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EX-32.1 - EX-32.1 - Viracta Therapeutics, Inc.snss-ex321_1025.htm
EX-31.2 - EX-31.2 - Viracta Therapeutics, Inc.snss-ex312_1024.htm
EX-31.1 - EX-31.1 - Viracta Therapeutics, Inc.snss-ex311_1026.htm
EX-10.4 - EX-10.4 - Viracta Therapeutics, Inc.snss-ex104_883.htm
EX-10.3 - EX-10.3 - Viracta Therapeutics, Inc.snss-ex103_882.htm

 

 

 

UNITED STATES

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 June 30, 2016

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: 000-51531

 

SUNESIS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

94-3295878

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

395 Oyster Point Boulevard, Suite 400

South San Francisco, California 94080

(Address of Principal Executive Offices including Zip Code)

(650) 266-3500

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file 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 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 Exchange Act Rule 12b-2).    Yes  ¨    No  x

The registrant had 87,014,355 shares of common stock, $0.0001 par value per share, outstanding as of July 22, 2016.

 

 

 

 

 

 

 


 

SUNESIS PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

 

Page

No.

PART I. FINANCIAL INFORMATION

3

Item 1.

  

Financial Statements:

3

 

  

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

3

 

  

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015

4

 

  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

5

 

  

Notes to Condensed Consolidated Financial Statements

6

Item 2.

  

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

14

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

  

Controls and Procedures

22

 

PART II. OTHER INFORMATION

23

Item 1.

  

Legal Proceedings

23

Item 1A.

  

Risk Factors

23

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

  

Defaults Upon Senior Securities

37

Item 4.

  

Mine Safety Disclosures

37

Item 5.

  

Other Information

37

Item 6.

  

Exhibits

37

 

  

Signatures

38

 

 

 

 


 

PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

June 30,

2016

 

 

December 31,

2015

 

 

(Unaudited)

 

 

(1)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

9,447

 

 

$

26,886

 

Marketable securities

 

23,674

 

 

 

19,544

 

Prepaids and other current assets

 

831

 

 

 

558

 

Total current assets

 

33,952

 

 

 

46,988

 

Property and equipment, net

 

8

 

 

 

14

 

Total assets

$

33,960

 

 

$

47,002

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,759

 

 

$

2,453

 

Accrued clinical expense

 

2,006

 

 

 

1,954

 

Accrued compensation

 

1,113

 

 

 

1,606

 

Other accrued liabilities

 

1,858

 

 

 

2,711

 

Current portion of deferred revenue

 

1,831

 

 

 

2,441

 

Current portion of notes payable

 

833

 

 

 

7,834

 

Total current liabilities

 

10,400

 

 

 

18,999

 

Non-current portion of deferred revenue

 

 

 

 

610

 

Non-current other accrued liabilities

 

56

 

 

 

 

Non-current portion of notes payable

 

13,444

 

 

 

 

Commitments

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Convertible Preferred stock

 

16,459

 

 

 

16,459

 

Common stock

 

9

 

 

 

9

 

Additional paid-in capital

 

573,496

 

 

 

570,309

 

Accumulated other comprehensive income (loss)

 

1

 

 

 

(11

)

Accumulated deficit

 

(579,905

)

 

 

(559,373

)

Total stockholders’ equity

 

10,060

 

 

 

27,393

 

Total liabilities and stockholders’ equity

$

33,960

 

 

$

47,002

 

  

 

(1)

The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


 

SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and other revenue

$

610

 

 

$

854

 

 

$

1,250

 

 

$

1,708

 

Total revenues

 

610

 

 

 

854

 

 

 

1,250

 

 

 

1,708

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

6,606

 

 

 

6,302

 

 

 

12,815

 

 

 

10,814

 

General and administrative

 

3,997

 

 

 

5,175

 

 

 

8,292

 

 

 

10,286

 

Total operating expenses

 

10,603

 

 

 

11,477

 

 

 

21,107

 

 

 

21,100

 

Loss from operations

 

(9,993

)

 

 

(10,623

)

 

 

(19,857

)

 

 

(19,392

)

Interest expense

 

(476

)

 

 

(233

)

 

 

(774

)

 

 

(472

)

Other income, net

 

23

 

 

 

1,907

 

 

 

99

 

 

 

1,787

 

Net loss

 

(10,446

)

 

 

(8,949

)

 

 

(20,532

)

 

 

(18,077

)

Unrealized gain (loss) on available-for-sale securities

 

(1

)

 

 

 

 

 

12

 

 

 

2

 

Comprehensive loss

$

(10,447

)

 

$

(8,949

)

 

$

(20,520

)

 

$

(18,075

)

Basic and diluted loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(10,446

)

 

$

(8,949

)

 

$

(20,532

)

 

$

(18,077

)

Diluted

$

(10,446

)

 

$

(10,816

)

 

$

(20,532

)

 

$

(18,077

)

Shares used in computing net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

86,960

 

 

 

72,513

 

 

 

86,810

 

 

 

70,090

 

Diluted

 

86,960

 

 

 

72,525

 

 

 

86,810

 

 

 

70,090

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.12

)

 

$

(0.12

)

 

$

(0.24

)

 

$

(0.26

)

Diluted

$

(0.12

)

 

$

(0.15

)

 

$

(0.24

)

 

$

(0.26

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


 

SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Six months ended

June 30,

 

 

2016

 

 

2015

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(20,532

)

 

$

(18,077

)

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

 

 

 

 

 

 

 

Stock-based compensation expense

 

2,659

 

 

 

3,332

 

Depreciation and amortization

 

6

 

 

 

22

 

Amortization of debt discount and debt issuance costs

 

201

 

 

 

75

 

Write-off debt discount upon note repayment

 

27

 

 

 

 

Change in fair value of warrant liability

 

 

 

 

(1,778

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaids and other assets

 

(273

)

 

 

54

 

Accounts payable

 

306

 

 

 

(895

)

Accrued clinical expense

 

52

 

 

 

(863

)

Accrued compensation

 

(493

)

 

 

(1,042

)

Other accrued liabilities

 

(876

)

 

 

1,074

 

Deferred revenue

 

(1,220

)

 

 

(1,709

)

Net cash used in operating activities

 

(20,143

)

 

 

(19,807

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

(57,422

)

 

 

(18,927

)

Proceeds from maturities of marketable securities

 

53,304

 

 

 

20,470

 

Net cash (used in) provided by investing activities

 

(4,118

)

 

 

1,543

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from notes payable

 

15,000

 

 

 

 

Principal payments on notes payable

 

(830

)

 

 

(1,642

)

Payoff notes payable and final payment

 

(7,153

)

 

 

 

Payment of financing fees and debt issuance costs

 

(229

)

 

 

 

Proceeds from issuance of common stock through controlled equity offering facilities, net

 

 

 

 

17,675

 

Proceeds from exercise of warrants, stock options and stock purchase rights

 

34

 

 

 

347

 

Net cash provided by financing activities

 

6,822

 

 

 

16,380

 

Net decrease in cash and cash equivalents

 

(17,439

)

 

 

(1,884

)

Cash and cash equivalents at beginning of period

 

26,886

 

 

 

22,186

 

Cash and cash equivalents at end of period

$

9,447

 

 

$

20,302

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

 

Fair value of warrants issued in connection with notes payable

$

537

 

 

$

100

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


 

SUNESIS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

(Unaudited)

 

1. Company Overview

Description of Business

Sunesis Pharmaceuticals, Inc. (the “Company” or “Sunesis”) was incorporated in the state of Delaware on February 10, 1998, and its facilities are located in South San Francisco, California. Sunesis is a biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of solid and hematologic cancers. The Company’s primary activities since incorporation have been conducting research and development internally and through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, conducting clinical trials and raising capital.

Our most advanced program is QINPREZOTM (vosaroxin), our product candidate for the treatment of acute myeloid leukemia, or AML. In October 2014, we announced the results of a Phase 3, multi-national, randomized, double-blind, placebo-controlled trial of vosaroxin in combination with cytarabine in patients with relapsed or refractory AML, or the VALOR trial. The VALOR trial did not meet its primary endpoint of demonstrating a statistically significant improvement in overall survival, but based upon the favorable results of other predefined analyses of the data, the Company submitted a letter of intent to the European Medicines Agency, or EMA, in November 2014 describing its intention to file a marketing authorization application, or MAA, for marketing authorization of vosaroxin plus cytarabine for the treatment of relapsed or refractory AML. In June 2015, the Company met separately with our Rapporteur and Co-Rapporteur, who are two appointed members of the EMA’s Committee of Human Medicinal Products. Based upon feedback from these meetings, the Company filed an MAA with the EMA at the end of 2015. In July 2015, the Company met with the U.S. Food and Drug Administration, or FDA, to discuss a potential regulatory filing in the U.S. Based upon the meeting, the FDA recommended that the Company provide additional clinical evidence prior to any regulatory filing in the U.S. As a result, the Company is evaluating regulatory and clinical strategies with the goal of gaining future marketing approval in the U.S.

