 

   

 

 

 

Total current liabilities

     3,815        1,861   

Notes payable

     3,347        199   

Noncurrent portion of deferred revenue

     —          127   

Deferred rent

     618        388   

Warrant liability

     23,988        12,983   

Class UA preferred stock, 12,500 shares authorized, issued and outstanding

     30        30   

Contingencies, commitments, and guarantees

    

Stockholders’ equity:

    

Preferred stock, $0.0001 par value; 10,000,000 shares authorized, no shares issued or outstanding

     —          —     

Common stock, $0.0001 par value; 100,000,000 shares authorized, 42,043,494 and 30,088,628 shares issued and outstanding

     353,851        353,850   

Additional paid-in capital

     65,369        17,328   

Accumulated deficit

     (378,407     (347,255

Accumulated other comprehensive loss

     (5,052     (5,066
  

 

 

   

 

 

 

Total stockholders’ equity

     35,761        18,857   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 67,559      $ 34,445   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

ONCOTHYREON INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011     2010     2011     2010  
     (Unaudited)  

Revenue

        

Revenue from collaborative and licensing agreements

   $         $ 4      $ 145      $ 13   

Operating expenses

        

Research and development

     5,383        2,680        13,764        8,149   

General and administrative

     1,060        1,665        4,522        6,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     6,443        4,345        18,286        14,505   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,443 )      (4,341     (18,141 )      (14,492
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Investment and other income (expense), net

     (74 )      48        290        100   

Interest expense

     (179 )      —          (453 )      —     

Change in fair value of warrant liability

     16,633        (259     (12,848 )      4,728   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     16,380        (211     (13,011 )      4,828   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     9,937        (4,552     (31,152 )      (9,664

Income tax benefit

     —          200        —          200   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 9,937      $ (4,352   $ (31,152 )    $ (9,464
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share — basic

   $ 0.24      $ (0.17   $ (0.85 )    $ (0.37
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share — diluted

   $ 0.22      $ (0.17   $ (0.85 )    $ (0.37
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute basic net income (loss) per share

     41,928,775        25,948,423        36,527,164        25,819,126   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute diluted net income (loss) per share

     44,849,971        25,948,423        36,527,164        25,819,126   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

ONCOTHYREON INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Nine months ended
September 30,
 
     2011     2010  
     (Unaudited)  

Cash flows from operating activities

    

Net loss

   $ (31,152   $ (9,464

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

    

Depreciation and amortization

     347        350   

Amortization of discount and deferred financing costs on notes payable

     105        —     

Stock-based compensation expense

     1,023        888   

Change in fair value of warrant liability

     12,848        (4,728

Recognition of deferred revenue

     (145     (17

Extinguishment of debt

     (199     35   

Other

     13        200   

Net change in assets and liabilities:

    

Government grant receivable

     489        —     

Prepaid expenses

     (165     (465

Other current assets

     (423     (23

Other long term assets

     138        64   

Accounts payable

     (159     (21

Accrued liabilities

     410        (279

Accrued compensation and related liabilities

     131        107   

Deferred rent

     230        70   
  

 

 

   

 

 

 

Net cash used in operating activities

     (16,509     (13,283
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchase of investments

     (57,969     (12,157

Redemption of investments

     30,175        9,478   

Purchase of plant and equipment

     (76     (175
  

 

 

   

 

 

 

Net cash used in investing activities

     (27,870     (2,854
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock and warrants, net of issuance cost

     43,112        13,645   

Proceeds from stock options exercised

     48        —     

Proceeds from warrants exercised

     1,901        —     

Proceeds from debt financing, net of issuance cost

     4,804        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     49,865        13,645   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     5,486        (2,492

Cash and cash equivalents, beginning of period

     5,514        18,974   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 11,000      $ 16,482   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

ONCOTHYREON INC.

Notes to the Condensed Consolidated Financial Statements

Three and nine months ended September 30, 2011 and 2010

(Unaudited)

 

1. DESCRIPTION OF BUSINESS

Oncothyreon Inc. (the “Company”) is a clinical-stage biopharmaceutical company incorporated in the State of Delaware on September 7, 2007. The Company is focused primarily on the development of therapeutic products for the treatment of cancer. The Company’s goal is to develop and commercialize novel synthetic vaccines and targeted small molecules that have the potential to improve the lives and outcomes of cancer patients. Its operations are not subject to any seasonality or cyclicality factors.

 

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements. The accounting principles and methods of computation adopted in these condensed consolidated financial statements are the same as those of the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Omitted from these statements are certain information and note disclosures normally included in the audited consolidated financial statements prepared in accordance with U.S. GAAP. The Company believes all adjustments necessary for a fair statement of the results for the periods presented have been made, and such adjustments consist only of those considered normal and recurring in nature. The financial results for the three months and nine months ended September 30, 2011 are not necessarily indicative of financial results for the full year. The condensed consolidated balance sheet as of December 31, 2010 has been derived from the audited financial statements at that date. The unaudited condensed consolidated financial statements and notes presented should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission.

Comprehensive Income or Loss

Comprehensive income or loss consists of net income or loss and other comprehensive income or loss. The Company generated comprehensive income of $9.95 million and incurred a comprehensive loss of $4.35 million for the three months ended September 30, 2011 and 2010 respectively, and incurred comprehensive losses of $31.14 million and $9.46 million for the nine months ended September 30, 2011 and 2010, respectively. The Company’s other comprehensive income or loss includes unrealized gains and losses on its available-for-sale short-term investments.

Revenue

Licensing Revenue from Collaborative and License Agreements. Revenue from collaborative and license agreements consists of (1) up-front cash payments for initial technology access or licensing fees and (2) contingent payments triggered by the occurrence of specified events or other contingencies derived from the Company’s collaborative and license agreements. Royalties from the commercial sale of products derived from the Company’s collaborative and license agreements are reported as licensing, royalties and other revenue.

If the Company has continuing obligations under a collaborative agreement and the deliverables within the collaboration cannot be separated into their own respective units of accounting, it utilizes a multiple attribution

 

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model for revenue recognition as the revenue related to each deliverable within the arrangement should be recognized upon the culmination of the separate earnings processes and in such a manner that the accounting matches the economic substance of the deliverables included in the unit of accounting. As such, (1) up-front cash payments are recorded as deferred revenue and recognized as revenue ratably over the period of performance under the applicable agreement and (2) contingent payments are recorded as deferred revenue when all the criteria for revenue recognition are met and recognized as revenue ratably over the estimated period of the Company’s ongoing obligations. Royalties based on reported sales of licensed products, if any, are recognized based on the terms of the applicable agreement when and if reported sales are reliably measurable and collectability is reasonably assured.

If the Company has no continuing obligations under a license agreement, or a license deliverable qualifies as a separate unit of accounting included in a collaborative arrangement, license payments that are allocated to the license deliverable are recognized as revenue upon commencement of the license term and contingent payments are recognized as revenue upon the occurrence of the events or contingencies provided for in such agreement, assuming collectability is reasonably assured.

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance on testing goodwill for impairment. The new guidance simplifies how an entity tests goodwill for impairment. It allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The new guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We have not adopted this standard or determined the impact of this standard on our results of operations, cash flows and financial position.

In June 2011, FASB and the International Accounting Standards Board (“IASB”) updated the guidance on presentation of items within other comprehensive income. In this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is only expected to impact the presentation of the Company’s financial statements, and not the results of operations or financial position of the Company.

In May 2011, FASB and the IASB published converged standards on fair value measurement and disclosure. The standards do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The standards clarified some existing rules and provided guidance for additional disclosures: (1) the concepts of “highest and best use” and “valuation premise” in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities; (2) when measuring the fair value of instruments classified in equity (e.g., equity issued in a business combination), the entity should measure it from the perspective of a market participant that holds that instrument as an asset; and (3) quantitative information about the unobservable inputs used in Level 3 measurements should be included. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this standard is only expected to impact the presentation of the Company’s financial statements, and not the results of operations or financial position of the Company.

In April 2010, FASB issued new guidance for recognizing revenue under the milestone method. This new guidance allows an entity to make a policy election to recognize a substantive milestone in its entirety in the period

 

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in which the milestone is achieved. This guidance is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted. The adoption of this new accounting pronouncement on January 1, 2011 had no impact on the Company’s condensed consolidated financial statements for the three or nine months ended September 30, 2011.

In October 2009, FASB issued new guidance for revenue recognition with multiple deliverables. This new guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this new guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. This guidance is effective on a prospective basis for multiple-element arrangements entered or materially modified in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted. The adoption of this guidance on January 1, 2011 had no impact on the Company’s condensed consolidated financial statements for the nine months ended September 30, 2011. However, the adoption may result in different accounting treatment for future collaboration arrangements than the accounting treatment applied to existing collaboration arrangements.

 

4. FAIR VALUE MEASUREMENTS

The Company measures at fair value certain financial assets and liabilities in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs which reflect the Company’s market assumptions when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

   

Level 1 — quoted prices in active markets for identical assets or liabilities;

 

   

Level 2 — observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

   

Level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial assets and liabilities measured at fair value consisted of the following as of September 30, 2011 and December 31, 2010 (in thousands):

 

     September 30, 2011      December 31, 2010  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  

Financial Assets:

                       

Money market funds

   $ 4,240       $ —         $ —         $ 4,240       $ 4,005       $ —         $ —         $ 4,005   

Certificates of deposits

     —           16,941         —           16,941         —           23,363         —           23,363   

Debt securities of U.S. government agencies

     —           11,000         —           11,000         —           —           —           —     

Corporate debt securities and commercial paper

     —           27,715         —           27,715         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,240       $ 55,656       $ —         $ 59,896       $ 4,005       $ 23,363       $ —         $ 27,368   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liability:

                       

Warrants

   $ —         $ —         $ 23,988       $ 23,988       $ —         $ —         $ 12,983       $ 12,983   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices from similar assets or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2 and consist of debt securities of U.S government agencies, corporate debt securities and commercial paper and certificates of deposits denominated at or below $250,000 issued by banks insured by the Federal Deposit Insurance Corporation.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2011. The changes in fair value of warrants classified in Level 3 in the amount of $16.6 million

 

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recorded as other income and $12.8 million recorded as other expense, respectively, for the three and nine months ended September 30, 2011 are recognized in the condensed consolidated statements of operations. A discussion of the valuation techniques and inputs to determine fair value of these instruments is included in Note 9.

 

5. FINANCIAL INSTRUMENTS

Financial instruments consist of cash and cash equivalents, investments and accounts receivable that will result in future cash receipts, as well as accounts payable, accrued liabilities, Class UA preferred stock and notes payable that require future cash outlays.

Investments

Investments consist of short-term investments and long-term investments. Short-term and long-term investments are classified as available-for-sale securities and are carried at market value with unrealized temporary holding gains and losses, where applicable, excluded from net income (loss) and reported in other comprehensive income (loss). Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect an other-than-temporary impairment. The Company determined that the gross unrealized losses on our marketable securities as of September 30, 2011 were temporary in nature, and the Company currently does not intend to sell these securities before recovery of their amortized cost basis. As of September 30, 2011, short-term investments consisted of debt securities of U.S government agencies, corporate debt securities and commercial paper and certificates of deposits with an estimated fair value of $53.1 million. Certificate of deposits are denominated at or below $250,000 issued by banks insured by the Federal Deposit Insurance Corporation. All asset classes purchased for short-term investment are limited to a final maturity from purchase date of 12 months. The Company’s long-term investments are investment with maturities exceeding 12 months but less than five years. As of September 30, 2011, long-term investments consisted of debt securities of U.S. government agencies with an estimated fair value of $2.6 million. There were no long-term investments as of December 31, 2010.

The amortized cost, unrealized gains or losses and estimated fair value of our investments for the periods presented are summarized below (in thousands):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

As of September 30, 2011

          

Certificates of deposits

   $ 16,937       $ 4       $ —        $ 16,941   

Debt securities of U.S. government agencies

     11,001         —           (1     11,000   

Corporate bonds

     27,704         11         —          27,715   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 55,642       $ 15       $ (1   $ 55,656   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2010

          

Certificates of deposits

   $ 23,363       $ —         $ —        $ 23,363   
  

 

 

    

 

 

    

 

 

   

 

 

 

Accounts Receivable, Government Grant Receivable, Accounts Payable and Accrued Liabilities

The carrying amounts of accounts receivable, government grant receivable and accounts payable and accrued liabilities approximate their fair values due to the short-term nature of these financial instruments.

Class UA Preferred Stock

The fair value of class UA preferred stock is assumed to be equal to its carrying value as the amounts that will be paid and the timing of the payments cannot be determined with any certainty.