In January 2014, we announced the expansion of our oncology pipeline through separate global licensing agreements for two preclinical kinase inhibitor programs. The first agreement, with Biogen Idec MA, Inc., or Biogen, is for global commercial rights to SNS-062, a selective non-covalently binding oral inhibitor of BTK. We filed a Clinical Trial Authorization application in the first quarter of 2016 and enrolled the first patients in a Phase 1A study of SNS-062 in healthy volunteers.

The second agreement, with Milennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, or Takeda, is for global commercial rights to several potential first-in class, pre-clinical inhibitors of the novel target PDK1. In 2014, we selected two PDK1 inhibitors, SNS-229 and SNS-510, of which we have taken one, SNS-229 into IND-enabling absorption, distribution, metabolism and excretion, and toxicology studies.

In addition, we are in a collaboration with Takeda for the development of TAK-580 (formerly MLN2480), an oral pan-RAF inhibitor, for which Takeda is conducting a multi-arm, open-label Phase 1B study in combination with MLN0128, an oral mTORC 1/2 inhibitor; alisertib, an oral aurora A kinase inhibitor; or paclitaxel, in adult patients with advanced non-hematologic malignancies.

Significant Risks and Uncertainties

The Company has incurred significant losses and negative cash flows from operations since its inception, and as of June 30, 2016, had cash, cash equivalents and marketable securities totaling $33.1 million and an accumulated deficit of $579.9 million.

The Company will need to raise substantial additional capital to pursue a regulatory strategy for the potential commercialization of QINPREZOTM (vosaroxin), its product candidate for the potential treatment of acute myeloid leukemia, and to continue the development of vosaroxin and the Company’s other programs. The Company expects to finance its future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to vosaroxin and its other development programs, or a combination of the above. However, the Company does not know whether additional funding will be available on acceptable terms, or at all. If the Company is unable to raise required funding on acceptable terms or at all, it will need to reduce operating expenses, enter into a collaboration or other similar arrangement with respect to development and/or commercialization rights to vosaroxin, outlicense intellectual property rights to vosaroxin or our other development programs, sell unsecured assets, or a combination of the above, or be forced to delay or reduce the scope of its vosaroxin development program, potentially including any regulatory filings related to the VALOR trial, and/or limit or cease its operations.

6


 

Concentrations of Credit Risk

In accordance with its investment policy, the Company invests cash that is not currently being used for operational purposes. The policy allows for the purchase of low risk debt securities issued by: (a) the United States and certain European governments and government agencies, and (b) highly rated banks and corporations, denominated in U.S. dollars, Euros or British pounds, subject to certain concentration limits. The policy limits maturities of securities purchased to no longer than 24 months and the weighted average maturity of the portfolio to 12 months. Management believes these guidelines ensure both the safety and liquidity of any investment portfolio the Company may hold.

Financial instruments that potentially subject the Company to concentrations of credit risk generally consist of cash, cash equivalents and marketable securities. The Company is exposed to credit risk in the event of default by the institutions holding its cash, cash equivalents and any marketable securities to the extent of the amounts recorded in the balance sheets.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The financial statements include all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for a fair presentation of the periods presented. The balance sheet as of December 31, 2015 was derived from the audited financial statements as of that date. These interim financial results are not necessarily indicative of results to be expected for the full year or any other period. These unaudited condensed consolidated financial statements and the notes accompanying them should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

During the first six months of fiscal 2016, the Company adopted Accounting Standards Update (ASU) 2016-06 “Derivatives and Hedging (Topic 815):  Contingent Put and Call Options in Debt Instruments (a consensus of the FASB Emerging Issues Task Force)”on a modified retrospective basis.  Pursuant to ASU 2016-06, a four-step decision sequence is required to assess whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts.  The economic characteristics and risks of embedded derivatives that are not clearly and closed related to their debt hosts is a criteria pursuant to Topic 815 that requires embedded derivatives be separated from the host contract and accounted for separately as derivatives.  There have been no adjustments to existing debt instruments as of the beginning of fiscal 2016 and no significant changes in our reported financial position or results of operations and cash flows as a result of the adoption of ASU 2016-06.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), that will supersede most existing revenue recognition guidance under US GAAP. The new revenue standard requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. Entities can choose either the retrospective or cumulative effect transition method. The new revenue standard as amended by Accounting Standards Update No. 2015-14, is effective for annual and interim periods beginning after December 15, 2017. In March, April and May 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.  These pronouncements have the same effective date as the new revenue standard and provide additional guidance, clarification and practical expedients to reduce the cost and complexity of applying the new standard.  The Company has yet to evaluate which adoption method it plans to use or the potential effect of the new standard on its consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which will require a reporting entity to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the reporting entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. The standard will be effective for annual periods ending after December 15, 2016, with early adoption permitted. The Company is in the process of evaluating the potential effect of the new standard on its consolidated financial statements.

7


 

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 made modifications to how certain financial instruments should be measured and disclosed, including using the exit price notion when measuring the fair value, separating the presentation of financial assets and financial liabilities by measurement category on the balance sheet and eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods. The Company will evaluate the guidance and present the required disclosures in its consolidated financial statements at the time of adoption.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. ASU 2016-02 is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU 2016-02 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 principally affects the recognition of excess tax benefits and deficiencies and the cash flow classification of share-based compensation related transactions. This guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company will evaluate the guidance and present the required disclosures in its consolidated financial statements at the time of adoption.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments, which will require a reporting entity to use a new forward-looking impairment model for most financial assets that generally will result in the earlier recognition of allowances for losses.  For available-for-sale debt securities with unrealized losses, credit losses will be recognized as allowances rather than as reductions in amortized cost. The standard will be effective for annual periods ending after December 15, 2019, with early adoption permitted beginning in 2019. Entities will apply the guidance as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  The Company will evaluate the guidance and present the required disclosures in its consolidated financial statements at the time of adoption.

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Sunesis Europe Limited, a United Kingdom corporation, and Sunesis Pharmaceuticals (Bermuda) Ltd., a Bermuda corporation, as well as a Bermuda limited partnership, Sunesis Pharmaceuticals International LP. All intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting

Management has determined that the Company operates as a single reportable segment.

Significant Estimates and Judgments

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes thereto. Actual results could differ materially from these estimates. Estimates, assumptions and judgments made by management include those related to the valuation of equity and related instruments, debt instruments, revenue recognition, stock-based compensation and clinical trial accounting.

Cash Equivalents and Marketable Securities

Invoices for certain services provided to the Company are denominated in foreign currencies. To manage the risk of future movements in foreign exchange rates that would affect such amounts, the Company may purchase certain European currencies or highly-rated investments denominated in those currencies, subject to similar criteria as for other investments defined in the Company’s investment policy. There is no guarantee that the related gains and losses will substantially offset each other, and the Company may be subject to exchange gains or losses as currencies fluctuate from quarter to quarter. To date, the Company has purchased Euros and Euro-denominated obligations of foreign governments and corporate debt. As of June 30, 2016 and December 31, 2015, the Company held cash and investments denominated in Euros with an aggregate fair value of $0.7 million. Any cash, cash equivalent and

8


 

marketable securities balances denominated in foreign currencies are recorded at their fair value based on the current exchange rate as of each balance sheet date. The resulting exchange gains or losses and those from amounts payable for services originally denominated in foreign currencies are recorded in other income, net in the statements of operations and comprehensive loss.

Fair Value Measurements

The Company measures cash equivalents and marketable securities at fair value on a recurring basis and warrants issued in connection with debt on a non-recurring basis using the following hierarchy to prioritize valuation inputs, in accordance with applicable GAAP:

Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities that can be accessed at the measurement date.

Level 2 - inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly.

Level 3 - unobservable inputs.

The Company’s Level 2 valuations of marketable securities are generally derived from independent pricing services based upon quoted prices in active markets for similar securities, with prices adjusted for yield and number of days to maturity, or based on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets.

The fair value of the warrants issued in connection with a loan security agreement (see Note 7) is determined using the Black-Scholes model, which requires inputs such as the expected term of the warrants, share price volatility and risk-free interest rate. As some of these inputs are unobservable, and require significant analysis and judgment to measure, these variables are classified as Level 3.

The Company does not measure cash, prepayments, accounts payable, accrued liabilities, deferred revenue and notes payable at fair value, as their carrying amounts approximated their fair value as of June 30, 2016 and December 31, 2015.

 

 

3. Loss per Common Share

Basic loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted loss per common share is computed by dividing (a) net loss, less any anti-dilutive amounts recorded during the period for the change in the fair value of warrant liabilities, by (b) the weighted-average number of common shares outstanding for the period plus dilutive potential common shares as determined using the treasury stock method for options and warrants to purchase common stock.

The following table sets forth the computation of basic and diluted loss per common share for the periods presented (in thousands, except per share amounts):

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss—basic

$

(10,446

)

 

$

(8,949

)

 

$

(20,532

)

 

$

(18,077

)

Adjustment for change in fair value of warrant

   liability

 

 

 

 

(1,867

)

 

 

 

 

 

 

Net loss—diluted

$

(10,446

)

 

$

(10,816

)

 

$

(20,532

)

 

$

(18,077

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding—basic

 

86,960

 

 

 

72,513

 

 

 

86,810

 

 

 

70,090

 

Dilutive effect of warrants

 

 

 

 

12

 

 

 

 

 

 

 

Weighted-average common shares outstanding—diluted

 

86,960

 

 

 

72,525

 

 

 

86,810

 

 

 

70,090

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.12

)

 

$

(0.12

)

 

$

(0.24

)

 

$

(0.26

)

Diluted

$

(0.12

)

 

$

(0.15

)

 

$

(0.24

)

 

$

(0.26

)

 

9


 

The following table represents the potential common shares issuable pursuant to outstanding securities as of the related period end dates that were excluded from the computation of diluted loss per common share because their inclusion would have had an anti-dilutive effect (in thousands):

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Warrants to purchase shares of common stock

 

1,615

 

 

 

9,040

 

 

 

1,615

 

 

 

11,960

 

Convertible preferred stock

 

20,200

 

 

 

 

 

 

20,200

 

 

 

 

Options to purchase shares of common stock

 

12,150

 

 

 

10,422

 

 

 

12,150

 

 

 

10,422

 

Restricted stock units

 

344

 

 

 

233

 

 

 

344

 

 

 

233

 

Outstanding securities not included in calculations

 

34,309

 

 

 

19,695

 

 

 

34,309

 

 

 

22,615

 

 

 

4. Financial Instruments

Financial Assets

The following tables summarize the estimated fair value of the Company’s financial assets measured on a recurring basis as of the dates indicated, which were comprised solely of available-for-sale marketable securities with remaining contractual maturities of one year or less (in thousands):

 

June 30, 2016

 

Input Level

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

Money market funds

 

Level 1

 

$

6,179

 

 

$

 

 

$

 

 

$

6,179

 

U.S. Treasury securities

 

Level 1

 

 

5,539

 

 

 

3

 

 

 

 

 

 

5,542

 

U.S. certificates of deposit

 

Level 1

 

 

7,794

 

 

 

 

 

 

 

 

 

7,794

 

U.S. corporate debt obligations

 

Level 2

 

 

10,340

 

 

 

 

 

 

(2

)

 

 

10,338

 

Total available-for-sale securities

 

 

 

 

29,852

 

 

 

3

 

 

 

(2

)

 

 

29,853

 

Less amounts classified as cash equivalents

 

 

 

 

(6,179

)

 

 

 

 

 

 

 

 

(6,179

)

Amounts classified as marketable securities

 

 

 

$

23,673

 

 

$

3

 

 

$

(2

)

 

$

23,674

 

 

December 31, 2015

 

Input Level

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

Money market funds

 

Level 1

 

$

17,200

 

 

$

 

 

$

 

 

$

17,200

 

U.S. Treasury securities

 

Level 1

 

 

1,003

 

 

$

 

 

$

 

 

$

1,003

 

U.S. certificates of deposit

 

Level 1

 

 

5,001

 

 

 

 

 

 

 

 

$

5,001

 

Debt securities of U.S. government agencies

 

Level 2

 

 

4,494

 

 

 

 

 

 

 

 

$

4,494

 

U.S. corporate debt obligations

 

Level 2

 

 

11,660

 

 

 

 

 

 

(11

)

 

$

11,649

 

Total available-for-sale securities

 

 

 

 

39,358

 

 

 

 

 

 

(11

)

 

 

39,347

 

Less amounts classified as cash equivalents

 

 

 

 

(19,803

)

 

 

 

 

 

 

 

 

(19,803

)

Amounts classified as marketable securities

 

 

 

$

19,555

 

 

$

 

 

$

(11

)

 

$

19,544

 

 

The following table summarizes the available-for-sale securities that were in an unrealized loss position as of the date indicated, having been in such position for less than 12 months, and none having been deemed to be other-than temporarily impaired (in thousands):    

 

June 30, 2016

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

U.S. corporate debt obligations

 

$

(2

)

 

$

7,816

 

 

 

$

(2

)

 

$

7,816

 

10


 

 

December 31, 2015

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

U.S. corporate debt obligations

 

$

(11

)

 

$

11,649

 

 

 

$

(11

)

 

$

11,649

 

 

No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of these securities. The gross unrealized losses are not considered to be significant and have generally been for relatively short durations. As of June 30, 2016, the Company had U.S. corporate debt obligations with an estimated fair value of $10.3 million and does not intend to sell these securities before maturity. There were no sales of available-for-sale securities during either the six months ended June 30, 2016 or 2015.

 

 

5. Royalty Agreement

In March 2012, the Company entered into a Revenue Participation Agreement (the “Royalty Agreement”), with RPI Finance Trust (“RPI”), an entity related to Royalty Pharma. In September 2012, pursuant to the provisions of the Royalty Agreement, RPI made a $25.0 million cash payment to the Company. The payment, less $3.1 million representing the fair value of the warrants granted under the arrangement, was initially classified as deferred revenue and is being amortized to revenue over the related performance period.

  

Revenue participation right payments will be made to RPI when and if vosaroxin is commercialized, at a rate of 6.75% of net sales of vosaroxin, on a product-by-product and country-by-country basis world-wide through the later of: (a) the expiration of the last to expire of certain specifically identified patents; (b) 10 years from the date of first commercial sale of such product in such country; or (c) the expiration of all applicable periods of data, market or other regulatory exclusivity in such country with respect to such product.

 

 

6. License Agreements

Biogen

In December 2013, the Company entered into a second amended and restated collaboration agreement with Biogen Idec MA, Inc. (the “Biogen 2nd ARCA”), to provide the Company with an exclusive worldwide license to develop, manufacture and commercialize SNS-062, a BTK inhibitor synthesized under the first amended and restated collaboration agreement with Biogen (the “Biogen 1st ARCA”), solely for oncology indications. The Company may be required to make a $2.5 million milestone payment depending on its development of SNS-062 and royalty payments depending on related product sales of SNS-062. All other of Sunesis’ rights and obligations contained in the Biogen 1st ARCA remain unchanged, except that potential future royalty payments to Sunesis were reduced to equal those amounts due to Biogen for potential future sales of SNS-062.

Takeda

In March 2011, Takeda Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”) purchased and exclusively licensed Biogen’s rights to a PDK1 inhibitor program and a pan-Raf inhibitor program which were both originally developed through a collaboration agreement between Sunesis and Biogen. In January 2014, the Company entered into an amended and restated license agreement with Takeda (the “Amended Takeda Agreement”), to provide the Company with an exclusive worldwide license to develop and commercialize preclinical inhibitors of PDK1. In connection with the execution of the Amended Takeda Agreement, the Company paid an upfront fee and may be required to make up to $9.2 million in pre-commercialization milestone payments depending on its development of PDK1 inhibitors and royalty payments depending on related product sales, if any.

With respect to the pan-Raf inhibitor program, the Company may in the future receive up to $57.5 million in pre-commercialization event-based payments related to the development by Takeda of the first two indications for each of the licensed products directed against the Raf target and royalty payments depending on related product sales. Under this program, Takeda is currently conducting Phase 1 clinical studies of an oral investigative drug, TAK-580 (formerly MLN2480).

 

 

11


 

7. Notes Payable

On March 31, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with Western Alliance Bank (“Western Bank”) and Solar Capital Ltd. (“Solar Capital,” and collectively with Western Bank, the “Lenders”) and Western Alliance, as Collateral Agent (the “Collateral Agent”). Pursuant to the terms of the Loan Agreement, the Lenders provided the Company with a loan in the principal amount of $15,000,000 of which $12,500,000 was funded on March 31, 2016 and $2,500,000 was funded on April 1, 2016, for working capital, to fund its general business requirements and to repay indebtedness of the Company to Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation (collectively, the “Existing Lenders”) pursuant to the Loan and Security Agreement, dated as of October 18, 2011, entered into by and among the Existing Lenders and the Company (the “Oxford Loan Agreement”). On March 31, 2016, the Company used $7.2 million of the loan proceeds to repay the outstanding principal of $6.0 million, a final payment fee of $1.2 million and accrued interest of $45,000 under the Oxford Loan Agreement. The Company paid the Lenders a $0.1 million facility fee and $0.1 million in legal fees. 