 

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Notes Payable

The Company utilizes quoted market prices to estimate the fair value of its fixed rate debt, when available. If quoted market prices are not available, the Company uses an approach that reflects the proceeds that it would receive if it were to issue an identical liability as of the measurement date with the same remaining term and the same remaining cash flows. As of September 30, 2011, the fair value of the term loan approximated the carrying value.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment; therefore, they cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

6. NOTES PAYABLE

Notes payable assumed in connection with the acquisition of ProlX

In connection with the acquisition of ProlX, the Company assumed two loan agreements under which approximately $199,000 was outstanding at December 31, 2010. The Company was required to repay such loans if it commercialized or sold the product, PX-12, that was the subject of such agreement. In February 2011, the Company provided notice to the counterparty to such agreements that it does not intend to commercialize PX-12. As a result, the agreements terminated in March 2011 and the Company is no longer required to repay such loans. Accordingly, the Company derecognized the notes payable in March 2011 and recognized $199,000 in other income.

Notes payable — General Electric Capital Corporation

On February 8, 2011, the Company entered into a Loan and Security Agreement with General Electric Capital Corporation (“GECC”, and together with the other financial institutions that may become parties to the Loan and Security Agreement, the “Lenders”), pursuant to which the Lenders agreed to make a term loan in an aggregate principal amount of $5.0 million (the “Term Loan”), subject to the terms and conditions set forth in the Term Loan. On February 8, 2011, the Lenders funded a Term Loan in the principal amount of $5.0 million on a total facility of $12.5 million. The Term Loan accrues interest at a fixed rate of 10.64% per annum and is payable over a 42-month period. The Company is required to make monthly payments of interest only, through November 1, 2011, and is required to repay the principal amount of the Term Loan over a period of 32 consecutive equal monthly installments of principal of $151,515 plus accrued interest, commencing on December 1, 2011. At maturity of the Term Loan, the Company is also required to make a final payment equal to 1.5% ($75,000) of the Term Loan, which has been treated as a discount to the loan. The Company may incur additional fees if it elects to prepay the Term Loan. In connection with the Term Loan, on February 8, 2011, the Company issued to an affiliate of GECC a warrant to purchase up to an aggregate of 48,701 shares of common stock at an exercise price of $3.08 per share. This warrant, classified as equity, is immediately exercisable and will expire on February 8, 2018.

The Company allocated the aggregate proceeds of the Term Loan between the warrant and the debt obligations based on their relative fair values. The fair value of the warrant issued to the affiliate of GECC was calculated utilizing the Black-Scholes option-pricing model. The Company is amortizing the relative fair value of the warrants of $114,447 together with the final payment of $75,000 as a discount over the term of the loan through maturity date using the effective interest method, resulting in a total effective interest rate of 14.89%. As of September 30, 2011, the unamortized Term Loan discount was $137,533. If the maturity of the debt is accelerated due to an event of default, then the amortization would also be accelerated.

The loan agreement with GECC contains certain restrictive covenants that limit or restrict the Company’s ability to incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, or repurchase stock.

 

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The loan agreement also requires that the Company have 12 months of unrestricted cash and cash equivalents (as calculated in the loan agreement) as of each December 31 during the term of the loan agreement. As security for its obligations under the Loan agreement, the Company granted the Lenders a lien on substantially all of its assets, excluding intellectual property. The Company was in compliance with its financial and non-financial covenants as of September 30, 2011.

Deferred financing costs of $196,039 were capitalized as other assets and are being amortized to interest expense over the term of the Term Loan. As of September 30, 2011, the unamortized Term Loan deferred financing costs were $142,319.

As of September 30, 2011, the future contractual principal payments on the Term Loan are as follows (in thousands):

 

2011

   $ 303   

2012

     1,818   

2013

     1,818   

2014

     1,061   
  

 

 

 

Total

   $ 5,000   
  

 

 

 

A reconciliation of the face value of the Term Loan to the carrying value of the Term Loan as of September 30, 2011 is as follows (in thousands):

 

Total Term Loan, including final payment fee (face value)

   $ 5,075   

Less: Term Loan discount balance

     (138
  

 

 

 

Total Term Loan carrying value

     4,937   

Less: current portion of notes payable

     (1,590
  

 

 

 

Long-term notes payable

   $ 3,347   
  

 

 

 

Interest expense for the three months and nine months ended September 30, 2011, all of which related to the Term Loan, was $178,522 and $452,912, respectively. Interest expense is calculated using the effective interest method and includes non-cash amortization of debt discount and capitalized loan fees in the amount of $42,566 and $105,635 for the three months and nine months ended September 30, 2011, respectively.

 

7. NET INCOME OR LOSS PER SHARE

Basic net income or loss per share is calculated by dividing net income or loss by the weighted average number of shares outstanding for the period. Diluted net income or loss per share is calculated by dividing net income or loss by the weighted-average number of shares of the common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock resulting from the assumed exercise of outstanding stock options, restricted shares units, warrants and shares under our 2010 Employee Stock Purchase Plan are determined under the treasury stock method. Basic net loss per share equaled the diluted loss per share for the three months ended September 30, 2010 and for the nine months ended September 30, 2011 and 2010, since the effect of shares potentially issuable upon the exercise or conversion was anti-dilutive.

The following table is a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income or loss per share (in thousands, except share amounts):

 

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     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011      2010     2011     2010  

Numerator:

         

Net income (loss)

   $ 9,937       $ (4,352   $ (31,152   $ (9,464
  

 

 

    

 

 

   

 

 

   

 

 

 

Denominator:

         

Weighted-average shares of common stock outstanding used in the calculation of basic net income (loss) per share

     41,928,775         25,948,423        36,527,164        25,819,126   

Effect of dilutive securities:

         

Stock options

     351,696         —          —          —     

Warrants

     2,337,916         —          —          —     

Restricted share unit plan

     231,584         —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted-average shares of common stock outstanding used in the calculation of diluted net income (loss) per share

     44,849,971         25,948,423        36,527,164        25,819,126   
  

 

 

    

 

 

   

 

 

   

 

 

 

The following table presents the number of shares that were excluded from the number of shares used to calculate diluted net income or loss per share:

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
     2011      2010      2011      2010  

Director and employee stock options

     773,162         1,876,766         2,080,119         1,876,766   

Warrants

     —           7,156,665         5,922,089         7,156,665   

Non-employee director restricted share units

     —           226,696         231,584         226,696   

Employee stock purchase plan

     23,664         13,572         23,664         13,572   

 

8. EQUITY BASED TRANSACTIONS

Equity Financing

On May 4, 2011, the Company closed an underwritten public offering of 11,500,000 shares of its common stock at a price to the public of $4.00 per share. The net proceeds from the sale of the shares, after deducting the underwriters’ discounts and other offering expenses payable by the Company were approximately $43.1 million.

Equity Line Financing

On July 6, 2010, the Company entered into a common stock purchase agreement (“Purchase Agreement”) with Small Cap Biotech Value Fund, Ltd. (“SCBV”) providing for a committed equity line financing facility. The Purchase Agreement provides that, upon the terms and subject to the conditions in the Purchase Agreement, SCBV is committed to purchase up to $20.0 million of shares of the Company’s common stock over the 24-month term of the Purchase Agreement under certain specified conditions and limitations and subject to a maximum of 5,150,680 shares of common stock. After subtracting 59,921 shares of common stock the Company issued to SCBV in July 2010 as compensation for their commitment to enter into the financing arrangement, the Company may sell, under the Purchase Agreement, no more than the 5,090,759 remaining shares of common stock. Furthermore, in no event may SCBV purchase any shares of the Company’s common stock which, when aggregated with all other shares of common stock then beneficially owned by SCBV, would result in the beneficial ownership by SCBV of more than 9.9% of the then outstanding shares of the Company’s common stock. These maximum share and beneficial ownership limitations may not be waived by the parties.

From time to time over the term of the Purchase Agreement, and in the Company’s sole discretion, the Company may present SCBV with draw down notices requiring SCBV to purchase a specified dollar amount of shares of the Company’s common stock, based on the price per share over 10 consecutive trading days (the “Draw Down Period”) with the total dollar amount of each draw down subject to certain agreed-upon limitations based on

 

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the market price of the Company’s common stock at the time of the draw down (which may not be waived or modified). In addition, in the Company’s sole discretion, but subject to certain limitations, the Company may require SCBV to purchase a percentage of the daily trading volume of the Company’s common stock for each trading day during the Draw Down Period. The Company is allowed to present SCBV with up to 24 draw down notices during the term of the Purchase Agreement, with only one such draw down notice allowed per Draw Down Period and a minimum of five trading days required between each Draw Down Period.

Before SCBV is obligated to purchase any shares of the Company’s common stock pursuant to a draw down notice, certain conditions specified in the Purchase Agreement, none of which are in SCBV’s control, must be satisfied. One such condition is that the registration statement registering the resale of any shares issued to SCBV pursuant to the Purchase Agreement (the “Registration Statement”) must be effective under the Securities Act of 1933, as amended (the “Securities Act”). In connection with the execution of the Purchase Agreement, the Company entered into a registration rights agreement with SCBV, pursuant to which the Company agreed to use its commercially reasonable efforts to prepare and file the Registration Statement.

Once presented with a draw down notice, SCBV is required to purchase a pro rata portion of the shares on each trading day during the trading period on which the daily volume weighted average price for the Company’s common stock exceeds a threshold price determined by the Company for such draw down. The per share purchase price for these shares equals the daily volume weighted average price of the Company’s common stock on each date during the Draw Down Period on which shares are purchased, less a discount ranging from 5.00% to 7.00% (which range may not be modified), based on a minimum price the Company specifies. If the daily volume weighted average price of the Company’s common stock falls below the threshold price on any trading day during a Draw Down Period, the Purchase Agreement provides that SCBV will not be required to purchase the pro-rata portion of shares of common stock allocated to that trading day. The obligations of SCBV under the Purchase Agreement to purchase shares of the Company’s common stock may not be transferred to any other party.

If the Company issues a draw down notice and fails to deliver the shares to SCBV on the applicable settlement date, and such failure continues for 10 trading days, the Company agreed to pay SCBV, in addition to all other remedies available to SCBV under the Purchase Agreement, an amount in cash equal to 2.0% of the purchase price of such shares for each 30-day period the shares are not delivered, plus accrued interest.

Reedland Capital Partners, an Institutional Division of Financial West Group, member FINRA/SIPC, served as the Company’s placement agent in connection with the financing arrangement. The Company agreed to pay Reedland, upon each sale of its common stock to SCBV under the Purchase Agreement, a fee equal to 1.0% of the aggregate dollar amount of common stock purchased by SCBV upon settlement of each such sale.

In partial consideration for SCBV’s execution and delivery of the Purchase Agreement, the Company issued to SCBV upon the execution and delivery of the Purchase Agreement 59,921 shares of the Company’s common stock (the “Commitment Shares”), which is equal to the sum of $200,000 divided by the volume weighted average price of the Company’s common stock for each trading day during the 10 trading day period ending July 6, 2010. The average price per Commitment Share was approximately $3.34. The Company recorded the fair value of the Commitment Shares issued to SCBV as an expense during the three months ended September 30, 2010.

On October 4, 2011, the Company sold an aggregate of 639,071 shares of its common stock pursuant to the Purchase Agreement, at a per share price of $6.43 resulting of aggregate proceeds of $4.1 million. See “Note 14 Subsequent Events” for additional information.

 

9. WARRANTS

Warrants consist of liability-classified warrants and equity-classified warrants. As of September 30, 2011, the total number of warrants outstanding was 5,922,089. In the three and nine months ended September 30, 2011, warrants totaling 402,101 were exercised, resulting in gross proceeds to the Company of approximately $1.9 million. In the three and nine months ended September 30, 2011, warrants totaling 544,150 expired. No warrants were exercised or expired in the three and nine months ended September 30, 2010.

Warrants classified as equity

Equity-classified warrants consist of warrants issued in connection with an equity financing in August 2009 and a Term Loan in February 2011. In August 2009, the Company closed the sale of 2,280,502 units with each unit consisting of one share of common stock and a warrant to purchase 0.30 shares of common stock, and in February 2011 the Company issued 48,701 warrants to purchase shares of common stock in connection with a Loan and Security Agreement entered into with GECC. During the three and nine months ended September 30, 2011, 140,000 of the August 2009 warrants were exercised and 544,150 of the August 2009 warrants expired. As of September 30, 2011, there were 48,701 outstanding warrants that were classified as equity.

Warrants classified as liability

Liability-classified warrants consist of warrants issued in conjunction with equity financings in May 2009 and September 2010. In September 2010, the Company closed the sale of 4,242,870 units, with each unit consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock, and in May 2009 the Company closed the sale of 3,878,993 units, with each unit consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock. The warrants issued in May 2009 and September 2010 have been classified as liabilities, as opposed to equity, due to potential cash settlement upon the occurrence of certain transactions specified in the warrant agreement related to the warrants. During the three and nine months ended September 30,

 

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2011, approximately 262,100 of the May 2009 warrants were exercised. As of September 30, 2011, there were outstanding warrants from the May 2009 and September 2010 financings of 2,691,241 and 3,182,147, respectively.