The Company will be required to pay interest on the borrowings under the Loan Agreement at a per annum rate equal to 8.54% plus the then effective one-month U.S. LIBOR rate. Payments under the Loan Agreement are monthly in arrears and interest-only for the first 12-months. Thereafter and until the scheduled maturity date of April 1, 2020, in addition to interest accrued during such period, the monthly payments will include an amount equal to the outstanding principal divided by 36 months, unless the interest only period is extended by a further six months, in which case the amortization period will be 30 months. A final payment equal to 3.75% of the original principal amount borrowed will be due upon maturity or such earlier date specified in the Loan Agreement. If the Company repays all amounts owed under the Loan Agreement prior to the maturity date, the Company will pay a prepayment fee equal to 2.0% of the amount prepaid if the prepayment occurs on or prior to March 31, 2017, 1.0% of the amount prepaid if the prepayment occurs after March 31, 2017 but on or prior to March 31, 2018 and 0.5% of the amount prepaid if the prepayment occurs thereafter.       

The facility fee and legal fees related to the debt are being accounted for as a debt discount and classified within notes payable on the Company’s balance sheet and amortized as interest expense over the term of the loan using the effective interest method.  The final payment is being accreted as interest expense over the term of the loan using the effective interest method.

In conjunction with the Loan Agreement, the Lenders were issued five-year warrants to purchase an aggregate of up to 1,248,012 shares of the Company’s common stock at a per share exercise price of $0.5409. The fair value of the warrants issued was estimated to be $0.5 million using a Black-Scholes valuation model with the following assumptions: common stock price at issuance of $0.54; exercise price of $0.5409; risk-free interest rate of 1.21% based upon observed risk-free interest rates; expected volatility of 111.96% based on the Company’s average historical volatility; expected term of five years, which is the contractual life of the warrants; and a dividend yield of 0%. The fair value was recorded as a debt discount within notes payable and an increase to additional paid-in capital on the Company’s balance sheet. The debt discount is being amortized as interest expense over the term of the Loan Agreement, using the effective interest method.

Pursuant to the Loan Agreement, the Company is bound by a variety of affirmative covenants during the term of the Loan Agreement, including, without limitation, certain information delivery requirements, notice requirements and obligations to maintain certain insurance. Additionally, the Company is bound by certain negative covenants setting forth actions that are not permitted to be taken during the term of the Loan Agreement without the Lenders’ consent, including, without limitation, incurring certain additional indebtedness, making certain asset dispositions, entering into certain mergers, acquisitions or other business combination transactions or incurring any non-permitted lien or other encumbrance on the Company’s assets. Upon the occurrence of an event of default under the Loan Agreement (subject to cure periods for certain events of default), all amounts owed by the Company thereunder would begin to bear interest at a rate that is 5.0% higher than the rate that would otherwise be applicable and may be declared immediately due and payable by the Collateral Agent. Events of default under the Loan Agreement include, among other things, the following: the occurrence of certain bankruptcy events; the failure to make payments under the Loan Agreement when due; the occurrence of a material impairment on the Collateral Agent’s security interest over the collateral, a material adverse change in the business, operations or condition (financial or otherwise) of the Company or material impairment of the prospect of repayment of the obligations under the Loan Agreement; the occurrence of a default under certain other agreements entered into by the Company; the rendering of certain types of judgments against the Company; the revocation of certain government approvals of the Company; any breach by the Company of any covenant (subject to cure periods for certain covenants) made in the Loan Agreement; and the failure of any representation or warranty made by the Company in connection with the Loan Agreement to be correct in all material respects when made.

The Collateral Agent, for the benefit of the Lenders, has a perfected security interest in substantially all of the Company’s property, rights and assets, except for intellectual property, to secure the payment of all amounts owed to the Lenders under the Loan Agreement. Upon marketing approval of vosaroxin, the Collateral Agent, for the benefit of the Lenders, will also have a perfected security interest in the Company’s intellectual property rights relating to vosaroxin.

12


 

Aggregate future minimum payments due under the Loan Agreement as of June 30, 2016 were as follows (in thousands):

 

Year ending December 31,

 

Total

 

2016

 

$

674

 

2017

 

 

4,592

 

2018

 

 

5,842

 

2019

 

 

5,393

 

2020

 

 

2,260

 

Total minimum payments

 

 

18,761

 

Less amount representing interest

 

 

(3,761

)

Total notes payable as of June 30, 2016

 

 

15,000

 

Less unamortized debt discount and issuance costs

 

 

(723

)

Less current portion of notes payable

 

 

(833

)

Non-current portion of notes payable

 

$

13,444

 

 

 

8. Stockholders’ Equity

Controlled Equity Offerings

In August 2011, the Company entered into a Controlled Equity OfferingSM sales agreement (the “Sales Agreement”), with Cantor Fitzgerald & Co. (“Cantor”), as agent and/or principal, pursuant to which the Company could issue and sell shares of its common stock having an aggregate gross sales price of up to $20.0 million. In April 2013, the Sales Agreement was amended to provide for an increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. In March 2015, the Sales Agreement was further amended to provide for an additional increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. The Company will pay Cantor a commission of up to 3.0% of the gross proceeds from any common stock sold through the Sales Agreement, as amended.

During the six months ended June 30, 2016, no shares of common stock were sold under the Sales Agreement. As of June 30, 2016, $18.2 million of common stock remained available to be sold under this facility, subject to certain conditions as specified in the Sales Agreement, as amended.

 

 

9. Stock-Based Compensation

Employee stock-based compensation expense is calculated based on the grant-date fair value of awards ultimately expected to vest, and is recorded on a straight-line basis over the vesting period of the awards. Forfeitures are estimated at the time of grant, based on historical option cancellation information, and revised in subsequent periods if actual forfeitures differ from those estimates.

The following table summarizes stock-based compensation expense related to the Company’s stock-based awards for the periods indicated (in thousands):

 

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development

 

$

351

 

 

$

595

 

 

$

901

 

 

$

1,293

 

General and administrative

 

 

711

 

 

 

718

 

 

 

1,605

 

 

 

1,876

 

Employee stock-based compensation expense

 

 

1,062

 

 

 

1,313

 

 

 

2,506

 

 

 

3,169

 

Non-employee stock-based compensation expense

 

 

144

 

 

 

55

 

 

 

153

 

 

 

163

 

Total stock-based compensation expense

 

$

1,206

 

 

$

1,368

 

 

$

2,659

 

 

$

3,332

 

 

 

13


 

Item 2.

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

The following discussion and analysis of our financial condition as of June 30, 2016 and results of operations for the six months ended June 30, 2016 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 14, 2016.

This discussion and analysis contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, which involve risks, uncertainties and assumptions. All statements, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including without limitation any statements relating to our strategy, including receiving approval of vosaroxin from the European Medicines Agency, our regulatory and clinical strategies for gaining marketing approval in the United States, our marketing plans and commercialization strategies for vosaroxin, if approved, and the commercial potential of vosaroxin, presenting clinical data and initiating clinical trials, our future research and development activities, including clinical testing and the costs and timing thereof, sufficiency of our cash resources, our ability to raise additional funding when needed, any statements concerning anticipated regulatory activities or licensing or collaborative arrangements, our research and development and other expenses, our operations and legal risks, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “anticipates,” “believe,” “continue,” “estimates,” “expects,” “intend,” “look forward,” “may,” “could,” “seeks,” “plans,” “potential,” or “will” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under “Risk Factors,” and elsewhere in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements included in this report are based on information available to us on the date of this report, and we assume no obligation to update any forward-looking statements contained in this report.

In this report, “Sunesis,” the “Company,” “we,” “us,” and “our” refer to Sunesis Pharmaceuticals, Inc. and its wholly-owned subsidiaries, except where it is made clear that the term means only the parent company.

Overview

We are a biopharmaceutical company focused on the development and commercialization of our pipeline of new oncology therapeutics for the potential treatment of solid and hematologic cancers. Our most advanced program is QINPREZOTM (vosaroxin), our product candidate for the treatment of acute myeloid leukemia, or AML.