The estimated fair value of outstanding warrants accounted for as liabilities is determined as of the balance sheet date and recorded in the condensed consolidated balance sheet at each financial reporting period. The change in the estimated fair value of such warrants is recorded in the condensed consolidated statement of operations in other income (expense) as a gain (loss). The fair value of the warrants is estimated using the Black-Scholes option-pricing model with the following inputs for the warrants issued in May 2009 and September 2010, respectively:

 

     As of
September 30, 2011
 
     May 2009
Warrants
    September 2010
Warrants
 

Exercise price

   $ 3.74      $ 4.24   

Market value of stock at end of period

   $ 5.98      $ 5.98   

Expected dividend rate

     0.0     0.0

Expected volatility

     86.54     97.37

Risk-free interest rate

     0.36     0.69

Expected life (in years)

     2.65        4.00   

 

     As of
December 31, 2010
 
     May 2009
Warrants
    September 2010
Warrants
 

Exercise price

   $ 3.74      $ 4.24   

Market value of stock at end of period

   $ 3.26      $ 3.26   

Expected dividend rate

     0.0     0.0

Expected volatility

     102.7     92.2

Risk-free interest rate

     1.2     1.9

Expected life (in years)

     3.40        4.75   

The change in fair value of the warrant liability during the three months ended September 30, 2011 was as follows (in thousands):

 

Warrant liability as of July 1, 2011

   $ 42,464   

Change in fair value for the three months ended September 30, 2011

     (16,633

Reclassified to equity upon exercise for the three months ended September 30, 2011

     (1,843
  

 

 

 

Balance as of September 30, 2011

   $ 23,988   
  

 

 

 

The change in fair value of the warrant liability during the nine months ended September 30, 2011 was as follows (in thousands):

 

Warrant liability as of January 1, 2011

   $  12,983   

Change in fair value for the nine months ended September 30, 2011

     12,848   

Reclassified to equity upon exercise for the nine months ended September 30, 2011

     (1,843
  

 

 

 

Balance as of September 30, 2011

   $ 23,988   
  

 

 

 

On December 31, 2010, the Company changed the way it estimates volatility when determining the fair value of the warrants using the Black-Scholes model. Prior to December 31, 2010, the volatility was calculated using the Company’s historical stock price, and discounting it by 15% to give effect to estimated lowered volatility expected by warrant holders. Before estimating the fair value of the warrants on December 31, 2010, the Company commissioned a study on volatility, and determined that the most appropriate volatility to use as of December 31, 2010 and for the foreseeable future thereafter, is the unadjusted volatility calculated using the Company’s historical stock price.

 

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10. STOCK-BASED COMPENSATION

Share Option Plan

The Company sponsors a Share Option Plan under which a maximum fixed reloading percentage of 10% of the issued and outstanding common stock of the Company may be granted to employees, directors, and service providers. In general, options granted under the plan begin to vest after one year from the date of the grant, are exercisable in equal amounts over four years on the anniversary date of the grant, and expire eight years following the date of grant. As of September 30, 2011, the maximum number of shares of common stock reserved for issuance under the Share Option Plan was 4,164,139, and 2,084,020 shares of common stock remained available for future grant under the Share Option Plan.

The Company granted 19,000 and zero stock options during the three months ended September 30, 2011 and 2010, respectively, and zero stock options were exercised during each of the three months ended September 30, 2011 and 2010, respectively. The Company granted 38,250 and 42,500 stock options during the nine months ended September 30, 2011 and 2010, respectively, and 12,708 and zero stock options were exercised during the nine months ended September 30, 2011 and 2010, respectively. The Company recorded stock compensation expense of $231,152 and $247,081 during the three months ended September 30, 2011 and 2010, respectively and $772,690 and $708,016 during the nine months ended September 30, 2011 and 2010, respectively. The Company uses the Black-Scholes option pricing model to value the options at each grant date, using the following weighted average assumptions:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011     2010  

Weighted average grant-date fair value for stock options granted

   $ 4.20      $ —         $ 3.78      $ 2.80   

Expected dividend rate

     0.00     —           0.00     0.00

Expected volatility

     83.21     —           82.68     90.61

Risk-free interest rate

     1.19     —           1.68     2.60

Expected life of options in years

     6        —           6        6   

The expected life of options in years is determined utilizing the “simplified” method, which calculates the expected life as the average of the vesting term and the contractual term of the option.

Employee Stock Purchase Plan

The Company adopted an Employee Stock Purchase Plan (“ESPP”) on June 3, 2010, pursuant to which a total of 900,000 shares of common stock were reserved for sale to employees of the Company. The ESPP is administered by the compensation committee of the board of directors and is open to all eligible employees of the Company. Under the terms of the ESPP, eligible employees may purchase shares of the Company’s common stock at six month intervals during 18-month offering periods through their periodic payroll deductions, which may not exceed 15% of any employee’s compensation and may not exceed a value of $25,000 in any calendar year, at a price not less than the lesser of an amount equal to 85% of the fair market value of the Company’s common stock at the beginning of the offering period or an amount equal to 85% of the fair market value of the Company’s common stock on each purchase date. The maximum aggregate number of shares that may be purchased by each eligible employee during each offering period is 15,000 shares of the Company’s common stock. For the three and nine months ended September 30, 2011, expense related to this plan was $51,177 and $100,498, respectively. For the three and nine months ended September 30, 2010 expense related to this plan was $31,000. Under the ESPP, the Company issued zero and 31,753 shares to employees during the three and nine months ended September 30, 2011, respectively. There are 847,813 shares reserved for future issuances under the ESPP as of September 30, 2011.

Restricted Share Unit Plan

The Company also sponsors a Restricted Share Unit Plan (the “RSU Plan”) for non-employee directors that was established in 2005. The RSU Plan provides for grants to be made from time to time by the board of directors

 

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or a committee thereof. Each grant will be made in accordance with the RSU Plan and terms specific to that grant and will be converted into one share of common stock at the end of the grant period (not to exceed five years) without any further consideration payable to the Company in respect thereof. As of September 30, 2011, maximum number of common shares of the Company reserved for issuance pursuant to the RSU Plan was 466,666. As of September 30, 2011, 197,651 shares of common stock remain available for future grant under the RSU Plan. The Company did not grant any restricted share units during the three months ended September 30, 2011 and 2010. The Company granted 22,690 and 40,430 restricted share units during each of the nine months ended September 30, 2011 and 2010, both with a fair value of $150,000. Zero and 8,304 shares had been issued upon conversion of RSUs for the three and nine months ended September 30, 2011. No shares were issued upon conversion of RSUs for the three and nine months ended September 30, 2010. The fair value of the restricted share units has been determined to be the equivalent of the Company’s common shares closing trading price on the date of grant as quoted in NASDAQ Global Market.

 

11. CONTINGENCIES, COMMITMENTS, AND GUARANTEES

Royalties

In connection with the issuance of the Class UA preferred stock, the Company has agreed to pay a royalty in the amount of 3% of the net proceeds of sale of any products sold by the Company employing technology acquired in exchange for the shares. None of the Company’s products currently under development employ the technology acquired.

In addition, pursuant to other various license agreements, the Company is obligated to make payments based both on the achievement of certain milestones and a percentage of revenues derived from the sublicensed technology and royalties on net sales.

Guarantees

The Company is contingently liable under a mutual undertaking of indemnification with Merck KGaA for any withholding tax liability that may arise from payments under the Company’s agreements with them.

In the normal course of operations, the Company indemnifies counterparties in transactions such as purchase and sale contracts for assets or shares, service agreements, director/officer contracts and leasing transactions. These indemnification agreements may require the Company to compensate the counterparties for costs incurred as a result of various events, including environmental liabilities, changes in (or in the interpretation of) laws and regulations, or as a result of litigation claims or statutory sanctions that may be suffered by the counterparties as a consequence of the transaction. The terms of these indemnification agreements vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amount that could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnification agreements and no amounts have been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification guarantees.

Under the Agreement and Plan of Reorganization between Oncothyreon, Biomira Acquisition Corporation, ProlX and two of the principal stockholders of ProlX, the Company has indemnified the former ProlX stockholders against certain liabilities, including with respect to certain tax liabilities that may arise as a result of actions taken by the Company through 2011. The estimated maximum potential amount of future payments that could potentially result from hypothetical future claims is $15 million. The Company believes the risk of having to make any payments under this agreement to be remote and therefore no amounts have been recorded thereon.

 

12. COLLABORATIVE AND LICENSE AGREEMENTS

The Company has granted an exclusive, worldwide license to Merck KGaA of Darmstadt, Germany, or Merck KGaA, for the development, manufacture and commercialization of Stimuvax. The Company has no continuing involvement in the ongoing development, manufacturing or commercialization of Stimuvax. Under the 2008 license agreement, the Company may receive milestones of up to $90 million upon the occurrence of certain

 

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specified events. These contingent payments would be recognized as revenue upon the occurrence of such events. The Company is also entitled to receive royalties based on net sales of Stimuvax ranging from a percentage in the mid-teens to high single digits, depending on the territory in which the net sales occur. The Company has (1) agreed not to develop any product, other than ONT-10, that is competitive with Stimuvax and (2) granted to Merck KGaA a right of first negotiation in connection with any contemplated collaboration or license agreement with respect to the development of commercialization of ONT-10. No amounts were recognized in connection with this agreement in either 2011 or 2010.

In September 2011, the Company entered into an exclusive, worldwide license agreement with the Sanford-Burnham Medical Research Institute (“SBMRI”) for certain intellectual property related to SBMRI’s small molecule program based on ONT-701(sabutoclax) and related compounds. ONT-701(sabutoclax) is a pan-inhibitor of the B-cell lymphoma-2 (“Bcl-2”) family of anti-apoptotic proteins and is currently in pre-clinical development. Because the Company acquired ONT-701(sabutoclax) in an early research stage, the Company determined the compound did not have an alternate future use. Under the terms of this agreement, the Company made a payment of $1.5 million to SBMRI, which was recorded as part of research and development expense. In addition, the Company may be required to make milestone payments of up to approximately $26 million upon the occurrence of certain clinical development and regulatory milestones and up to $25 million based on certain net sales targets. The Company would be required to pay a royalty in the low to mid single digits on net sales of licensed products. In addition, if the Company generates income from a sublicense of any of the licensed rights, it must pay SBMRI a portion of certain income received from the sublicensee at a rate between mid single digits and 30%, depending on stage of the clinical development of the rights when the sublicense is granted. Unless earlier terminated in accordance with the license agreement, the agreement shall terminate on a country-by-country basis upon the later of (i) 10 years after the first commercial sale of the first licensed product and (ii) the expiration of the last-to-expire patent within the licensed patents.

 

13. INCOME TAX

For the three months ended September 30, 2011, the Company’s net income was $9.9 million. The net income was primarily attributable to non-taxable income as a result of the change in the estimated fair value of warrant liability. Excluding the effects of the non-taxable change in warrant liability, the Company would have incurred a net loss for the three and nine months ended September 30, 2011 of $6.7 million and $18.3 million, respectively. Due to the losses, no provisions for income taxes were made during the three and nine months ended September 30, 2011.

 

14. SUBSEQUENT EVENT

On October 4, 2011, the Company sold an aggregate of 639,071 shares of its common stock pursuant to the Purchase Agreement described in “Note 8 — Equity Based Transactions” above, at a per share price of approximately $6.43 resulting in aggregate proceeds of $4.1 million. The per share price at which SCBV purchased these shares was established under the Purchase Agreement by reference to the volume weighted average prices of the Company’s common stock on The NASDAQ Global Market during the pricing period, net a discount of 5% per share. The Company received net proceeds from the sale of these shares of approximately $4.1 million after deducting its estimated offering expenses of approximately $49,000, including a placement agent fee of $41,000, in connection with this draw down.

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

The information in this Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. These forward-looking statements include, but are not limited to, the following: our expectations regarding future expenses and our ability to effectively manage them; clinical and pre-clinical development activities, including our plans for the pre-clinical development of ONT-10 in 2011 and our decision to initiate additional planned Phase 2 trial for PX-866 in 2011; our expectations regarding the timing and results of the Phase 3 trials for Stimuvax; our ability to secure collaboration arrangements with pharmaceutical companies to complete the development and commercialization of our product candidates; our ability to obtain suitable financing

 

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to support our operations, clinical trials and commercialization of our products; and the use and adequacy of cash resources. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this quarterly report in Part II, Item 1A — “Risk Factors,” and elsewhere in this quarterly report. These statements, like all statements in this quarterly report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments.

Overview

We are a clinical-stage biopharmaceutical company focused primarily on the development of therapeutic products for the treatment of cancer. Our goal is to develop and commercialize novel synthetic vaccines and targeted small molecules that have the potential to improve the lives and outcomes of cancer patients. Our cancer vaccines are designed to stimulate the immune system to attack cancer cells, while our small molecule compounds are designed to inhibit the activity of specific cancer-related proteins. We are advancing our product candidates through in-house development efforts and strategic collaborations.

We believe the quality and breadth of our product candidate pipeline, strategic collaborations and scientific team will potentially enable us to become an integrated biopharmaceutical company with a diversified portfolio of novel, commercialized therapeutics for major diseases.

Our lead product candidate, Stimuvax, is being evaluated in two Phase 3 clinical trials for the treatment of non-small cell lung cancer, or NSCLC. We have granted an exclusive, worldwide license to Merck KGaA of Darmstadt, Germany, or Merck KGaA, for the development, manufacture and commercialization of Stimuvax. Our pipeline of clinical stage proprietary small molecule product candidates was acquired by us in October 2006 from ProlX Pharmaceuticals Corporation, or ProlX. We are currently focusing our internal development efforts on PX-866, for which we initiated two Phase 1/2 trials in 2010 and two Phase 2 trials in 2011. As of the date of this report, we have not licensed any rights to our small molecules to any third party and retain all development, commercialization and manufacturing rights. We are also conducting preclinical development of ONT-10, a cancer vaccine directed against a target similar to Stimuvax, and which is proprietary to us. In addition to our product candidates, we have developed novel vaccine technology which we may further develop ourselves and/or license to others.

Lastly, in September 2011, we entered into an exclusive, worldwide license agreement with the Sanford-Burnham Medical Research Institute, or SBMRI, for certain intellectual property related to SBMRI’s small molecule program based on ONT-701(sabutoclax) and related compounds. ONT-701(sabutoclax) is a pan-inhibitor of the B-cell lymphoma-2, or Bcl-2, family of anti-apoptotic proteins and is currently in pre-clinical development. Overexpression of one or more members of the Bcl-2 family of proteins is common in most human cancers. See “Note 12 — Collaborative and License Agreements” for additional information.

In May 2001, we entered into a collaborative arrangement with Merck KGaA to pursue joint global product research, clinical development and commercialization of Stimuvax. In December 2008, we entered into a license agreement with Merck KGaA which replaced our pre-existing agreements with them. Upon the execution of the 2008 license agreement, all of our future performance obligations related to the collaboration for the clinical development and development of the manufacture process of Stimuvax were removed and our continuing involvement in the development and manufacturing of Stimuvax ceased. Pursuant to the 2008 license agreement, we received an up-front cash payment of approximately $10.5 million. The provisions with respect to contingent payments remained unchanged and we may receive cash payments of up to $90 million, which figure excludes the $2.0 million received in December 2009 and $19.8 million received prior to the execution of the 2008 license agreement. We are also entitled to receive royalties based on net sales of Stimuvax ranging from a percentage in the mid-teens to high single digits, depending on the territory in which the net sales occur. Royalty rates were reduced relative to prior agreements by a specified amount which we believe is consistent with our estimated costs of goods,

 

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manufacturing scale-up costs and certain other expenses assumed by Merck KGaA. In addition, pursuant to the terms of the 2008 license agreement we (1) agreed not to develop any product, other than ONT-10, that is competitive with Stimuvax and (2) granted to Merck KGaA a right of first negotiation in connection with any contemplated collaboration or license agreement with respect to the development for commercialization of ONT-10. For additional information regarding our relationship with Merck KGaA, see “Note 10 — Collaborative and License Agreements” of the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.

We have not developed a therapeutic product to the commercial stage. As a result, with the exception of the unusual effects of the transaction with Merck KGaA in December 2008, our revenue has been limited to date, and we do not expect to recognize any material revenue for the foreseeable future. In particular, our ability to generate revenue in future periods will depend substantially on the progress of ongoing clinical trials for Stimuvax and our small molecule compounds, our ability to obtain development and commercialization partners for our small molecule compounds, Merck KGaA’s success in obtaining regulatory approval for Stimuvax, our success in obtaining regulatory approval for our small molecule compounds, and Merck KGaA’s and our respective abilities to establish commercial markets for these drugs.

Any adverse clinical results relating to Stimuvax or any decision by Merck KGaA to discontinue its efforts to develop and commercialize the product would have a material and adverse effect on our future revenues and results of operations and would be expected to have a material adverse effect on the trading price of our common stock. Our small molecule compounds are much earlier in the development stage than Stimuvax, and we do not expect to realize any revenues associated with the commercialization of our products candidates for the foreseeable future.

The continued research and development of our product candidates will require significant additional expenditures, including preclinical studies, clinical trials, manufacturing costs and the expenses of seeking regulatory approval. We rely on third parties to conduct a portion of our preclinical studies, all of our clinical trials and all of the manufacturing of current Good Manufacturing Practices, or cGMP, material. We expect expenditures associated with these activities to increase in future years as we continue the development of our small molecule product candidates.

We have incurred substantial losses since our inception. As of September 30, 2011, our accumulated deficit totaled $378.4 million. We incurred a net loss of $31.2 million for the nine months ended September 30, 2011 compared to a net loss of $9.5 million for the same period in 2010. The increase in net loss was primarily due to the increase in fair value of our warrant liability, which was primarily attributable to the increase in the price of our common stock. In future periods, we expect to continue to incur substantial net losses as we expand our research and development activities with respect to our small molecules product candidates. To date we have funded our operations principally through the sale of our equity securities, exercise of warrants, cash received through our strategic alliance with Merck KGaA, government grants, debt financings, and equipment financings. We completed a financing in September 2010, in which we raised approximately $14.9 million in gross proceeds. In February 2011, we entered into a loan and security agreement, which we refer to as the loan agreement, pursuant to which we incurred $5.0 million in term loan indebtedness. In May 2011, we completed a financing, in which we issued an aggregate of 11.5 million shares and generated net proceeds of approximately $43.1 million. During the three months ended September 30, 2011, warrants with respect to 402,101 underlying shares of our common stock were exercised, resulting in gross proceeds of approximately $1.9 million. See the section captioned “Liquidity and Capital Resources” and “Note 6 — Notes payable”, “Note 8 — Equity Based Transactions” and “Note 9 — Warrants” of the unaudited financial statements included in this report for additional information. Because we have limited revenues and substantial research and development and operating expenses, we expect that we will in the future seek additional working capital funding from the sale of equity, debt securities, or loans or the licensing of rights to our product candidates.

 

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Key Financial Metrics

Revenue

Licensing Revenue from Collaborative and License Agreements. Revenue from collaborative and license agreements consists of (1) up-front cash payments for initial technology access or licensing fees and (2) contingent payments triggered by the occurrence of specified events or other contingencies derived from our collaborative and license agreements. Royalties from the commercial sale of products derived from our collaborative and license agreements are reported as licensing, royalties, and other revenue.

If we have continuing obligations under a collaborative agreement and the deliverables within the collaboration cannot be separated into their own respective units of accounting, we utilize a multiple attribution model for revenue recognition as the revenue related to each deliverable within the arrangement should be recognized upon the culmination of the separate earnings processes and in such a manner that the accounting matches the economic substance of the deliverables included in the unit of accounting. As such, (1) up-front cash payments are recorded as deferred revenue and recognized as revenue ratably over the period of performance under the applicable agreement and (2) contingent payments are recorded as deferred revenue when all the criteria for revenue recognition are met and recognized as revenue ratably over the estimated period of our ongoing obligations. Royalties based on reported sales of licensed products, if any, are recognized based on the terms of the applicable agreement when and if reported sales are reliably measurable and collectability is reasonably assured.

If we have no continuing obligations under a license agreement, or a license deliverable qualifies as a separate unit of accounting included in a collaborative arrangement, license payments that are allocated to the license deliverable are recognized as revenue upon commencement of the license term and contingent payments are recognized as revenue upon the occurrence of the events or contingencies provided for in such agreement, assuming collectability is reasonably assured.

Expenses

Research and Development. Research and development expense consists of costs associated with research activities as well as costs associated with our product development efforts, and conducting preclinical studies. These expenses include external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations; technology access and licensing fees related to the use of proprietary third party technologies; employee and consultant-related expenses, including salaries, stock-based compensation expense; third party supplier expenses and an allocation of facility costs. To date, we have recognized research and development expenses, including those paid to third parties, as they have been incurred.

Our research and development programs are at an early stage and may not result in any approved products. Product candidates that appear promising at early stages of development may not reach the market for a variety of reasons. For example, Merck KGaA cancelled our collaboration relating to Theratope only after receiving Phase 3 clinical trial results. We had made substantial investments over several years in the development of Theratope and terminated all development activities following the cancellation of our collaboration. Similarly, any of our continuing product candidates may be found to be ineffective or cause harmful side effects during clinical trials, may take longer to complete clinical trials than we have anticipated, may fail to receive necessary regulatory approvals, and may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality. As part of our business strategy, we may enter into collaboration or license agreements with larger third party pharmaceutical companies to complete the development and commercialization of our small molecule or other product candidates, and it is unknown whether or on what terms we will be able to secure collaboration or license agreements for any candidate. In addition, it is difficult to provide the impact of collaboration or license agreements, if any, on the development of product candidates. Establishing product development relationships with large pharmaceutical companies may or may not accelerate the time to completion or reduce our costs with respect to the development and commercialization of any product candidate.

As a result of these uncertainties and the other risks inherent in the drug development process, we cannot determine the duration and completion costs of current or future clinical stages of any of our product candidates. Similarly, we cannot determine when, if, or to what extent we may generate revenue from the commercialization

 

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and sale of any product candidate. The timeframe for development of any product candidate, associated development costs, and the probability of regulatory and commercial success vary widely. As a result, we continually evaluate our product candidates and make determinations as to which programs to pursue and how much funding to direct to specific candidates. These determinations are typically made based on consideration of numerous factors, including our evaluation of scientific and clinical trial data and an ongoing assessment of the product candidate’s commercial prospects. We anticipate that we will continue to develop our portfolio of product candidates, which will increase our research and development expense in future periods. We do not expect any of our current candidates to be commercially available before 2013, if at all.

General and Administrative. General and administrative expense consists principally of salaries, benefits, stock-based compensation expense, and related costs for personnel in our executive, finance, accounting, information technology, and human resource functions. Other general and administrative expenses include professional fees for legal, consulting, and accounting services and an allocation of our facility costs.

Investment and Other Income (Expense), net. Investment and other income (expense), net consists of interest and other income on our cash, short-term and long-term investments, foreign exchange gains and losses and other non-operating income. Our short term investments consist of certificates of deposit issued by U.S. banks and insured by the Federal Deposit Insurance Corporation.

Interest Expense. Interest expense consists of interest paid and accrued and includes non-cash amortization of the debt discount and capitalized loan fees.

Change in Fair Value of Warrants. Warrants issued in connection with our securities offerings in May 2009 and September 2010 are classified as a liability due to their settlement and other terms and, as such, were recorded at their estimated fair value on the date of the closing of the respective transactions. The warrants are marked to market for each financial reporting period, with changes in estimated fair value recorded as a gain or loss in our condensed consolidated statement of operations. The fair value of the warrants is determined using the Black-Scholes option-pricing model, which requires the use of significant judgment and estimates for the inputs used in the model. For more information, see “Note 9 — Warrants” of the unaudited financial statements included in this report for more information.

Critical Accounting Policies and Significant Judgments and Estimates

We have prepared this Management’s Discussion and Analysis of Financial Condition and Results of Operations based on our condensed consolidated financial statements, which have been included elsewhere in this report and which have been prepared in accordance with generally accepted accounting principles in the United States. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of our consolidated financial statements as well as the reported amounts of revenue and expense during the periods presented. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable. We believe that the estimates and judgments upon which we rely are reasonable based upon historical experience and information available to us at the time that we make these estimates and judgments. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. Although we believe that our judgments and estimates are appropriate, actual results may differ from these estimates.

Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission, or SEC, on March 14, 2011. There have been no material changes in our critical accounting policies and judgments since that date.

Results of Operations for the Three and Nine Month Periods Ended September 30, 2011 and September 30, 2010

The following table sets forth selected consolidated statements of operations data for each of the periods indicated.

 

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Overview

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011      2010     2011     2010  
     (In millions, except per share
amounts)
 

Revenue

   $ —         $ —        $ 0.1      $ —     

Operating expenses

     6.4         4.3        18.3        14.5   

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

     16.6         (0.3     (12.8     4.7   

Net income (loss)

     9.9         (4.4     (31.2     (9.5

Net income (loss) per share — basic

     0.24         (0.17     (0.86     (0.37

Net income (loss) per share — diluted

     0.22         (0.17     (0.86     (0.37

As discussed in more detail below, the income for the three months ended September 30, 2011 and the increase in our net loss for the nine months ended September 30, 2011, as compared to the three and nine months ended September 30, 2010, was primarily due to the change in the estimated fair value of our warrant liability, which was attributable principally to the change in the price of our common stock. In addition, research and development expenses were higher due to the development of PX-866 and ONT-10. This increase was partially offset by a decrease in general and administrative expenses.

Revenue

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (In millions)  

Revenues from collaborative and license agreements

   $ —         $ —         $ 0.1       $ —     

During the three and nine months ended September 30, 2011, we recognized zero and $0.1 million of previously deferred revenue relating to an agreement with Prima Biomed Limited as we have no continuing performance obligations related to such agreement. We do not expect revenue from the license of Stimuvax until the submission, if any, by Merck KGaA, of the biologics license application, or BLA, for the first indication, which would trigger a contingent payment from them to us under the 2008 license agreement.