In October 2014, we announced the results of a Phase 3, multi-national, randomized, double-blind, placebo-controlled trial of vosaroxin in combination with cytarabine in patients with relapsed or refractory AML, or the VALOR trial. The VALOR trial, which enrolled 711 adult patients, was designed to evaluate the effect of vosaroxin in combination with cytarabine, a widely used chemotherapy in AML, on overall survival as compared to placebo in combination with cytarabine, and was conducted at 124 study sites in 15 countries. Patients treated with vosaroxin achieved increased overall survival compared to those treated with placebo (7.5 months vs 6.1 months, HR=0.87), the primary endpoint, but this difference did not achieve statistical significance (p=0.06). The complete remission (CR) rate, the sole secondary efficacy endpoint in the trial, did demonstrate a significant difference for the vosaroxin combination arm (30.1% vs 16.3%, p < 0.0001). Detailed results of the VALOR trial were presented in the “Late Breaking Abstracts” session of the American Society of Hematology (ASH) Annual Meeting in December 2014 and additionally published in the September 2015 issue of The Lancet Oncology.

The VALOR trial did not meet its primary endpoint of demonstrating a statistically significant improvement in overall survival, but based upon the favorable results of other predefined analyses of the data, in November 2014, we submitted a letter of intent to the European Medicines Agency, or EMA, describing our intention to file a marketing authorization application, or MAA, for marketing authorization of vosaroxin plus cytarabine for the treatment of relapsed or refractory AML. In June 2015, we met separately with our Rapporteur and Co-Rapporteur, who are two appointed members of the EMA’s Committee of Human Medicinal Products. Based upon feedback from these meetings, we filed an MAA with the EMA at the end of 2015. In July 2015, we met with the U.S. Food and Drug Administration, or FDA, to discuss a potential regulatory filing in the U.S. Based upon the meeting, the FDA recommended that we provide additional clinical evidence prior to any regulatory filing in the U.S. As a result, we are evaluating regulatory and clinical strategies with the goal of gaining future marketing approval in the U.S.

14


 

In the second half of 2013, we announced the initiation of three Phase 1/2 investigator-sponsored trials of vosaroxin, either as a standalone therapy or in combination with approved compounds, in various indications of AML and high-risk myelodysplastic syndrome, or MDS. The trials are being conducted at the University of Texas MD Anderson Cancer Center, or MDACC, Weill Cornell Medical College and New York-Presbyterian Hospital, and the Washington University School of Medicine, or Washington University.

In December 2015, preliminary results from the ongoing Phase 1b/2 MDACC-sponsored trial of vosaroxin in combination with decitabine in older patients with previously untreated AML and high-risk MDS and the ongoing Phase 1b/2 Washington University-sponsored trial of vosaroxin in combination with azacitidine in patients with intermediate- or high-risk MDS, were presented at the ASH Annual Meeting. In June 2016, we announced the presentation of updated results from an ongoing Phase 1b/2 University of Texas MD Anderson Cancer Center-sponsored trial of vosaroxin in combination with decitabine in older patients with previously untreated acute myeloid leukemia (AML) and high-risk myelodysplastic syndrome (MDS). The results were presented on June 11, 2016 in an oral session titled “New Compounds in AML Treatment” at the 21st Congress of the European Hematology Association (EHA) in Copenhagen, Denmark.

In March 2016, we announced that the first patients have been treated in the investigator-sponsored VITAL (Vosaroxin and Infusional Cytarabine for Frontline Treatment of Acute Myeloid Leukemia) Phase 2 study of vosaroxin in combination with cytarabine in patients with previously untreated acute myeloid leukemia (AML). The trial is being conducted at the Vanderbilt-Ingram Cancer Center at Vanderbilt University.

In January 2014, we announced the expansion of our oncology franchise through separate global licensing agreements for two preclinical kinase inhibitor programs. The first agreement, with Biogen, is for global commercial rights to SNS-062, a selective non-covalently binding oral inhibitor of BTK. In March 2016, the first subjects were dosed in a Phase 1A, randomized, double-blind, placebo-controlled dose-ranging study to investigate the safety, pharmacokinetics (PK) and pharmacodynamics (PD) of our oral, next-generation, non-covalently binding BTK-inhibitor, SNS-062, in healthy subjects.  The Phase 1A study is being conducted in Belgium, pursuant to a Clinical Trial Application (CTA).   With a successful study outcome, SNS-062 is expected to proceed to a Phase 1B/2 study in patients with B-cell malignancies later this year.

The second agreement, with Takeda, is for global commercial rights to several potential first-in class, pre-clinical inhibitors of the novel target PDK1. In 2014, we selected two PDK1 inhibitors, SNS-229 and SNS-510, of which we have taken one, SNS-229 into IND-enabling absorption, distribution, metabolism and excretion, and toxicology studies.

Both BTK and PDK1 programs were originally developed under a research collaboration agreement between Biogen and Sunesis. In 2011, Biogen exclusively licensed the PDK1 program to Takeda along with the more advanced program, TAK-580, a pan-RAF inhibitor currently in the maximum tolerated dose cohort expansion stage of a Takeda Phase 1, multicenter dose escalation study. We currently expect that SNS-062 and SNS-229 will be developed exclusively by Sunesis for the foreseeable future.

Recent Financial History

Equity Financing Agreements

In December 2015, we completed underwritten offerings of (i) 10,996,191 shares of our common stock, that included the exercise of the underwriter's over-allotment option of 1,434,286 shares, at a price of $0.84 per share, and (ii) 20,200 shares of our non-voting Series B Convertible Preferred Stock (“Series B Stock”) at a price of $840.00 per share. Gross proceeds from the sale were $26.2 million and net proceeds were $25.2 million. Each share of non-voting Series B Stock is convertible into 1,000 shares of our common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.98% of the total number of shares of our common stock then outstanding.

Controlled Equity Offerings

In August 2011, we entered into a Controlled Equity OfferingSM sales agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent and/or principal, pursuant to which we could issue and sell shares of our common stock having an aggregate gross sales price of up to $20.0 million. In April 2013, the Sales Agreement was amended to provide for an increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. In March 2015, the Sales Agreement was further amended to provide for an additional increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. We will pay Cantor a commission of up to 3.0% of the gross proceeds from any common stock sold through the Sales Agreement, as amended.

15


 

During the six months ended, June 30, 2016, no shares of common stock were sold under the Sales Agreement. As of June 30, 2016, $18.2 million of common stock remains available to be sold under the Sales Agreement, as amended, subject to certain conditions as specified in the agreement.

Loan Agreement

On March 31, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with Western Alliance Bank (“Western Bank”) and Solar Capital Ltd. (“Solar Capital,” and collectively with Western Bank, the “Lenders”) and Western Alliance, as Collateral Agent (the “Collateral Agent”). Pursuant to the terms of the Loan Agreement, the Lenders provided the Company with a loan in the principal amount of $15,000,000 of which $12,500,000 was funded on March 31, 2016 and $2,500,000 was funded on April 1, 2016, for working capital, to fund its general business requirements and to repay indebtedness of the Company to Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation (collectively, the “Existing Lenders”) pursuant to the Loan and Security Agreement, dated as of October 18, 2011, entered into by and among the Existing Lenders and the Company (the “Oxford Loan Agreement”). On March 31, 2016, the Company used $7.2 million of the loan proceeds to repay the outstanding principal of $6.0 million, a final payment fee of $1.2 million and accrued interest of $45,000 under the Oxford Loan Agreement. The Company paid the Lenders a $0.1 million facility fee and $0.1 million in legal fees.      

Capital Requirements

We have incurred significant losses in each year since our inception. As of June 30, 2016, we had cash, cash equivalents and marketable securities of $33.1 million and an accumulated deficit of $579.9 million. We expect to continue to incur significant losses for the foreseeable future as we continue the development process and seek regulatory approvals for vosaroxin.

We will need to raise substantial additional capital to complete the development and potential commercialization of vosaroxin, and expect to finance our future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to vosaroxin, or a combination of the above. However, we do not know whether additional funding will be available on acceptable terms, or at all. If we are unable to raise required funding on acceptable terms or at all, we will need to reduce operating expenses, enter into a collaboration or other similar arrangement with respect to development and/or commercialization rights to vosaroxin, outlicense intellectual property rights to vosaroxin or our other development programs, sell unsecured assets, or a combination of the above, or be forced to delay or reduce the scope of our vosaroxin development program, potentially including any regulatory filings related to the VALOR trial, and/or limit or cease our operations.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes during the six months ended June 30, 2016 to our critical accounting policies and significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Overview of Revenues

We have not generated any revenue from the sale of commercial products, and do not anticipate product sales until at least 2017, if at all. Over the past four years, we have generated revenue primarily through a Revenue Participation Agreement, or the Royalty Agreement, which was entered into in March 2012 with RPI Finance Trust, or RPI, an entity related to Royalty Pharma. In September 2012, we received a $25.0 million cash payment from RPI pursuant to the provisions of the Royalty Agreement. The payment, less $3.1 million representing the fair value of the warrants granted under the arrangement, was initially classified as deferred revenue and is being amortized to revenue over the related performance period.