Research and Development

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (In millions)  

Research and development

   $ 5.4       $ 2.7       $ 13.8       $ 8.1   

Research and development expenses increased by $2.7 million, or 100.0%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, primarily due to a license payment of $1.5 million to SBMRI, which was due upon the execution of the agreement. See the section captioned — “Overview” and “Note 12 — Collaborative and License Agreements” of the unaudited financial statements included in this report for additional information. In addition, the higher research and development expense was also due to an increase of expenses in clinical trials of $0.8 million and salaries and benefits of $0.3 million.

Research and development expenses increased by $5.7 million, or 70.4%, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase is attributable to, a license payment of $1.5 million to SBMRI which was due upon the execution of the agreement, an increase of

 

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expenses in clinical trials of $1.9 million, preclinical and manufacturing development of $1.3 million and salaries and benefits of $0.7 million.

We expect that our research and development costs will increase slightly from current levels for the rest of 2011 due to greater activity related to the development of PX-866 and ONT-10 compared to the prior year period and an increase in employee related compensation costs attributable to higher headcount.

General and Administrative

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (In millions)  

General and administrative

   $ 1.1       $ 1.7       $ 4.5       $ 6.4   

The $0.6 million, or 35.3%, decrease in general and administrative expense for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 was principally due to a $0.3 million decrease in professional fees related to legal fees and other costs associated with the execution of the equity line financing in 2010 and $0.3 million related to lower patent costs in 2011.

The $1.9 million, or 29.7% decrease in general and administrative expense for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was attributable to lower professional fees of $2.0 million. The professional fees incurred in the nine months ended September 30, 2010 primarily related to regulatory compliance activities. The decrease was offset in part by an increase in employee related compensation costs of $0.2 million.

We expect general and administration expense for the balance of the year to remain approximately at current levels.

Change in Fair Value of Warrant Liability

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011      2010     2011     2010  
     (In millions)  

Change in fair value of warrant liability — (loss)/income

   $ 16.6       $ (0.3   $ (12.8   $ 4.7   

The $16.6 million income and $12.8 million loss recorded in the three and nine months ended September 30, 2011, respectively, was due to the change in the estimated fair value of our warrant liability during those periods. Such changes were attributable principally to the change in the price of our common stock and pertain to warrants issued in connection with the September 2010 and May 2009 financings. On December 31, 2010, we changed the way we estimated volatility when determining the fair value of the warrants using the Black-Scholes model. For more information, see “Note 3 — Fair Value Measurements” of the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. If the fair value of the warrant liability for the three months ended September 30, 2010 was calculated using the current method, the change in fair value warrant liability loss would have increased from $0.3 million to $2.2 million. If the fair value of the warrant liability for the nine months ended September 30, 2010 was calculated using the current method, the change in fair value warrant liability income would have decreased from $4.7 million to $2.8 million.

Liquidity and Capital Resources

Cash, Cash Equivalents, Investments and Working Capital

As of September 30, 2011, our principal sources of liquidity consisted of cash and cash equivalents of $11.0 million, short-term investments of $48.6 million and long-term investment of $2.6 million. Our cash and cash

 

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equivalents consist of cash, money market funds and securities with an initial maturity of less than 90 days. Our short-term investments are invested in debt securities of U.S government agencies, corporate debt securities, commercial paper and certificates of deposit insured by the Federal Deposit Insurance Corporation with maturities not exceeding 12 months. Our long-term investments are invested in debt securities of U.S government agencies with maturities exceeding 12 months. Our primary source of cash has historically been proceeds from the issuance of equity securities, exercise of warrants, debt and equipment financings, and payments to us under grants, licensing and collaboration agreements. These proceeds have been used to fund our operations.

Our cash and cash equivalents were $11.0 million as of September 30, 2011 compared to $5.5 million as of December 31, 2010, an increase of $5.5 million, or 100.0%. The increase was primarily attributable to net proceeds of $43.1 million from an underwritten public offering of 11,500,000 shares of common stock at a price of $4.00 per share on May 4, 2011. In addition, $4.8 million received from a term loan from General Electric Capital Corporation, or GECC, in February 2011, and approximately $1.9 million received from warrant exercises. Such increase was offset by net purchase of investments of $27.8 million and net cash used in operations of $16.5 million.

As of September 30, 2011, our working capital (defined as current assets less current liabilities) was $57.1 million compared to $28.2 million as of December 31, 2010, an increase of $28.9 million, or 102.5%. The increase in working capital was primarily attributable to an increase in short-term investment of $25.3 million and cash and cash equivalents of $5.5 million. Such increase was offset by a $1.6 million increase in current portion of notes payable and a decrease in government grants receivable of $0.5 million.

In February 2011, we entered into a loan and security agreement, or the loan agreement, with GECC, pursuant to which the lenders extended to us an initial term loan with an aggregate principal amount of $5.0 million. The proceeds of the initial term loan, after payment of lender fees and expenses, were approximately $4.8 million. The net proceeds will be used for general corporate purposes, including research and product development, such as funding pre-clinical studies and clinical trials and otherwise moving product candidates towards commercialization, or the possible acquisition or licensing of new product candidates or technology which could result in other product candidates. Pending application of the net proceeds, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing instruments. See “Note 6 — Notes payable” to the unaudited financial statements included in this report for additional information regarding the loan agreement.

On May 4, 2011, we closed an underwritten public offering of 11,500,000 shares of its common stock at a price to the public of $4.00 per share for gross proceeds of $46.0 million. The net proceeds from the sale of the shares, after deducting the underwriters’ discounts and other estimated offering expenses payable by us were approximately $43.1 million.

In July and August of 2011, warrants with respect to 402,101 underlying shares of our common stock were exercised, resulting in gross proceeds of approximately $1.9 million.

On October 4, 2011, we sold an aggregate of 639,071 shares of its common stock pursuant to our committed equity line financing facility described in “Note 8 — Equity Based Transactions” of the unaudited financial statements included in this report, at a per share purchase price of approximately $6.43 resulting in aggregate proceeds of $4.1 million. The per purchase share price was established under the financing facility by reference to the volume weighted average prices of our common stock on The NASDAQ Global Market during a 10-day pricing period, net a discount of 5% per share. We received net proceeds from the sale of these shares of approximately $4.1 million after deducting our estimated offering expenses of approximately $49,000, including a placement agent fee of $41,000.

We believe that our currently available cash and cash equivalents will be sufficient to finance our operations for at least the next 12 months. Nevertheless, we expect that we will require additional capital from time to time in the future in order to continue the development of products in our pipeline and to expand our product portfolio. We would expect to seek additional financing from the sale and issuance of equity or debt securities, but we cannot predict that financing will be available when and as we need financing or that, if available, the financing terms will be commercially reasonable. If we are unable to raise additional financing when and if we require, it would have a material adverse effect on our business and results of operations. To the extent we issue additional equity securities, our existing shareholders could experience substantial dilution.

 

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Cash Flows From Operating Activities

We used $16.5 million of cash in operating activities for the nine months ended September 30, 2011, an increase of $3.2 million compared to $13.3 million of cash used in operating activities for the nine months ended September 30, 2010. The increase in cash used in operations was primarily due to an increase in research and development expenses.

Cash Flows From Investing Activities

We had cash outflows of $27.9 million from investing activities for the nine months ended September 30, 2011, compared to cash outflows from investing activities of $2.9 million for the nine months ended September 30, 2010. This change was attributable primarily to increased net purchases of short-term and long-term investments in the nine months ended September 30, 2011.

Cash Flows from Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2011 was $49.9 million, which consisted primarily of proceeds received pursuant to our underwritten common stock offering, the loan agreement and the exercise of warrants. On May 4, 2011, we closed an underwritten public offering of 11,500,000 shares of its common stock for net proceeds of approximately $43.1million. In addition, we received net proceeds of $4.8 million from term loan borrowing from GECC in February 2011. During the three months ended September 30, 2011, warrants with respect to 402,101 underlying shares of our common stock were exercised, resulting in gross proceeds of approximately $1.9 million. For the nine months ended September 30, 2010, cash provided by financing activities consisted of $13.6 million in proceeds, net of issuance costs of $1.2 million, pursuant to the sale of common stock and warrants in the September 2010 equity financing.

Contractual Obligations and Contingencies

In our operations, we have entered into long-term contractual arrangements from time to time for our facilities, debt financing, the provision of goods and services, and acquisition of technology access rights, among others. The following table presents contractual obligations arising from these arrangements as of September 30, 2011:

 

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

Operating leases

   $ 4,310       $ 548       $ 1,178       $ 1,209       $ 1,375   

Notes payable

     5,075         1,667         3,408         —           —     

Interest commitment on notes payable

     810         466         344         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,195       $ 2,681       $ 4,930       $ 1,209       $ 1,375   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In May 2008, we entered into a sublease for an office and laboratory facility in Seattle, Washington totaling approximately 17,000 square feet. The sublease expires on December 17, 2011. The sublease provides for a base monthly rent of $33,324 increasing to $36,354 in 2010. In May 2008, we also entered into a lease directly with the landlord of such facility, which will have a seven year term beginning at the expiration of the sublease. The lease provides for a base monthly rent of $47,715 increasing to $52,259 in 2018.

In connection with the acquisition of ProlX, we may become obligated to issue additional shares of our common stock to the former stockholders of ProlX upon satisfaction of certain milestones. We may become obligated to issue shares of our common stock with a fair market value of $5.0 million (determined based on a weighted average trading price at the time of issuance) upon the initiation of the first Phase 3 clinical trial for a ProlX product. We may become obligated to issue shares of our common stock with a fair market value of $10.0 million (determined based on a weighted average trading price at the time of issuance) upon regulatory approval of a ProlX product in a major market.

 

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Under certain licensing arrangements for technologies incorporated into our product candidates, we are contractually committed to payment of ongoing licensing fees and royalties, as well as contingent payments when certain milestones as defined in the agreements have been achieved.

Guarantees and Indemnification

In the ordinary course of our business, we have entered into agreements with our collaboration partners, vendors, and other persons and entities that include guarantees or indemnity provisions. For example, our agreements with Merck KGaA and the former stockholders of ProlX contain certain tax indemnification provisions, and we have entered into indemnification agreements with our officers and directors. Based on information known to us as of September 30, 2011, we believe that our exposure related to these guarantees and indemnification obligations is not material.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board, or FASB, issued new guidance on testing goodwill for impairment. The new guidance simplifies how an entity tests goodwill for impairment. It allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The new guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We have not adopted this standard or determined the impact of this standard on our results of operations, cash flows and financial position.

In June 2011, FASB and the International Accounting Standards Board, or IASB, updated the guidance on presentation of items within other comprehensive income. In this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is only expected to impact the presentation of the Company’s financial statements, and not the results of operations or financial position of the Company.

In May 2011, the FASB and the IASB published converged standards on fair value measurement and disclosure. The standards do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The standards clarified some existing rules and provided guidance for additional disclosures: (1) the concepts of “highest and best use” and “valuation premise” in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities; (2) when measuring the fair value of instruments classified in equity (e.g., equity issued in a business combination), the entity should measure it from the perspective of a market participant that holds that instrument as an asset; and (3) quantitative information about the unobservable inputs used in Level 3 measurements should be included. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. We have not yet adopted

 

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this standard or determined the impact of this standard on our results of operations, cash flows and financial position.

In April 2010, FASB issued new guidance for recognizing revenue under the milestone method. This new guidance allows an entity to make a policy election to recognize a substantive milestone in its entirety in the period in which the milestone is achieved. This guidance is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted. The adoption of this new accounting pronouncement on January 1, 2011 had no impact on our condensed consolidated financial statements for the three or nine months ended September 30, 2011.

In October 2009, FASB issued new guidance for revenue recognition with multiple deliverables. This new guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this new guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. This guidance is effective on a prospective basis for multiple-element arrangements entered or materially modified in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted. The adoption of this guidance on January 1, 2011 had no impact on our condensed consolidated financial statements for the nine months ended September 30, 2011. However, the adoption may result in different accounting treatment for future collaboration arrangements than the accounting treatment applied to existing collaboration arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We had cash, cash equivalents, short-term investments and long-term investment totaling $62.2 million and $28.9 million as of September 30, 2011 and December 31, 2010, respectively. We do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates since a majority of these assets are of a short term nature. Declines in interest rates, however, would reduce future investment income. A 100 basis points decline in interest rates, occurring January 1, 2011 and sustained throughout the period ended September 30, 2011, would have resulted in a decline in investment income of approximately $0.3 million for that same period.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness, as of the end of the period covered by this report, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the Securities and Exchange Commission, or SEC, under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the nine months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material legal proceedings with respect to us, our subsidiaries, or any of our material properties. From time to time, we may become involved in legal proceedings in the ordinary course of our business.

Item 1A. Risk Factors

Set forth below and elsewhere in this report, and in other documents we file with the SEC are descriptions of risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also affect our results of operations and financial condition.

Risks Relating to our Business

Our near-term success is highly dependent on the success of our lead product candidate, Stimuvax, and we cannot be certain that it will be successfully developed or receive regulatory approval or be successfully commercialized.