Overview of Operating Expenses

Research and Development expense. Research and development expense consists primarily of clinical trial costs, which include: payments for work performed by our contract research organizations, clinical trial sites, labs and other clinical service providers and for drug packaging, storage and distribution; drug manufacturing costs, which include costs for producing drug substance and drug product, and for stability and other testing; personnel costs, including non-cash stock-based compensation; other outside services and consulting costs; and payments under license agreements. We expense all research and development costs as they are incurred.

We are currently focused on the development of vosaroxin for the treatment of AML, as well as our portfolio of kinase inhibitors. For vosaroxin, based on results of translational research, our own and investigator-sponsored trials, regulatory and competitive concerns and our overall financial resources, we anticipate that we will make determinations as to which indications to

16


 

pursue and patient populations to treat in the future, and how much funding to direct to each indication, which will affect our research and development expense. If we proceed to commercialization following the approval of either an MAA filing with the EMA or a New Drug Application, or NDA, filing with the FDA, research and development costs may increase in the future. Due to the above uncertainties and other risks inherent in the development process, we are unable to estimate the costs we will incur in the vosaroxin development program in the future.

If we engage a development or commercialization partner for our vosaroxin program, or if, in the future, we acquire additional product candidates, our research and development expenses could be significantly affected. We cannot predict whether future licensing or collaborative arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

We anticipate continuing expenditures associated with advancing the SNS-062 and SNS-229 programs in 2016 and beyond. Additionally, under the Takeda Agreement, we have the right to participate in co-development and co-promotion activities for the related product candidates, including TAK-580 (formerly MLN2480), an oral pan-RAF inhibitor currently in Phase 1 clinical studies being conducted by Takeda. If we were to exercise our option on this or other product candidates, our research and development expense would increase significantly.

General and Administrative expense. General and administrative expense consists primarily of personnel costs for the related employees, including non-cash stock-based compensation; outside service costs, including fees paid to external legal advisors, marketing consultants and our independent registered public accounting firm; facilities expenses; and other administrative costs. If we proceed to commercialization in either Europe or the United States, we anticipate general and administrative expenses to increase in the future, including additional costs related to selling and marketing.

Results of Operations

Revenue

Total revenue was $0.6 million and $1.3 million for the three and six months ended June 30, 2016 as compared to $0.9 million and $1.7 million for the same periods in 2015. Revenue in each period was primarily due to deferred revenue recognized related to the Royalty Agreement with RPI. The decrease of $0.3 million between the comparable three month periods was primarily due to the increase in the estimated performance period through which the remaining balance of deferred revenue will be amortized.  

Research and Development Expense

Research and development expense was $6.6 million and $12.8 million for the three and six months ended June 30, 2016 as compared to $6.3 million and $10.8 million for the same periods in 2015, primarily relating to the vosaroxin development program in each period. The increase of $0.3 million between the comparable three month periods was primarily due to an increase of $0.6 million in professional services and $0.2 million in medical affairs expenses and technology license fees, offset by a decrease of $0.5 million in personnel costs. The increase of $2.0 million between the comparable six month periods was primarily due to an increase in consulting and clinical trials expenses of $2.5 million, $0.1 million milestone payment related to a license agreement, offset by a decrease of $0.7 million in personnel costs.

General and Administrative Expense

General and administrative expense was $4.0 million and $8.3 million for the three and six months ended June 30, 2016 as compared to $5.2 million and $10.3 million for the same periods in 2015. The decrease of $1.2 million between the comparable three month periods was primarily due to a decrease in SNS-062 related costs. The decrease of $2.0 million between the comparable six month periods was primarily due to a decrease of $0.8 million in personnel costs and $1.3 million in SNS-062 related costs, offset by an increase of $0.1 million in office related costs.

Interest Expense

Interest expense was $0.5 million and $0.8 million for the three and six months ended June 30, 2016 as compared to $0.2 million and $0.5 million for the same periods in 2015. The increases in the 2016 periods were primarily due to the increase in the notes payable.

17


 

Other Income, Net

Net other income was nil and $0.1 million for the three and six months ended June 30, 2016 as compared to net other income of $1.9 million and $1.8 million for the same period in 2015. The increases in the 2015 periods were primarily comprised of non-cash credits or charges for the revaluation of warrants issued in our underwritten offering in October 2010.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have funded our operations primarily through the issuance of common and preferred stock and other equity instruments, debt financings, receipts from our collaboration partners, the sale of revenue participation rights, and research grants.

Our cash, cash equivalents and marketable securities totaled $33.1 million as of June 30, 2016, as compared to $46.4 million as of December 31, 2015. The decrease of $13.3 million was primarily due to $20.1 million of net cash used in operating activities, $7.2 million of final payments against notes payable, and $0.8 million of principal payments against notes payable, partially offset by $14.8 million in net loan proceeds.

On March 31, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with Western Alliance Bank (“Western Bank”) and Solar Capital Ltd. (“Solar Capital,” and collectively with Western Bank, the “Lenders”) and Western Alliance, as Collateral Agent (the “Collateral Agent”). Pursuant to the terms of the Loan Agreement, the Lenders provided the Company with a loan in the principal amount of $15,000,000 of which $12,500,000 was funded on March 31, 2016 and $2,500,000 was funded on April 1, 2016 for working capital, to fund its general business requirements and to repay indebtedness of the Company to Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation (collectively, the “Existing Lenders”) pursuant to the Loan and Security Agreement, dated as of October 18, 2011, entered into by and among the Existing Lenders and the Company (the “Oxford Loan Agreement”). On March 31, 2016, the Company used $7.2 million of the loan proceeds to repay the outstanding principal of $6.0 million, a final payment fee of $1.2 million and accrued interest of $45,000 under the Oxford Loan Agreement. The Company paid the Lenders a $0.1 million facility fee and $0.1 million in legal fees.

In December 2015, we completed underwritten offerings of (i) 10,996,191 shares of our common stock, that included the exercise of the underwriter's over-allotment option of 1,434,286 shares, at a price of $0.84 per share, and (ii) 20,200 shares of our non-voting Series B Convertible Preferred Stock at a price of $840.00 per share. Gross proceeds from the sale were $26.2 million and net proceeds were $25.2 million. Each share of non-voting Series B Stock is convertible into 1,000 shares of our common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.98% of the total number of shares of our common stock then outstanding.

In August 2011, we entered into the Sales Agreement, with Cantor as agent and/or principal, pursuant to which we could issue and sell shares of our common stock having an aggregate gross sales price of up to $20.0 million. In April 2013, the Sales Agreement was amended to provide for an increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. In March 2015, the Sales Agreement was further amended to provide for an additional increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. We will pay Cantor a commission of up to 3.0% of the gross proceeds from any common stock sold through the Sales Agreement, as amended.

During the six months ended June 30, 2016, no shares of common stock were sold under the Sales Agreement. As of June 30, 2016, $18.2 million of common stock remains available to be sold under this facility, subject to certain conditions as specified in the Sales Agreement.

Cash Flows

Net cash used in operating activities was $20.1 million for the six months ended June 30, 2016, as compared to $19.8 million for the same period in 2015. Net cash used in the 2016 period resulted primarily from the net loss of $20.5 million and changes in operating assets and liabilities of $2.5 million, including a final payment fee representing interest expense of $1.2 million under the Oxford Loan Agreement, partially offset by net adjustments for non-cash items of $2.9 million. Net cash used in the 2015 period resulted primarily from the net loss of $18.1 million and changes in operating assets and liabilities of $3.4 million, partially offset by net adjustments for non-cash items of $1.7 million.

Net cash used in investing activities was $4.1 million for the six months ended June 30, 2016, as compared to net cash provided by investing activities of $1.5 million for the same period in 2015. Net cash used in 2016 period consisted primarily of purchases of

18


 

marketable securities, partially offset by proceeds from maturities of marketable securities. Net cash provided in the 2015 period consisted primarily of proceeds from maturities of marketable securities, partially offset by purchases of marketable securities.

Net cash provided by financing activities was $6.8 million for the six months ended June 30, 2016, as compared to $16.4 million for the same period in 2015. Net cash provided in the 2016 period resulted primarily from net proceeds of $14.8 million from debt financing, offset by $8.0 million of principal against notes payable. Net cash provided in the 2015 period resulted primarily from net proceeds of $17.7 million from sales of our common stock through the Sales Agreement with Cantor and $0.3 million from the exercise of warrants, stock options and stock purchase rights, partially offset by $1.6 million of principal payments against notes payable.

Operating Capital Requirements

We expect to continue to incur substantial operating losses in the future. We will not receive any product revenue until a product candidate has been approved by the EMA, FDA, or similar regulatory agencies in other countries, and has been successfully commercialized, if at all. We will need to raise substantial additional funding to complete the development and potential commercialization of vosaroxin. Additionally, we may evaluate in-licensing and acquisition opportunities to gain access to new drugs or drug targets that would fit with our strategy. Any such transaction would likely increase our funding needs in the future.

Our future funding requirements will depend on many factors, including but not limited to:

 

·

the rate of progress and cost of our clinical trials;

 

·

the need for additional or expanded clinical trials;

 

·

the timing, economic and other terms of any licensing, collaboration or other similar arrangement into which we may enter;

 

·

the costs and timing of seeking and obtaining EMA, FDA, or other regulatory approvals;

 

·

the extent of our other development activities, including our in-license agreements;

 

·

the costs associated with building or accessing commercialization and additional manufacturing capabilities and supplies;

 

·

the costs of acquiring or investing in businesses, product candidates and technologies, if any;

 

·

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

·

the effect of competing technological and market developments; and

 

·

the costs, if any, of supporting our arrangements with Biogen and Takeda.

We believe that we currently have the resources to fund our operations to the middle of 2017. We will need to raise substantial additional capital to complete the development and potential commercialization of vosaroxin. Until we can generate a sufficient amount of licensing or collaboration or product revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to vosaroxin, or a combination of the above.

Our failure to raise significant additional capital in the future would force us to delay or reduce the scope of our vosaroxin and other development programs, potentially including any additional clinical trials or subsequent regulatory filings in Europe or the United States, and/or limit or cease our operations. Any one of the foregoing would have a material adverse effect on our business, financial condition and results of operations.

Contractual Obligations

The following table summarizes our long-term contractual obligations as of June 30, 2016 (in thousands):

 

 

Payments Due by Period

 

 

Total

 

 

Less Than

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

Debt obligations(1)

$

18,761

 

 

$

2,177

 

 

$

11,683

 

 

$

4,901

 

Operating lease obligations(2)

$

1,309

 

 

$

645

 

 

$

664

 

 

$

 

  

 

(1)

Upon the occurrence of an event of default under the Loan Agreement (subject to cure periods for certain events of default), all amounts owed by the Company thereunder would begin to bear interest at a rate that is 5.0% higher than the rate that would

19


 

otherwise be applicable and may be declared immediately due and payable by the Collateral Agent. A final payment equal to 3.75% of the original principal amount borrowed will be due upon maturity or such earlier date specified in the Loan Agreement. We may elect to prepay all amounts owed under the Loan Agreement prior to the maturity date therefore, subject to a prepayment fee equal to 2.0% of the amount prepaid if the prepayment occurs on or prior to March 31, 2017, 1.0% of the amount prepaid if the prepayment occurs after March 31, 2017 but on or prior to March 31, 2018 and 0.5% of the amount prepaid if the prepayment occurs thereafter.  

(2)

Operating lease obligations relate solely to the leasing of office space in a building at 395 Oyster Point Boulevard in South San Francisco, California, which is currently our corporate headquarters. In January 2014, a lease for 15,378 square feet was entered into with an expiration date of April 30, 2015. In June 2014, the lease was amended to extend the expiration date to June 30, 2015, and to add 6,105 square feet of additional office space within the same building. In January 2015, the lease was amended to extend the expiration date to December 31, 2015, in September 2015, the lease was amended to extend the expiration date to June 30, 2016, and in May 2016, the lease was amended to extend the expiration date to June 30, 2018.

The above amounts exclude potential payments under:

 

·

our 2003 license agreement with Sumitomo Dainippon Pharma Co., Ltd., or Sumitomo, pursuant to which we are required to make certain milestone payments in the event we file new drug applications in the United States, Europe or Japan, and if we receive regulatory approvals in any of these regions, for cancer-related indications, including a payment following the filing of an MAA with the EMA. If vosaroxin is approved for a non-cancer indication, an additional milestone payment becomes payable to Sumitomo. We are also required to make royalty payments to Sumitomo in the event that vosaroxin is commercialized.

 

·

our Royalty Agreement with RPI, pursuant to which we are required to make certain revenue participation payments in the event that vosaroxin is commercialized. Based on the regulatory interactions with the EMA and FDA outlined in Note 1, the Company extended the end date of the estimated performance period through which the balance of deferred revenue will be amortized from September 30, 2016 to March 31, 2017. As a result, the quarterly amortization was adjusted from $0.9 million per quarter to $0.6 million per quarter, commencing with the quarter ended September 30, 2015. Revenue participation right payments will be made to RPI when and if vosaroxin is commercialized, at a rate of 6.75% of net sales of vosaroxin, on a product-by-product and country-by-country basis world-wide through the later of: (a) the expiration of the last to expire of certain specifically identified patents; (b) 10 years from the date of first commercial sale of such product in such country; or (c) the expiration of all applicable periods of data, market or other regulatory exclusivity in such country with respect to such product.

 

·

our December 2013 second amended and restated collaboration agreement with Biogen and our January 2014 amended license agreement with Takeda, pursuant to which we are required to make certain milestone and royalty payments.

We also have agreements with contract research organizations clinical sites and other third party contractors for the conduct of our clinical trials. We generally make payments to these entities based upon the activities they perform related to the particular clinical trial. There are generally no penalty clauses for cancellation of these agreements if notice is duly given and payment is made for work performed by the third party under the related agreement.

Off-Balance Sheet Arrangements

Since our inception, we have not had any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

 

20


 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk  

Interest Rate and Market Risk

As of June 30, 2016 and December 31, 2015, we had $33.1 million and $46.4 million, respectively, in cash, cash equivalents and marketable securities. The securities in our investment portfolio are not leveraged and are classified as available-for-sale, which, due to their short-term nature, are subject to minimal interest rate risk. We currently do not hedge our interest rate risk exposure. Because of the short-term maturities of our investments, we do not believe that a change in market rates would have a significant impact on the value of our investment portfolio.

We are subject to interest rate fluctuation exposure through the outstanding principal on our notes payable.  Borrowings under the notes payable bear interest at a rate equal to the one-month LIBOR plus 8.54% per annum. As of June 30, 2016, the interest rate on our borrowings under the notes payable was 9.01% per annum. An increase in the one-month LIBOR of 100 basis points above the current one-month LIBOR rates would increase our interest expense by $0.4 million through the maturity of the loan.

The primary objective of our investment activities is to preserve capital while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of highly rated securities, which may include money market funds and U.S. and European government obligations and corporate debt obligations (including certificates of deposit, corporate notes and commercial paper). These securities are classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss). In the past, we have generally purchased investments with an original maturity of less than one year, although our policy allows for the purchase of securities with a maturity of up to two years. Our holdings of the securities of any one corporate issuer do not exceed 10% of the portfolio at the time of purchase. If interest rates rise, the market value of our investments may decline, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We do not utilize derivative financial instruments to manage our interest rate risks.

The tables below present the original principal amounts and weighted-average interest rates by maturity period for our investment portfolio as of the dates indicated (in thousands, except percentages):

 

 

Expected Maturity

 

 

Total

 

 

0-3

months

 

 

Over 3

months

 

 

Fair Value as of

June 30,

2016

 

Available-for-sale securities

$

14,655

 

 

$

15,198

 

 

$

29,853

 

Average interest rate

 

0.5

%

 

 

0.7

%

 

 

 

 

 

 

Expected Maturity

 

 

Total

 

 

0-3

months

 

 

Over 3

months

 

 

Fair Value as of

December 31,

2015

 

Available-for-sale securities

$

28,264

 

 

$

11,083

 

 

$

39,347

 

Average interest rate

 

0.2

%

 

 

0.5

%

 

 

 

 

 

Foreign Currency Exchange Rate Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Invoices for certain services provided to us are denominated in foreign currencies, including the Euro and British pound, among others. Therefore, we are exposed to adverse movements in the related foreign currency exchange rates. To manage this risk, we may purchase certain European currencies or highly-rated investments denominated in those currencies, subject to similar criteria as for other investments allowed by our investment policy. We do not make these purchases for trading or speculative purposes, and there is no guarantee that the related gains and losses will substantially offset each other.