Our lead product candidate, Stimuvax, is being evaluated in Phase 3 clinical trials for the treatment of non-small cell lung cancer, or NSCLC. Stimuvax will require the successful completion of the ongoing NSCLC trials and possibly other clinical trials before submission of a biologic license application, or BLA, or its foreign equivalent for approval. This process can take many years and require the expenditure of substantial resources. Pursuant to our agreement with Merck KGaA, Merck KGaA is responsible for the development and the regulatory approval process and any subsequent commercialization of Stimuvax. We cannot assure you that Merck KGaA will continue to advance the development and commercialization of Stimuvax as quickly as would be optimal for our stockholders. In addition, Merck KGaA has the right to terminate the 2008 license agreement upon 30 days’ prior written notice if, in its reasonable judgment, it determines there are issues concerning the safety or efficacy of Stimuvax that would materially and adversely affect Stimuvax’s medical, economic or competitive viability. Clinical trials involving the number of sites and patients required for FDA approval of Stimuvax may not be successfully completed. If these clinical trials fail to demonstrate that Stimuvax is safe and effective, it will not receive regulatory approval. Even if Stimuvax receives regulatory approval, it may never be successfully commercialized. If Stimuvax does not receive regulatory approval or is not successfully commercialized, or if Merck were to terminate the 2008 license agreement, we may not be able to generate revenue, become profitable or continue our operations. Any failure of Stimuvax to receive regulatory approval or be successfully commercialized would have a material adverse effect on our business, operating results, and financial condition and could result in a substantial decline in the price of our common stock.

We understand that Merck KGaA intends to submit for regulatory approval of Stimuvax for the treatment of NSCLC based on the results of a single Phase 3 trial, the START study. If the FDA determines that the results of this single study do not demonstrate the efficacy of Stimuvax with a sufficient degree of statistical certainty, the FDA may require an additional Phase 3 study to be performed prior to regulatory approval. Such a trial requirement would delay or prevent commercialization of Stimuvax and could result in the termination by Merck KGaA of our license agreement with them. In addition, there can be no guarantee that the results of an additional trial would be supportive of the results of the START trial.

 

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Stimuvax and ONT-10 are based on novel technologies, which may raise new regulatory issues that could delay or make FDA approval more difficult.

The process of obtaining required FDA and other regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Stimuvax and ONT-10 are novel; therefore, regulatory agencies may lack experience with them, which may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of Stimuvax and our other active vaccine products under development.

To date, the FDA has approved for commercial sale in the United States only one active vaccine designed to stimulate an immune response against cancer. Consequently, there is limited precedent for the successful development or commercialization of products based on our technologies in this area.

The suspension of Merck’s clinical development program for Stimuvax could severely harm our business.

In March 2010, we announced that Merck KGaA suspended the clinical development program for Stimuvax as the result of a suspected unexpected serious adverse event reaction in a patient with multiple myeloma participating in an exploratory clinical trial. The suspension was a precautionary measure while an investigation of the cause of the adverse event was conducted, but it affected the Phase 3 clinical trials in NSCLC and in breast cancer. In June 2010, we announced that the FDA, lifted the clinical hold it had placed on the Phase 3 clinical trials in NSCLC. Merck KGaA has resumed the treatment and enrollment in these trials for Stimuvax in NSCLC. The clinical hold on the Stimuvax trial in breast cancer remains in effect and Merck KGaA has discontinued the Phase 3 trial in breast cancer.

As of the date of this report, we can offer no assurances that this serious adverse event was not caused by Stimuvax or that there are not or will not be more such serious adverse events in the future. The occurrence of this serious adverse event, or other such serious adverse events, could result in a prolonged delay, including the need to enroll more patients or collect more data, or the termination of the clinical development program for Stimuvax. For example, we have been informed that Merck KGaA plans to increase the size of the START trial of Stimuvax in NSCLC from an estimated number of 1,322 to 1,476 patients as part of a plan to maintain the statistical power of the trial. This change was agreed in consultation with the FDA and the Special Protocol Agreement for START has been amended to reflect the change. Another unexpected serious adverse event reaction could cause a similar suspension of clinical trials in the future. Any of these foregoing risks could materially and adversely affect our business, results of operations and the trading price of our common stock.

We have a history of net losses, we anticipate additional losses and we may never become profitable.

Other than the year ended December 31, 2008, we have incurred net losses in each fiscal year since we commenced our research activities in 1985. The net income we realized in 2008 was due entirely to our December 2008 transactions with Merck KGaA and we do not anticipate realizing net income again for the foreseeable future. As of September 30, 2011, our accumulated deficit was approximately $378.4 million. Our losses have resulted primarily from expenses incurred in research and development of our product candidates. We do not know when or if we will complete our product development efforts, receive regulatory approval for any of our product candidates, or successfully commercialize any approved products. As a result, it is difficult to predict the extent of any future losses or the time required to achieve profitability, if at all. Any failure of our products to complete successful clinical trials and obtain regulatory approval and any failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations.

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

Merck KGaA has been testing our lead product candidate, Stimuvax, in Phase 3 clinical trials for the treatment of NSCLC. We have initiated two Phase 1 / 2 trials in 2010 for PX-866 and two Phase 2 trials in 2011. Our other product candidates remain in the pre-clinical testing stages. The results from pre-clinical testing and clinical trials that we have completed may not be predictive of results in future pre-clinical tests and clinical trials, and there can be no assurance that we will demonstrate sufficient safety and efficacy to obtain the requisite

 

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regulatory approvals. A number of companies in the biotechnology and pharmaceutical industries, including our company, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. For example, the clinical trials for Stimuvax were suspended as a result of a suspected unexpected serious adverse event reaction in a patient. Although the clinical hold for trials in NSCLC has been lifted, it remains in effect for the trial in breast cancer and Merck KGaA has decided to discontinue the Phase 3 trial in breast cancer. Regulatory approval may not be obtained for any of our product candidates. If our product candidates are not shown to be safe and effective in clinical trials, the resulting delays in developing other product candidates and conducting related pre-clinical testing and clinical trials, as well as the potential need for additional financing, would have a material adverse effect on our business, financial condition and results of operations.

We are dependent upon Merck KGaA to develop and commercialize our lead product candidate, Stimuvax.

Under our license agreement with Merck KGaA for our lead product candidate, Stimuvax, Merck KGaA is entirely responsible for the development, manufacture and worldwide commercialization of Stimuvax and the costs associated with such development, manufacture and commercialization. Any future payments, including royalties to us, will depend on the extent to which Merck KGaA advances Stimuvax through development and commercialization. Merck KGaA has the right to terminate the 2008 license agreement, upon 30 days’ written notice, if, in Merck KGaA’s reasonable judgment, Merck KGaA determines that there are issues concerning the safety or efficacy of Stimuvax which materially adversely affect Stimuvax’s medical, economic or competitive viability; provided that if we do not agree with such determination we have the right to cause the matter to be submitted to binding arbitration. Our ability to receive any significant revenue from Stimuvax is dependent on the efforts of Merck KGaA. If Merck KGaA fails to fulfill its obligations under the 2008 license agreement, we would need to obtain the capital necessary to fund the development and commercialization of Stimuvax or enter into alternative arrangements with a third party. We could also become involved in disputes with Merck KGaA, which could lead to delays in or termination of our development and commercialization of Stimuvax and time-consuming and expensive litigation or arbitration. If Merck KGaA terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, the chances of successfully developing or commercializing Stimuvax would be materially and adversely affected.

We and Merck KGaA currently rely on third party manufacturers to supply our product candidates. Any disruption in production, inability of these third party manufacturers to produce adequate quantities to meet our needs or Merck’s needs or other impediments with respect to development or manufacturing could adversely affect the clinical development and commercialization of Stimuvax, our ability to continue our research and development activities or successfully complete pre-clinical studies and clinical trials, delay submissions of our regulatory applications or adversely affect our ability to commercialize our other product candidates in a timely manner, or at all.

Merck KGaA currently depends on a single manufacturer, Baxter International Inc., or Baxter, for the supply of our lead product candidate, Stimuvax, and on Corixa Corp. (now a part of GlaxoSmithKline plc, or GSK) for the manufacture of the adjuvant in Stimuvax. If Stimuvax is not approved by 2015, Corixa/GSK may terminate its obligation to supply the adjuvant. In this case, we would retain the necessary licenses from Corixa/GSK required to have the adjuvant manufactured, but the transfer of the process to a third party would delay the development and commercialization of Stimuvax, which would materially harm our business.

Similarly, we rely on a single manufacturer, Fermentek, LTD for the supply of wortmannin, a key raw ingredient for PX-866. Without the timely support of Fermentek, LTD, our development program for PX-866 could suffer significant delays, require significantly higher spending or face cancellation

Our product candidates have not yet been manufactured on a commercial scale. In order to commercialize a product candidate, the third party manufacturer may need to increase its manufacturing capacity, which may require the manufacturer to fund capital improvements to support the scale up of manufacturing and related activities. With respect to PX-866, we may be required to provide all or a portion of these funds. The third party manufacturer may not be able to successfully increase its manufacturing capacity for our product candidate for which we obtain marketing approval in a timely or economic manner, or at all. If any manufacturer is unable to provide commercial quantities of a product candidate, we (or Merck KGaA, in the case of Stimuvax) will need to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for a

 

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particular product candidate could require us (or Merck KGaA, in the case of Stimuvax) to conduct comparative studies or use other means to determine equivalence between product candidates manufactured by a new manufacturer and those previously manufactured by the existing manufacturer, which could delay or prevent commercialization of our product candidates. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if alternative arrangements are not established on a timely basis or on acceptable terms, the development and commercialization of our product candidates may be delayed or there may be a shortage in supply.

Any manufacturer of our products must comply with current Good Manufacturing Practices, or cGMP, requirements enforced by the FDA through its facilities inspection program or by foreign regulatory agencies. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.

Any failure or delay in commencing or completing clinical trials for our product candidates could severely harm our business.

Each of our product candidates must undergo extensive pre-clinical studies and clinical trials as a condition to regulatory approval. Pre-clinical studies and clinical trials are expensive and take many years to complete. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:

 

   

safety issues or side effects;

 

   

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

 

   

poor effectiveness of product candidates during clinical trials;

 

   

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

 

   

our or our collaborators’ ability to obtain regulatory approval to commence a clinical trial;

 

   

our or our collaborators’ ability to manufacture or obtain from third parties materials sufficient for use in pre-clinical studies and clinical trials; and

 

   

varying interpretation of data by the FDA and similar foreign regulatory agencies.

It is possible that none of our product candidates will complete clinical trials in any of the markets in which we and/or our collaborators intend to sell those product candidates. Accordingly, we and/or our collaborators may not receive the regulatory approvals necessary to market our product candidates. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for product candidates would prevent or delay their commercialization and severely harm our business and financial condition. For example, although the suspension of the clinical development program for Stimuvax in March 2010 has been lifted for trials in NSCLC, it remains in effect for the Phase 3 breast cancer trial and, in any event, may result in a prolonged delay or in the termination of the clinical development program for Stimuvax. For example, Merck KGaA has announced that it has decided to discontinue the Phase 3 trial in breast cancer. A prolonged delay or termination of the clinical development program would have a material adverse impact on our business and financial condition.

 

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The failure to enroll patients for clinical trials may cause delays in developing our product candidates.

We may encounter delays if we, any collaboration partners or Merck KGaA are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including, the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. Moreover, when one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials. Our product candidates are focused in oncology, which can be a difficult patient population to recruit. For example, the suspension of the Stimuvax trials resulted in Merck KGaA enrolling additional patients which could delay such trials.

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

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

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

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

 

   

warning letters;

 

   

fines;

 

   

product recalls;

 

   

withdrawal of regulatory approval;

 

   

operating restrictions;

 

   

disgorgement of profits;

 

   

injunctions; and

 

   

criminal prosecution.

 

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Regulatory agencies may require us, any of our collaborators or Merck KGaA to delay, restrict or discontinue clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. For example, in March 2010, Merck KGaA suspended the clinical development program for Stimuvax in both NSCLC and breast cancer as the result of a suspected unexpected serious adverse event reaction in a patient with multiple myeloma participating in an exploratory clinical trial. Although the clinical hold placed on Stimuvax clinical trials in NSCLC has been lifted, the suspension of clinical trials in breast cancer remains in effect and Merck KGaA has announced that it has decided to discontinue the Phase 3 trial in breast cancer. In addition, we, any of our collaborators or Merck KGaA may be unable to submit applications to regulatory agencies within the time frame we currently expect. Once submitted, applications must be approved by various regulatory agencies before we, any of our collaborators or Merck KGaA can commercialize the product described in the application. All statutes and regulations governing the conduct of clinical trials are subject to change in the future, which could affect the cost of such clinical trials. Any unanticipated costs or delays in such clinical studies could delay our ability to generate revenues and harm our financial condition and results of operations.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally.