As of June 30, 2016 and December 31, 2015, we held cash and investments denominated in Euros with an aggregate fair value of $0.7 million. The balances are recorded at their fair value based on the current exchange rate as of each balance sheet date. The resulting exchange gains or losses and those from amounts payable for services originally denominated in foreign currencies are recorded in other income (expense), net in the statements of operations and comprehensive loss.

 

 

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Item 4.

Controls and Procedures  

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in SEC Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting , as defined in Rules 13a-15(f) under the Securities and Exchange Act of 1934, as amended, that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. The ultimate outcome of any litigation is uncertain and unfavorable outcomes could have a negative impact on our results of operations and financial condition. Regardless of outcome, litigation can have an adverse impact on us because of the defense costs, diversion of management resources and other factors.

We believe there is no litigation pending that could, individually or in the aggregate, have a material adverse effect on our results of operations or financial condition.

Item 1A.

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this Quarterly Report on Form 10-Q, as each of these risks could adversely affect our business, operating results and financial condition. If any of the possible adverse events described below actually occurs, we may be unable to conduct our business as currently planned and our financial condition and operating results could be harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment.

Please see the language regarding forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2015 that was filed with the SEC on March 14, 2016.

Risks Related to Our Business

We need to raise substantial additional funding to pursue our regulatory strategy for the potential commercialization of QINPREZOTM (vosaroxin), and to continue the development of vosaroxin and our other programs.

We believe that with $33.1 million in cash and investments held as of June 30, 2016, we currently have the resources to fund our operations to the middle of 2017.

However, we will need to raise substantial additional capital to:

 

·

complete the development, regulatory strategy and potential commercialization of vosaroxin in AML in Europe and the United States;

 

·

fund additional clinical trials of vosaroxin and seek regulatory approvals, including additional clinical evidence the FDA recommended that we provide prior to any regulatory filing for vosaroxin in the United States;

 

·

expand our development activities;

 

·

implement additional internal systems and infrastructure; and

 

·

build or access commercialization and additional manufacturing capabilities and supplies.

Our future funding requirements and sources will depend on many factors, including but not limited to the:

 

·

rate of progress and cost of our clinical trials;

 

·

need for additional or expanded clinical trials;

 

·

timing, economic and other terms of any licensing, collaboration or other similar arrangement into which we may enter;

 

·

costs and timing of seeking and obtaining EMA, FDA, or other regulatory approvals;

 

·

extent of our other development activities, including our other clinical programs and in-license agreements;

 

·

costs associated with building or accessing commercialization and additional manufacturing capabilities and supplies;

23


 

 

·

costs of acquiring or investing in businesses, product candidates and technologies, if any;  

 

·

costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

·

effect of competing technological and market developments; and

 

·

costs of supporting our arrangements with Biogen, Takeda or any potential future licensees or partners.

Until we can generate a sufficient amount of licensing, collaboration or product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to vosaroxin or our other development programs, or a combination of the above. Any issuance of convertible debt securities, preferred stock or common stock may be at a discount from the then-current trading price of our common stock. If we issue additional common or preferred stock or securities convertible into common or preferred stock, our stockholders will experience additional dilution, which may be significant. Further, we do not know whether additional funding will be available on acceptable terms, or at all. If we are unable to raise substantial additional funding on acceptable terms, or at all, we will be forced to delay or reduce the scope of our vosaroxin or other development programs, potentially including any additional clinical trials or subsequent regulatory filings in Europe and the United States related to vosaroxin, and/or limit or cease our operations.

We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We may not ever achieve or sustain profitability.*

We are not profitable and have incurred losses in each year since our inception in 1998. Our net losses for the six months ended June 30, 2016 and the years ended December 31, 2015 and 2014 were $20.5 million, $36.7 million and $43.0 million, respectively. As of June 30, 2016, we had an accumulated deficit of $579.9 million. We do not currently have any products that have been approved for marketing, and we continue to incur substantial development and general and administrative expenses related to our operations. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase significantly as we seek regulatory approvals for vosaroxin, and as we prepare to commercialize vosaroxin, if approved. Our losses, among other things, have caused and will continue to cause our stockholders’ equity and working capital to decrease.

To date, we have derived substantially all of our revenue from license and collaboration agreements. We currently have two agreements, the Biogen 2nd ARCA and the Amended Takeda Agreement, which each include certain pre-commercialization event-based and royalty payments. We cannot predict whether we will receive any such payments under these agreements in the foreseeable future, or at all.

We also do not anticipate that we will generate revenue from the sale of products until at least 2017, if at all. In the absence of additional sources of capital, which may not be available to us on acceptable terms, or at all, the development of vosaroxin or future product candidates, if any, may be reduced in scope, delayed or terminated. If our product candidates or those of our collaborators fail in clinical trials or do not gain regulatory approval, or if our future products do not achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

The development of vosaroxin could be halted or significantly delayed for various reasons; our clinical trials for vosaroxin may not lead to regulatory approval.

Vosaroxin is vulnerable to the risks of failure inherent in the drug development process. Our VALOR trial failed to meet its primary endpoint, and we may not be able to obtain regulatory approval for commercialization in any of the United States, Europe, or in other regions. Based upon a meeting with the FDA held in July 2015, the FDA recommended that we provide additional clinical evidence prior to any regulatory filing in the United States. We may also need to conduct significant additional preclinical studies and clinical trials before we can attempt to demonstrate that vosaroxin is safe and effective to the satisfaction of the EMA and other regulatory authorities. Failure can occur at any stage of the development process, and successful preclinical studies and early clinical trials do not ensure that later clinical trials will be successful. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.

For example, we terminated two Phase 2 clinical trials of vosaroxin in small cell and non-small cell lung cancer, and the LI-1 trial, conducted by a co-operative group in Europe, was halted at an interim data analysis. If our clinical trials result in unacceptable toxicity or lack of efficacy, we may have to terminate them. If clinical trials are halted, or if they do not show that vosaroxin is safe and effective in the indications for which we are seeking regulatory approval, our future growth will be limited and we may not have any other product candidates to develop.

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We do not know whether any future clinical trials with vosaroxin or any of our product candidates will be completed on schedule, or at all, or whether our ongoing or planned clinical trials will begin or progress on the time schedule we anticipate. The commencement of future clinical trials could be substantially delayed or prevented by several factors, including:

 

·

delays or failures to raise additional funding;

 

·

results of future meetings with the EMA, FDA and/or other regulatory bodies;

 

·

a limited number of, and competition for, suitable patients with particular types of cancer for enrollment in our clinical trials;

 

·

delays or failures in obtaining regulatory approval to commence a clinical trial;

 

·

delays or failures in obtaining sufficient clinical materials;

 

·

delays or failures in obtaining approval from independent institutional review boards to conduct a clinical trial at prospective sites; or

 

·

delays or failures in reaching acceptable clinical trial agreement terms or clinical trial protocols with prospective sites.

The completion of our clinical trials could be substantially delayed or prevented by several factors, including:

 

·

delays or failures to raise additional funding;

 

·

slower than expected rates of patient recruitment and enrollment;

 

·

failure of patients to complete the clinical trial;

 

·

delays or failures in reaching the number of events pre-specified in the trial design;

 

·

the need to expand the clinical trial;

 

·

delays or failures in obtaining sufficient clinical materials, including vosaroxin and any drugs to be tested in combination with vosaroxin;

 

·

unforeseen safety issues;

 

·

lack of efficacy during clinical trials;

 

·

inability or unwillingness of patients or clinical investigators to follow our clinical trial protocols; and

 

·

inability to monitor patients adequately during or after treatment.

Additionally, our clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, or ourselves. Any failure to complete or significant delay in completing clinical trials for our product candidates could harm our financial results and the commercial prospects for our product candidates.

We rely on a limited number of third-party manufacturers that are capable of manufacturing the vosaroxin active pharmaceutical ingredient, or API, and finished drug product, or FDP, to supply us with our vosaroxin API and FDP. If we fail to obtain sufficient quantities of these materials, the development and potential commercialization of vosaroxin could be halted or significantly delayed.

We do not currently own or operate manufacturing facilities and lack the capability to manufacture vosaroxin on a clinical or commercial scale. As a result, we rely on third parties to manufacture vosaroxin API and FDP. The vosaroxin API is classified as a cytotoxic substance, limiting the number of available manufacturers for both API and FDP.

We currently rely on a single contract manufacturer for the production of vosaroxin API and a single contract manufacturer to formulate the vosaroxin API and fill and finish vials of the vosaroxin FDP. If our third-party vosaroxin API or FDP manufacturers are unable or unwilling to produce the vosaroxin API or FDP we require, we would need to establish arrangements with one or more alternative suppliers. However, establishing a relationship with an alternative supplier would likely delay our ability to produc