We intend to have our product candidates marketed outside the United States. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. To date, we have not filed for marketing approval for any of our product candidates and may not receive the approvals necessary to commercialize our product candidates in any market. The approval procedure varies among countries and can involve additional testing and data review. The time required to obtain foreign regulatory approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in other jurisdictions, including approval by the FDA. The failure to obtain regulatory approval in foreign jurisdictions could harm our business.

Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.

Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians, patients, third party payers such as health insurance companies and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:

 

   

our ability to provide acceptable evidence of safety and efficacy;

 

   

the prevalence and severity of adverse side effects;

 

   

availability, relative cost and relative efficacy of alternative and competing treatments;

 

   

the effectiveness of our marketing and distribution strategy;

 

   

publicity concerning our products or competing products and treatments; and

 

   

our ability to obtain sufficient third party insurance coverage or reimbursement.

 

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If our product candidates do not become widely accepted by physicians, patients, third party payers and other members of the medical community, our business, financial condition and results of operations would be materially and adversely affected.

The terms of our secured debt facility may restrict our current and future operations, particularly our ability to respond to changes or to take some actions, and our failure to comply with such covenants, whether due to events beyond our control or otherwise, could result in an event of default which could materially and adversely affect our operating results and our financial condition.

In February 2011 we borrowed $5.0 million pursuant to the terms of a loan and security agreement, or the loan agreement, with General Electric Capital Corporation, or GECC. The loan agreement with GECC contains certain restrictive covenants that limit or restrict our ability to incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, or repurchase stock. The loan agreement also requires that we have 12 months of unrestricted cash and cash equivalents (as calculated in the loan agreement) as of each December 31 during the term of the loan agreement. A breach of any of these covenants or the occurrence of certain other events of default, which are customary in similar loan facilities, would result in a default under the loan agreement. If there was an uncured event of default, GECC could cause all amounts outstanding under the loan agreement to become due and payable immediately and could proceed against the collateral securing the indebtedness, including our cash, cash equivalents and short-term investments. We cannot be certain that our assets would be sufficient to fully repay borrowings under the loan agreement, either upon maturity or acceleration upon an uncured event of default.

Our ability to continue with our planned operations is dependent on our success at raising additional capital sufficient to meet our obligations on a timely basis. If we fail to obtain additional financing when needed, we may be unable to complete the development, regulatory approval and commercialization of our product candidates.

We have expended and continue to expend substantial funds in connection with our product development activities and clinical trials and regulatory approvals. The very limited funds generated currently from our operations will be insufficient to enable us to bring all of our products currently under development to commercialization. Accordingly, we need to raise additional funds from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of our product candidates. We cannot be certain that additional financing will be available when and as needed or, if available, that it will be available on acceptable terms. If financing is available, it may be on terms that adversely affect the interests of our existing stockholders or restrict our ability to conduct our operations. If adequate financing is not available, we may need to continue to reduce or eliminate our expenditures for research and development, testing, production and marketing for some of our product candidates. Our actual capital requirements will depend on numerous factors, including:

 

   

activities and arrangements related to the commercialization of our product candidates;

 

   

the progress of our research and development programs;

 

   

the progress of pre-clinical and clinical testing of our product candidates;

 

   

the time and cost involved in obtaining regulatory approvals for our product candidates;

 

   

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights with respect to our intellectual property;

 

   

the effect of competing technological and market developments;

 

   

the effect of changes and developments in our existing licensing and other relationships; and

 

   

the terms of any new collaborative, licensing and other arrangements that we may establish.

 

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If we require additional financing and cannot secure sufficient financing on acceptable terms, we may need to delay, reduce or eliminate some or all of our research and development programs, any of which would be expected to have a material adverse effect on our business, operating results, and financial condition.

We may expand our business through the acquisition of companies or businesses or in-licensing product candidates that could disrupt our business and harm our financial condition.

We may in the future seek to expand our products and capabilities by acquiring one or more companies or businesses or in-licensing one or more product candidates. For example, in September 2011 we entered into an exclusive, worldwide license agreement with the Stanford-Burnham Medical Research Institute, or SBMRI, for certain intellectual property related to SBMRI’s small molecule program based on ONT-701(sabutoclax) and related compounds. Acquisitions and in-licenses involve numerous risks, including:

 

   

substantial cash expenditures;

 

   

potentially dilutive issuance of equity securities;

 

   

incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;

 

   

difficulties in assimilating the operations of the acquired companies;

 

   

diverting our management’s attention away from other business concerns;

 

   

entering markets in which we have limited or no direct experience; and

 

   

potential loss of our key employees or key employees of the acquired companies or businesses.

Other than our license from SBMRI, we have not expanded our business through in-licensing and we have completed only one acquisition; therefore, our experience in making acquisitions and in-licensing is limited. We cannot assure you that any acquisition or in-license will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business or in-licensed product candidate. In addition, our future success would depend in part on our ability to manage the rapid growth associated with some of these acquisitions and in-licenses. We cannot assure you that we would be able to make the combination of our business with that of acquired businesses or companies or in-licensed product candidates work or be successful. Furthermore, the development or expansion of our business or any acquired business or company or in-licensed product candidate may require a substantial capital investment by us. We may also seek to raise funds by selling shares of our capital stock, which could dilute our current stockholders’ ownership interest, or securities convertible into our capital stock, which could dilute current stockholders’ ownership interest upon conversion.

If we are unable to obtain, maintain and enforce our proprietary rights, we may not be able to compete effectively or operate profitably.

Our success is dependent in part on obtaining, maintaining and enforcing our patents and other proprietary rights and will depend in large part on our ability to:

 

   

obtain patent and other proprietary protection for our technology, processes and product candidates;

 

   

defend patents once issued;

 

   

preserve trade secrets; and

 

   

operate without infringing the patents and proprietary rights of third parties.

 

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As of September 30, 2011, we owned approximately 11 U.S. patents and 19 U.S. patent applications, as well as the corresponding foreign patents and patent applications, and held exclusive or partially exclusive licenses to approximately 14 U.S. patents and 11 U.S. patent applications, as well as the corresponding foreign patents and patent applications. The degree of future protection for our proprietary rights is uncertain. For example:

 

   

we might not have been the first to make the inventions covered by any of our patents, if issued, or our pending patent applications;

 

   

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

 

   

others may independently develop similar or alternative technologies or products and/or duplicate any of our technologies and/or products;

 

   

it is possible that none of our pending patent applications will result in issued patents or, if issued, these patents may not be sufficient to protect our technology or provide us with a basis for commercially-viable products and may not provide us with any competitive advantages;

 

   

if our pending applications issue as patents, they may be challenged by third parties as infringed, invalid or unenforceable under U.S. or foreign laws;

 

   

if issued, the patents under which we hold rights may not be valid or enforceable; or

 

   

we may develop additional proprietary technologies that are not patentable and which may not be adequately protected through trade secrets, if for example a competitor were to independently develop duplicative, similar or alternative technologies.

The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed in patents or the degree of protection afforded under patents. Although we believe our potential rights under patent applications provide a competitive advantage, it is possible that patent applications owned by or licensed to us will not result in patents being issued, or that, if issued, the patents will not give us an advantage over competitors with similar products or technology, nor can we assure you that we can obtain, maintain and enforce all ownership and other proprietary rights necessary to develop and commercialize our product candidates.

Even if any or all of our patent applications issue as patents, others may challenge the validity, inventorship, ownership, enforceability or scope of our patents or other technology used in or otherwise necessary for the development and commercialization of our product candidates. We may not be successful in defending against any such challenges. Moreover, the cost of litigation to uphold the validity of patents to prevent infringement or to otherwise protect our proprietary rights can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use the challenged technologies without payment to us. There is no assurance that our patents, if issued, will not be infringed or successfully avoided through design innovation. Intellectual property lawsuits are expensive and would consume time and other resources, even if the outcome were successful. In addition, there is a risk that a court would decide that our patents, if issued, are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of a patent were upheld, a court would refuse to stop the other party from using the inventions, including on the ground that its activities do not infringe that patent. If any of these events were to occur, our business, financial condition and results of operations would be materially and adversely effected.

In addition to the intellectual property and other rights described above, we also rely on unpatented technology, trade secrets, trademarks and confidential information, particularly when we do not believe that patent protection is appropriate or available. However, trade secrets are difficult to protect and it is possible that others will independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality and invention assignment agreement at the commencement of an employment or consulting relationship with us. However, it is possible that these agreements will not provide

 

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effective protection of our confidential information or, in the event of unauthorized use of our intellectual property or the intellectual property of third parties, provide adequate or effective remedies or protection.

If our vaccine technology or our product candidates, including Stimuvax, conflict with the rights of others, we may not be able to manufacture or market our product candidates, which could have a material and adverse effect on us and on our collaboration with Merck KGaA.

Issued patents held by others may limit our ability to develop commercial products. All issued patents are entitled to a presumption of validity under the laws of the United States. If we need licenses to such patents to permit us to develop or market our product candidates, we may be required to pay significant fees or royalties, and we cannot be certain that we would be able to obtain such licenses on commercially reasonable terms, if at all. Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our products to market, that we use in producing our products, or that we use in treating patients with our products.

We know that others have filed patent applications in various jurisdictions that relate to several areas in which we are developing products. Some of these patent applications have already resulted in the issuance of patents and some are still pending. We may be required to alter our processes or product candidates, pay licensing fees or cease activities. Certain parts of our vaccine technology, including the MUC1 antigen, originated from third party sources.

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

There has been significant litigation in the biotechnology industry over patents and other proprietary rights and if we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses and pay substantial royalties in order to continue to manufacture or market the affected products.

There is no assurance that we would prevail in any legal action or that any license required under a third party patent would be made available on acceptable terms or at all. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of claims of patent infringement or violation of other intellectual property rights, which could have a material and adverse effect on our business, financial condition and results of operations.

If any products we develop become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, our ability to successfully commercialize our products will be impaired.

Our future revenues, profitability and access to capital will be affected by the continuing efforts of governmental and private third party payers to contain or reduce the costs of health care through various means. We expect a number of federal, state and foreign proposals to control the cost of drugs through government regulation. We are unsure of the impact recent health care reform legislation may have on our business or what actions federal, state, foreign and private payers may take in response to the recent reforms. Therefore, it is difficult to provide the effect of any implemented reform on our business. Our ability to commercialize our products successfully will depend, in part, on the extent to which reimbursement for the cost of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the United States, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of

 

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newly approved health care products, particularly for indications for which there is no current effective treatment or for which medical care typically is not sought. Adequate third party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product research and development. If adequate coverage and reimbursement levels are not provided by government and third party payers for use of our products, our products may fail to achieve market acceptance and our results of operations will be harmed.

Governments often impose strict price controls, which may adversely affect our future profitability.

We intend to seek approval to market our future products in both the United States and foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product. In some foreign countries, particularly in the European Union, prescription drug pricing is subject to government control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our future product to other available therapies. In addition, it is unclear what impact, if any, recent health care reform legislation will have on the price of drugs; however, prices may become subject to controls similar to those in other countries. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for our product candidates;

 

   

impairment of our business reputation;

 

   

withdrawal of clinical trial participants;

 

   

costs of related litigation;

 

   

substantial monetary awards to patients or other claimants;

 

   

loss of revenues; and

 

   

the inability to commercialize our product candidates.

Although we currently have product liability insurance coverage for our clinical trials for expenses or losses up to a $10 million aggregate annual limit, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any or all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

 

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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 our product candidates. We expect any product candidate that we commercialize with our collaborative partners or on our own will compete with existing, market-leading products and products in development.

Stimuvax. There are currently two products approved as maintenance therapy following treatment of inoperable locoregional Stage III NSCLC with induction chemotherapy, Tarceva (erlotinib), a targeted small molecule from Genentech, Inc., a member of the Roche Group, and Alimta (pemetrexed), a chemotherapeutic from Eli Lilly and Company. Stimuvax has not been tested in combination with or in comparison to these products. It is possible that other existing or new agents will be approved for this indication. In addition, there are at least three vaccines in development for the treatment of NSCLC, including GSK’s MAGE A3 vaccine in Phase 3, NovaRx Corporation’s Lucanix in Phase 3 and Transgene’s TG-4010 in Phase 2. TG-4010 also targets MUC1, although using technology different from Stimuvax. Of these vaccines, only Lucanix is being developed as a maintenance therapy in Stage III NSCLC, the same indication as Stimuvax. However, subsequent development of these vaccines, including Stimuvax, may result in additional direct competition.

Small Molecule Products. There are two small molecule programs in development; PX866 and ONT-701(sabutoclax). PX-866 is an inhibitor of phosphoinositide 3-kinase (PI3K). We are aware of several companies that have entered clinical trials with competing compounds targeting the same protein. Among those are compounds being developed by Novartis (Phase 1/2), Roche/Genentech (Phase 1), Bayer (Phase 1), Semafore (Phase 1), Sanofi-Aventis (Phase 2), Pfizer (Phase 1), GlaxoSmithKline (Phase 1) and Gilead Sciences, Inc. (Phase 2). There are also several approved targeted therapies for cancer and in development against which PX-866 might compete. ONT-701(sabutoclax) is a small molecule inhibitor of the Bcl-2 anti-apoptotic protein family. We are aware of several companies that are developing competing drugs that target the same family, including Cephalon (Phase 2), Ascenta (Phase 2) and Abbott/Roche (Phase 1). There are also several approved targeted therapies for cancer and in development against which ONT-701(sabutoclax) might compete.

Many of our potential competitors have substantially greater financial, technical and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to:

 

   

design and develop products that are superior to other products in the market;

 

   

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

 

   

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

 

   

obtain required regulatory approvals; and

 

   

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

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

 

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If we are unable to enter into agreements with partners to perform sales and marketing functions, or build these functions ourselves, we will not be able to commercialize our product candidates.

We currently do not have any internal sales, marketing or distribution capabilities. In order to commercialize any of our product candidates, we must either acquire or internally develop a sales, marketing and distribution infrastructure or enter into agreements with partners to perform these services for us. Under our agreements with Merck KGaA, Merck KGaA is responsible for developing and commercializing Stimuvax, and any problems with that relationship could delay the development and commercialization of Stimuvax. Additionally, we may not be able to enter into arrangements with respect to our product candidates not covered by the Merck KGaA agreements on commercially acceptable terms, if at all. Factors that may inhibit our efforts to commercialize our product candidates without entering into arrangements with third parties include:

 

   

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

 

   

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

 

   

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

 

   

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

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

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

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

Furthermore, we have not entered into non-competition agreements with all of our key employees. In addition, we do not maintain “key person” life insurance on any of our officers, employees or consultants. The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would harm our research and development programs and our business.

Our business is subject to increasingly complex environmental legislation that has increased both our costs and the risk of noncompliance.

Our business may involve the use of hazardous material, which will require us to comply with environmental regulations. We face increasing complexity in our product development as we adjust to new and upcoming requirements relating to the materials composition of many of our product candidates. If we use biological and hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages. Environmental regulations could have a material adverse effect on the results of our operations and our financial position. We maintain insurance under our general liability policy for any liability associated with

 

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our hazardous materials activities, and it is possible in the future that our coverage would be insufficient if we incurred a material environmental liability.

If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business, and our stock price.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition, and could cause the trading price of our common stock to fall dramatically. For the year ended December 31, 2009, we and our independent registered public accounting firm identified certain material weaknesses in our internal controls that are described in “Item 9A — Controls and Procedures — Management’s Report on Internal Control over Financial Reporting,” of our Annual Report on Form 10-K for the year ended December 31, 2009. Remediation of the material weaknesses was fully completed on December 31, 2010; however, we can provide no assurances that these or other material weaknesses in our internal control over financial reporting will not be identified in the future.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company will have been detected.

In June 2010 we retained outside consultants to assist us with designing and implementing an adequate risk assessment process to identify future complex transactions requiring specialized knowledge to ensure the appropriate accounting for and disclosure of such transactions. In September 2010 and January 2011, we retained personnel with the appropriate technical expertise to assist us in accounting for complex transactions in accordance with U.S. GAAP. In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals any other material weaknesses or significant deficiencies, the correction of any such material weaknesses or significant deficiencies could require additional remedial measures which could be costly and time-consuming. In addition, we may be unable to produce accurate financial statements on a timely basis. Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

If we are required to redeem the shares of our Class UA preferred stock, our financial condition may be adversely affected.

Our certificate of incorporation provides for the mandatory redemption of shares of our Class UA preferred stock if we realize “net profits” in any year. See “Note 8 — Share Capital — Authorized Shares — Class UA preferred stock” of the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. For this purpose, “net profits. means the after tax profits determined in accordance with generally accepted accounting principles, where relevant, consistently applied.”

The certificate of incorporation does not specify the jurisdiction whose generally accepted accounting principles would apply for the redemption provision. At the time of the original issuance of the shares, we were a corporation organized under the federal laws of Canada, and our principal operations were located in Canada. In addition, the original purchaser and current holder of the Class UA preferred stock is a Canadian entity. In connection with our reincorporation in Delaware, we disclosed that the rights, preferences and privileges of the shares would remain unchanged except as required by Delaware law, and the mandatory redemption provisions were not changed.

 

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In addition, the formula for determining the price at which such shares would be redeemed is expressed in Canadian dollars. Although, if challenged, we believe that a Delaware court would determine that “net profits” be interpreted in accordance with Canadian GAAP, we cannot provide assurances that a Delaware court would agree with such interpretation.

As a result of the December 2008 Merck KGaA transaction, we recognized on a one-time basis all deferred revenue relating to Stimuvax, under both U.S. GAAP and Canadian GAAP. Under U.S. GAAP this resulted in net income. However, under Canadian GAAP we were required to recognize an impairment on intangible assets which resulted in a net loss for 2008 and therefore did not redeem any shares of Class UA preferred stock in 2009. If in the future we recognize net income under Canadian GAAP, or any successor to such principles, or if the holder of Class UA preferred stock were to challenge, and prevail in a dispute involving, the interpretation of the mandatory redemption provision, we may be required to redeem such shares which would have an adverse effect on our cash position. The maximum aggregate amount that we would be required to pay to redeem such shares is CAN $1.25 million.

The holder of the Class UA preferred stock has declined to sign an acknowledgement that Canadian GAAP applies to the redemption provision and has indicated that it believes U.S. GAAP should apply. As of the date of this report, the holder has not initiated a proceeding to challenge this interpretation; however, it may do so. If they do dispute this interpretation, although we believe a Delaware court would agree with the interpretation described above, we can provide no assurances that we would prevail in such a dispute. Further, any dispute regarding this matter, even if we were ultimately successful, could require significant resources which may adversely affect our results of operations.

Risks Related to the Ownership of Our Common Stock

Our common stock may become ineligible for listing on The NASDAQ Stock Market, which would materially adversely affect the liquidity and price of our common stock.

Our common stock is currently listed for trading in the United States on The NASDAQ Global Market. As a result of our failure to timely file our Annual Report on Form 10-K for the year ended December 31, 2009, we received a letter from The NASDAQ Stock Market informing us that we did not comply with continued listing requirements. Although the filing of our Annual Report on Form 10-K for the year ended December 31, 2009 allowed us to regain full compliance with SEC reporting requirements and The NASDAQ Stock Market continued listing requirements, we have in the past and could in the future be unable to meet The NASDAQ Global Market continued listing requirements. For example, on August 20, 2008 we disclosed that we had received a letter from The NASDAQ Stock Market indicating that we did not comply with the requirements for continued listing on The NASDAQ Global Market because we did not meet the maintenance standard in Marketplace Rule 4450(b)(1)(A) (recodified as Marketplace Rule 5450(b)) that specifies, among other things, that the market value of our common stock be at least $50 million or that our stockholders’ equity was at least $10 million. Although we regained compliance with the stockholders’ equity standard, we have a history of losses and would expect that, absent the completion of a financing or other event that would have a positive impact on our stockholders’ equity, our stockholders’ equity would decline over time. Further, in the past our stock price has traded near, and at times below, the $1.00 minimum bid price required for continued listing on NASDAQ. Although NASDAQ in the past has provided relief from the $1.00 minimum bid price requirement as a result of the recent weakness in the stock market, it may not do so in the future. If we fail to maintain compliance with NASDAQ’s listing standards, and our common stock becomes ineligible for listing on The NASDAQ Stock Market the liquidity and price of our common stock would be adversely affected.

If our common stock was delisted, the price of our stock and the ability of our stockholders to trade in our stock would be adversely affected. In addition, we would be subject to a number of restrictions regarding the registration of our stock under U.S. federal securities laws, and we would not be able to allow our employees to exercise their outstanding options, which could adversely affect our business and results of operations. If we are delisted in the future from The NASDAQ Global Market, there may be other negative implications, including the potential loss of confidence by actual or potential collaboration partners, suppliers and employees and the loss of institutional investor interest in our company.

 

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The trading price of our common stock may be volatile.

The market prices for and trading volumes of securities of biotechnology companies, including our securities, have been historically volatile. The market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common shares may fluctuate significantly due to a variety of factors, including:

 

   

the results of pre-clinical testing and clinical trials by us, our collaborators, our competitors and/or companies that are developing products that are similar to ours (regardless of whether such products are potentially competitive with ours);

 

   

public concern as to the safety of products developed by us or others;

 

   

technological innovations or new therapeutic products;

 

   

governmental regulations;

 

   

developments in patent or other proprietary rights;

 

   

litigation;

 

   

comments by securities analysts;

 

   

the issuance of additional shares of common stock, or securities convertible into, or exercisable or exchangeable for, shares of our common stock in connection with financings, acquisitions or otherwise;

 

   

the incurrence of debt;

 

   

general market conditions in our industry or in the economy as a whole; and

 

   

political instability, natural disasters, war and/or events of terrorism.

In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Because we do not expect to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never paid cash dividends on our common shares and have no present intention to pay any dividends in the future. We are not profitable and do not expect to earn any material revenues for at least several years, if at all. As a result, we intend to use all available cash and liquid assets in the development of our business. Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, if any, capital requirements, operating and financial conditions and on such other factors as our board of directors deems relevant. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

 

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We may seek to raise additional capital in the future; however, such capital may not be available to us on reasonable terms, if at all, when or as we require additional funding. If we issue additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing stockholders would experience further dilution.

We expect that we will seek to raise additional capital from time to time in the future. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional working capital when required would have a material adverse effect on our business and financial condition and would be expected to result in a decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.

For example, in July 2010, we entered into a committed equity line financing facility, or financing arrangement, under which we may sell up to $20.0 million of our common stock to SCBV over a 24-month period subject to a maximum of 5,150,680 shares of our common stock. In October 2011, we sold an aggregate of 639,071 shares of our common stock pursuant to our committed equity line financing facility. The sale of additional shares of our common stock pursuant to the financing arrangement will have a dilutive impact on our existing stockholders. SCBV may resell some or all of the shares we issue to them under the financing arrangement and such sales could cause the market price of our common stock to decline significantly with advances under the financing arrangement. To the extent of any such decline, any subsequent advances would require us to issue a greater number of shares of common stock to SCBV in exchange for each dollar of the advance. Under these circumstances, our existing stockholders would experience greater dilution. Although SCBV is precluded from short sales of shares acquired pursuant to advances under the financing arrangement, the sale of our common stock under the financing arrangement could encourage short sales by third parties, which could contribute to the further decline of our stock price.

Our management will have broad discretion over the use of proceeds from the sale of shares of our common stock and may not use such proceeds in ways that increase the value of our stock price.

In May 2011, we generated approximately $43.1 million of net proceeds from the sale of shares of our common stock in an underwritten public offering and in October 2011 we generated approximately $4.1 million in net proceeds from the sale of shares pursuant to our committed equity line financing facility. We will have broad discretion over the use of proceeds from the sale of those shares and the sale, if any, of additional shares of common stock to SCBV and we could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our product candidates and cause the price of our common stock to decline.

We can issue shares of preferred stock that may adversely affect the rights of a stockholder of our common stock.

Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock with designations, rights, and preferences determined from time-to-time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock. For example, an issuance of shares of preferred stock could:

 

   

adversely affect the voting power of the holders of our common stock;

 

   

make it more difficult for a third party to gain control of us;

 

   

discourage bids for our common stock at a premium;

 

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limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or

 

   

otherwise adversely affect the market price or our common stock.

We have in the past, and we may at any time in the future, issue additional shares of authorized preferred stock.

We expect our quarterly operating results to fluctuate in future periods, which may cause our stock price to fluctuate or decline.

Our quarterly operating results have fluctuated in the past, and we believe they will continue to do so in the future. Some of these fluctuations may be more pronounced than they were in the past as a result of the issuance by us in May 2009 of warrants to purchase shares of our common stock and the issuance by us in September 2010 of warrants to purchase shares of our common stock. These warrants are accounted for as a derivative financial instrument and classified as a derivative liability. Accordingly, the fair value of the warrants is recorded on our consolidated balance sheet as a liability, and such fair value is adjusted at each financial reporting date with the adjustment to fair value reflected in our consolidated statement of operations. The fair value of the warrants is determined using the Black-Scholes option-pricing model. Fluctuations in the assumptions and factors used in the Black-Scholes model can result in adjustments to the fair value of the warrants reflected on our balance sheet and, therefore, our statement of operations. Due to the classification of such warrants and other factors, quarterly results of operations are difficult to forecast, and period-to-period comparisons of our operating results may not be predictive of future performance. In one or more future quarters, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our common stock could decline. In addition, the market price of our common stock may fluctuate or decline regardless of our operating performance.

Item 6. Exhibits

 

Exhibit
Number

  

Description

  31.1    Certification of Christopher S. Henney, PhD, Interim President and Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Christopher S. Henney, PhD, Interim President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ONCOTHYREON INC.
Date: November 8, 2011  

/s/ Julia M. Eastland

  Chief Financial Officer

 

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Table of Contents

INDEX OF EXHIBITS

 

Exhibit
Number

  

Description

  31.1    Certification of Christopher S. Henney, PhD, Interim President and Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Christopher S. Henney, PhD, Interim President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document